Legal and other Professional Fees


As the two concepts are often addressed in an integrated manner in the jurisprudence, this commentary reviews whether professional fees are capital expenditures (whose deduction is prohibited by s. 18(1)(b)) as well as whether they are incurred for an income-producing purpose (as required by s. 18(1)(a)).

An expenditure incurred for the purpose of acquiring a capital asset or business as a going concern will be a capital expenditure even if the acquisition does not proceed (Neonex, Rona, Graham Construction). Following the Dominion Natural Gas case, an expenditure incurred in order to preserve a capital asset generally will be a capital expenditure (Evans, BP Oil, Farmers). Similarly, an expenditure that is incurred in order to increase the proceeds of disposition of a capital asset will generally be a capital expenditure (BC Power). The Potash case seems to suggest that legal fees incurred for the purpose of accomplishing a beneficial corporate reorganization will be capital expenditures, even where the benefits of the reorganization will last only three years - although this case seems to be inconsistent with the proposition that if expenditures give rise to intangible benefits that last for less than approximately five years, this tends to support their being on income account (BP Australia, see also Canderel and Toronto College Park).

Expenditures incurred to maintain the income generated from a capital asset or another source of income generally will be on income account (Evans). Accordingly, profesional fees incurred in order to maintain the right to continue in income-generating trade practices that are alleged to be illegal generally will be deductible (Rolland, Caulk). Similarly, legal fees incurred in defending practices which are alleged to infringe a trade mark likely will be deductible (Kellogg). Expenditures incurred in order to avoid increased expenses for an income-generating operation, including (apparently) professional fees incurred to avoid impositions of excise taxes or foreign taxes on a business operation generally will be deductible (Reader's Digest, Premium Iron Ore).

Fees incurred in responding to a takeover bid for a public company so as to enhance shareholder value were found to be fully deductible on the basis that it is a necessary cost of a running a public company to incur investment dealer and other fees in responding to such a bid in accordance with the fiduciary obligations of the target's directors (BJ Services, see also Boulangerie).

The reasonable costs incurred by a corporation in communicating respecting its affairs to its shareholders are properly a part of the carrying on of its business and, therefore, are deductible (BC Power). Accordingly, costs of preparing an information circular that was statutorily required to be provided to shareholders were deductible (Boulangeire).

Legal fees incurred by a corporation in defending a shareholder and director in a civil or criminal action generally will be deductible if losing such cases would have a significant adverse effect on its revenues (Friedland) whereas legal expenses incurred in defending an officer or director will not be so deductible if there is only a remote connection between the action and the corporation's business (Border Chemical).


Gouveia v. Canada, 2014 FCA 289

fees incurred to preserve reputation and income-earning capacity were capital expenditures

The taxpayer who was the CEO of an income trust and the holder, through a personal holding company of 8.1% of its units, and who provided consulting services through that or a related company, incurred $2.1 million in legal fees in connection with charges brought against him by the OSC (which ultimately were withdrawn) alleging that he and other senior employees had misstated the financial statements and a class action brought against various parties including the taxpayer, which ultimately was settled. Favreau J in the Tax Court found that the fees were not deductible by virtue of s. 18(1)(a) given inter alia that "the need for the appellant to defend himself against the OSC proceedings and the Class Action was separate from his consulting business" (para. 28), and also found (at para. 41) that "deduction of legal fees incurred to preserve the appellant's reputation and capacity to earn future income is prohibited by paragraph 18(1)(b)."

In dismissing the taxpayer's appeal, Dawson JA stated (at para. 4) that no "palpable and overriding error" had been demonstrated respecting the second (s. 18(1)(b)) finding.

Canada v. Doiron, 2012 DTC 5103 [at 7081], 2012 FCA 71

The taxpayer, a lawyer, received a four-year sentence and was suspended from practising law as a result of his conviction for obstruction of justice in respect of his defence of a client. The trial judge allowed the taxpayer to deduct his legal fees in computing his professional income, on the basis that the expenses arose directly from his law practice.

