9 April 1990 External T.I. 74720 F - Deductibility of Legal Expenses

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Subject: Deductibility of Legal Expenses

This is reply to your memorandum of February 14, 1990 concerning the deductibility of legal and accounting fees which were incurred by a corporation  24(1) You have also requested clarification of what is meant by "structuring the transactions".

District Office Position

As support for the position that the fees of 24(1) are capital expenditures, you have referred to the Dominion Natural Gas Co. Ltd. case (1 DTC 499-133). In this case, legal expenses were incurred in defending an action attacking the taxpayer's right to supply natural gas in the City of Hamilton. The Supreme Court held that the expenses were capital in nature on the basis that they were incurred for the purpose and with the effect of procuring an asset or advantage of an enduring benefit.

Taxpayer's Position

24(1) representative has referred to the Kellogg Company of Canada Ltd. case (2 DTC 601). In this case, legal cost were incurred in defending a suit for alleged infringement of trade marks. The Supreme Court of Canada held that the legal costs were deductible on the basis that they were simply current expenditures and deductible as such. In view of this case and the decision in the Hudson's Bay Co. case (3 DTC 968) which is consistent with the decision in Kellogg case, it is the representative's view that the tendency of the courts is to view legal fees as current expenses unless it is established that they were conducted with a specified capital item. It would follow that the expenditures in question are deductible under paragraph 18(1)(a).

The taxpayer's representatives has also indicated that the fees should be deductible on the basis that they relate to the completion and filing of income tax returns and the giving of advice on income tax questions and matters of taxation generally.

Rulings Comments

We referred to the Jager Homes Ltd. and the Jager Holdings (Calgary) Ltd. Case (88 6119). In this case, a petition was brought against the taxpayer corporations seeking to have them wound up. The taxpayers defended themselves and claimed a deduction for the related legal expenses. The federal court of Appeal decided that the expenses were not deductible as they were incurred to preserve the business, structure or organization of the taxpayers and were not the kinds of expenditures which are made to earn profits from the operations of such business entities. In the case at hand, 24(1) Consistent with the decision in the Jager case, it would follow that, the fees, other than those that are allowable under paragraph 20(1)(cc), are not deductible by virtue of paragraph 18(1)(b).

We also note that we agree with your view that the non-deductible expenses be treated as eligible capital expenditures pursuant to paragraph 14(5)(b).

For the purposes of determining which costs are deductible under paragraph 20(1)(cc), you have also requested us to comment on what is meant by "structuring the transactions" (paragraph 6(a) of IT-99R3). In this regard, the phrase in very broad and general terms, refers to the make-up and order of transactions to accomplish certain end results.

While the separation of "advance ruling costs" and "transaction" costs involves a question of fact, paragraph 6 of IT-99R3 states that "transactions costs" includes those costs which would have been incurred whether or not an advance ruling had been requested. It may be necessary for this purpose to assume that the transaction would have taken place even without an advance income tax ruling. Question of fact are best resolved by the District Office. However, we note that it appears that the amount of   24(1) of the 24(1) invoice and a portion of the 24(1) could be allowed under paragraph 20(1)(cc) of the Income Tax Act.

ChiefServices, Public Utilities and Exemption Corporations SectionSpecialty Rulings DirectorateLegislative and Intergovernmental  Affairs Branch