The Court of Appeal granted the Minister's appeal. The test in Symes is whether the taxpayer incurred the expense for the purpose of gaining or producing income from a business. As the taxpayer's licence to practice law had already been suspended when the expenses were incurred, they could not have been incurred for an income-producing purpose. Noël J.A. stated (at para. 44):

[T]he evidence had to show at the very least that the respondent had a plausible defence against the criminal charges and that, should he win his case, he was likely to regain his licence to practise.

The taxpayer had not introduced any new evidence on whether he was guilty of an offence, so the Court deferred to the finding at trial that he was. It was also immaterial that the taxpayer might resume the practice of law in a subsequent year. Noël J.A. stated (at para. 34):

[T]he deductions allowed under subsection 9(1) and paragraph 18(1)(a) are for expenses incurred for the purpose of gaining income for the year in which they are claimed. The mere fact that the expenses incurred by the respondent could earn him income outside the years at issue does not disallow [sic] them.

Another hurdle to the taxpayer's case was that expenses to protect an enduring asset, such as his licence to practise, are capital outlays (para. 42).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 169 - Subsection 169(1) legal fees did not relate to a law practice that was suspended 124

Bolen v. Canada, 2007 DTC 5559, 2007 FCA 293

The taxpayer earned his living as a prospector by staking claims and obtaining leases and selling them to mining companies for cash and other consideration, often shares of the companies.

Legal fees expended by the taxpayer in securing the return of mining rights from a defaulting mining company were fully deductible rather than eligible capital expenditures given that mining rights were held by the taxpayer in the course of his trade.

Cimolai v. Canada, 2007 DTC 5019, 2006 FCA 348, aff'd , 2009 DTC 6115, 2006 FCA 348

preservation of professional reputation and earnings capacity

Legal expenses incurred by the taxpayer, who was employed as a medical practitioner by a hospital, in a defamation action brought against his former professional colleagues and against his employer for suspending him from his employment, were made to protect his professional reputation and hence his capacity for future earnings and, therefore, were capital in nature. Accordingly, his expenses were non-deductible capital expenditures even if they related to his potential non-employment sources of income.

Plattig v. Attorney General of Canada, 2003 DTC 5601 (FCTD)

Legal fees incurred by the taxpayer in claiming and ultimately being awarded maintenance pursuant to section 57 of the Family Relations Act (Ontario) (at the time of the hearing, section 89) were deductible on the basis of a characterization that they were incurred not to establish the right to maintenance but, instead, to enforce the statutory right to maintenance.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4.2) 64

Coté v. The Queen, 99 DTC 5215 (FCTD)

A research program supervised by the taxpayer, who was associated with a Montreal hospital, was found to be a business in itself that was intended to produce exploitable intellectual property. Conversely, the taxpayer was not an employee of the hospital or an associated institute, notwithstanding that research grants were received by him from the institute. Accordingly, legal fees incurred by him when the institute terminated research grants were deductible.

MNR v. Poulin, 96 DTC 6477, 204 N.R. 376 (FCA)

fees incurred in unsuccessful defence of damages claim are deductible if sued-upon conduct necessary for profession's conduct

In finding that a real estate agent could not deduct legal expenses incurred in defending a suit alleging fraud and misrepresentation while negotiating a real estate transaction, Marceau J.A. indicated (at para. 7) that in order for a payment which is not itself made for the purpose of earning a profit to satisfy s. 18(1)(a):

it must be seen as the unfortunate consequence of a risk that the taxpayer had to take and assume in order to carry on his trade or profession. And in order for the payment to be seen as such, it is an essential condition, I believe, that it be directly related to an act that was necessary in order to carry on the trade or profession and that it could potentially have been considered to have been performed improperly.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Start-Up and Liquidation Costs business does not cease if still dealing with consequences of business acts 105

Doz v. The Queen, 95 DTC 5585, [1995] 2 CTC 312 (FCTD)

Legal fees incurred by the taxpayer in defending against contempt charges did not have a sufficiently direct connection with an objective of reversing a suspension of his qualification to practise law given that a conviction of the taxpayer for obstruction of justice and counselling perjury might continue to bar him from regaining such qualification. Legal fees incurred by the taxpayer in connection with a suit claiming that third parties had misrepresented the quantity of sand and gravel to be extracted from a parcel of land sold to a corporation also were non-deductible because such suit concerned the corporation's business rather than his. However, the taxpayer was able to deduct legal expenses incurred by him in defending against a third party action brought against him given that his principal purpose in doing so was to protect his rental-producing properties from seizure.

Upenieks v. The Queen, 94 DTC 6656 (FCA)

Legal fees incurred by the taxpayer (a medical doctor) in bringing an unsuccessful libel suit against the Toronto Star were not deductible given the Tax Court's factual finding that such expenses were incurred for the purpose of maintaining and preserving the taxpayer's professional reputation (which the Tax Court Judge had characterized as a capital asset).

Friedland v. The Queen, 89 DTC 5341, [1989] 2 CTC 79 (FCTD)

An individual ("Friedland") carried on his business of economics consulting through a corporation ("SFRA"). When dissatisfied clients brought action against SFRA and Friedland, and the OSC charged Friedland with acting as an unlicensed securities adviser, SFRA incorporated a subsidiary ("Comar") which continued carrying on the consulting business.

All legal fees were paid by Comar, which was entitled to deduct them in full. Because Comar's business depended on providing the services of Friedland to clients, its business would have been adversely affected if the legal proceedings had not been defended, or had been defended unsuccessfully. It accordingly was a sound business decision of Comar to incur the legal expenses.

The Queen v. Jaqer Homes Ltd., 88 DTC 6119, [1988] 1 CTC 215 (FCA)

Legal fees incurred by two companies in successfully defending against a petition, brought by a minority shareholder, to wind the two companies up, were characterized as having as their main "purpose", the preservation of the corporate entities as such, rather than enabling the two companies to continue to earn income, and were non-deductible.

Border Chemical Co. Ltd. v. The Queen, 87 DTC 5391, [1987] 2 CTC 183 (FCTD)

Legal fees paid by the taxpayer for the successful defence of its president against fraud charges brought in connection with alleged activities in which the taxpayer had no direct involvement, were non-deductible. "Unless ... any payment made remotely in the interests of the good name of the company's president and from which the company's reputation might stand to benefit, is an expense in the contemplation of paragraph 18(1)(a), which it clearly is not, the plaintiff cannot succeed."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence 55

The Queen v. Lalonde, 84 DTC 6159 (FCTD), aff'd 89 DTC 5286 (FCA)

Legal fees incurred by a doctor in order to dispute a decision not to build a comprehensive school in his immediate area were incurred for the purpose of increasing the revenues of his pharmaceutical business and medical practice, and thus were deductible. (It was accepted that he felt that a new school would increase the population, and thus the potential number of patients, in the area.)

Philp v. The Queen, 83 DTC 5424, [1983] CTC 403 (FCTD)

Legal fees and accounting fees incurred in relation to alimony and divorce arrangements were admitted by the taxpayer to have been incurred not to earn income from a business but to protect and preserve existing capital assets, and thus were not deductible.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 60.1 - Subsection 60.1(1) 26

The Queen v. Burgess, 81 DTC 5192, [1981] CTC 258 (FCTD)

The right of a wife to support from her husband terminates upon the granting of the decree absolute, in the absence of the granting of a discretionary order for maintenance. Consequently, legal fees which were successfully incurred for the purpose of obtaining an order for maintenance pursuant to s. 11 of the Divorce Act had the effect of creating a right to income (i.e., creating property) rather than enforcing the payment of income to which she already had a right, and thus were not deductible.

BP Oil Ltd. v. The Queen, 80 DTC 6331, [1980] CTC 408 (FCA)

Legal expenses which the appellant incurred in unsuccessfully opposing an application for an injunction prohibiting the operation of its service station because of a defect in its title to the underlying land (due to the presence of a "servitude") "were incurred in order to protect the very existence of the service station" and were not deductible.

The appellant continued to operate a service station after the injunction was issued prohibiting operation of this service station. The Crown successfully argued "that the fees [then] incurred in order to avoid conviction for contempt of court were not paid for the purpose of keeping the service station in operation, but solely in order to avoid appellant being punished."

Neonex International Ltd. v. The Queen, 78 DTC 6339, [1978] CTC 485 (FCA)

Legal fees incurred in connection with an abortive attempt to take over a company were made on capital account.

In the Federal Court, Trial Division (77 DTC 5321) Marceau J noted (at para. 23):

The plaintiff was in the business of making and selling signs, and it was also in the business of supplying funds and management services to its subsidiaries. But the acquisition of the shares of those subsidiaries which were to keep carrying on their own businesses, can only be regarded as a pure investment....

Farmers Mutual Petroleums Limited v. Minister of National Revenue, 67 DTC 5277, [1967] CTC 396, [1968] S.C.R. 59

The taxpayer, which had acquired the title to minerals from various Saskatchewan landowners, incurred legal expenses in defending actions by various of the landowners in which it was alleged that the taxpayer had obtained the mineral rights by fraudulent misrepresentation, and incurred further legal expenses in opposing the introduction of special Saskatchewan legislation which would have led to a renegotiation of the purchase contracts. Martland J. held that although the legal expenses arguably were deductible under s. 12(1)(a), they were non-deductible capital expenditures by virtue of s. 12(1)(b). The mineral rights clearly were items of fixed capital to the taxpayer, and it laid out the legal expenses for the purpose of preserving those capital assets. Martland J. noted (at p. 5281) that:

"The Dominion case has established the proposition that legal expense incurred with a view of preserving an asset [or] advantage for the enduring benefit of the trade is a capital expenditure and is not deductible."

British Columbia Power Corporation, Limited v. Minister of National Revenue, 67 DTC 5258, [1967] CTC 406, [1968] S.C.R. 17

The taxpayer, which owned all of the issued common shares of a public utility company, incurred approximately $1.2 million in legal fees in a successful action to have B.C. statutes, which expropriated its shares of the public utility company, declared ultra vires. It was found that it brought the action in order to preserve its title to the shares, in order that it could dispose of those shares to the Crown at a more favourable price (which in fact occurred). Martland J. found that because "in essence, the main purpose and the result of the litigation was to improve the consideration received for the disposition of a capital asset" (pp. 5263-5264), and in light of the proposition established by the Dominion Natural Gas case that a legal expense incurred to protect a taxpayer's title to a capital asset is a capital expenditure, that the taxpayer's legal expenses were incurred on capital account.

Various costs of communications with the taxpayer's shareholders respecting the expropriation legislation and the litigation were deductible as "the reasonable furnishing of information from time to time to shareholders by a company respecting its affairs is properly a part of the carrying on of the company's business of earning income" (p. 5264, DTC).

Reader's Digest Association (Canada) Ltd. v. MNR, 66 DTC 5416, [1966] CTC 626 (Ex. Ct.)

The taxpayer incurred legal fees in mounting an unsuccessful action to challenge the imposition by the federal government of a 20% excise tax on its revenue from the sale of advertising appearing in the English and French versions of Reader's Digest. Dumoulin J. followed the Premium Iron Ores case in finding these expenses to be deductible.

Premium Iron Ores Ltd. v. Minister of National Revenue, 66 DTC 5280, [1966] CTC 391, [1966] S.C.R. 685

When the taxpayer learned that the American revenue authorities were taking the position that it had a permanent establishment in the U.S., it incurred legal expenses in reaching a position in which any claim to tax income effectively connected to such an alleged permanent establishment could be effectively opposed. Martland J. found in light of the Kellogg and Evans cases that such expenses were deductible because they were made with a view to protecting the income earning capacity of the company, i.e., protecting its "income against encroachment by a third party" (p. 5283).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose legal exepnses incurred in challenging US assessments - deductible 144
Tax Topics - Income Tax Act - Section 9 - Nature of Income prior enforceable agreement to on-pay the receipt 113

Meteor Homes Ltd. v. MNR, 61 DTC 1001, [1960] CTC 419 (Ex. Ct.)

A payment made by the taxpayer to one group of shareholders was found to have been made to enable another group of shareholders to obtain absolute control of the taxpayer. Related legal fees accordingly were non-deductible.

Rolland Paper Co. Ltd. v. MNR, 60 DTC 1095, [1960] CTC 158 (Ex. Ct.)

The taxpayer was found guilty of illegal trade practices (conspiring to lessen competition in the fine papers industry) and sentenced to pay fines. In finding that the taxpayer's legal expenses were deductible, Fournier J. stated (p. 1102):

"Believing as I do that the appellant's trade practices in the operations of its business were used and followed for the purpose of earning income from the business, I find that lawful legal fees and costs incurred or made in defending such practices till a final decision on their legality or illegality was reached were made for the purposes of their trade and for the purpose of earning income and were deductible in ascertaining the appellant's taxable income within the meaning of s. 12(1)(a) ..."

Evans v. Minister of National Revenue, 60 DTC 1047, [1960] CTC 69, [1960] S.C.R. 391

deductible confrimation of entitlement as income beneficiary

The taxpayer incurred legal fees in successfully establishing that for the remainder of her lifetime she was entitled to a 1/3 share of the income from the residue of the estate of her father-in-law. She was not entitled to any part of the capital of the estate. Her legal fees were characterized as "expenses of collecting income to which she was entitled but the payment of which she could not otherwise obtain" (p. 1050), and, accordingly, were deductible. Whereas in the Dominion Natural Gas case, the expenses were incurred in litigation a subject matter of which was an item of fixed capital (a valuable, exclusive perpetual franchise), here the right to receive income was not a capital asset. Cartwright J. also noted (at p. 1050) that the Dominion Natural Gas case had extended the test in British Insulated to include the preserving of an asset or advantage for the enduring benefit of the trade.

Bannerman v. Minister of National Revenue, 59 DTC 1126, [1959] CTC 214, [1959] S.C.R. 562

When the taxpayer discovered that his co-shareholder had been diverting company funds for his own use during the previous few years, he brought a successful judicial application for a winding-up order. His expenses respecting applying for the winding-up order including legal expenses and travelling expenses were non-deductible given that his action to commence the winding-up proceedings was taken in order to remove his co-shareholder from the position he occupied in the company's affairs by reason of his casting vote, and in light of the fact that the receipt by the taxpayer of a deemed dividend was "very unlikely".

Minister of National Revenue v. Goldsmith Bros. Smelting & Refining Co., 54 DTC 1011, [1954] CTC 28, [1954] S.C.R. 55

The taxpayer successfully defended charges under the Combines Investigation Act that it had combined with others to prevent or unduly lessen the competition in the commercial distribution of dental supplies. Because the taxpayer incurred the associated legal expenses in order to defend its right to employ certain trade practices for the purpose of earning income from its business, those expenses were deductible by it.

Minister of National Revenue v. The Kellogg Company of Canada Ltd., 2 DTC 601, [1943] CTC 1, [1943] S.C.R. 58

deductible defence of infringement action

The taxpayer successfully defended a suit by the Canadian Shredded Wheat Company claiming that the taxpayer was infringing its registered trademark consisting of the words "Shredded Wheat". The taxpayer's legal expenses were held to fall within the general rule "that in the ordinary course legal expenses are simply current expenditures and deductible as such". Duff C.J. distinguished the Dominion Natural Gas case on the ground that:

"The right upon which the respondents relied was not a right of property, or an exclusive right of any description, but the right (in common with all other members of the public) to describe their goods in the manner in which they were describing them."

Minister of National Revenue v. Dominion Natural Gas Co. Ltd., 1 DTC 499-133, [1940-41] CTC 155, [1941] S.C.R. 19

fees incurred to preserve right to supply taxpayer's product

The taxpayer had continuously supplied the Township of Barton with natural gas under a by-law of that township granting perpetual rights for that purpose. Following the annexation of the Township to the City of Hamilton, the United Company, which had been supplying natural gas to the City of Hamilton, unsuccessfully sought an injunction restraining the taxpayer from supplying natural gas to what now was part of the City of Hamilton.

The legal expenses incurred by the taxpayer were non-deductible. Per Duff C.J., they were not incurred for the production of income but for the purpose of preventing the extinction of the business from which the income was derived (s.6(a) of the Income War Tax Act), and they were capital expenditures because the settlement of the issue gave rise to an enduring benefit within the sense of Lord Cave's language in British Insulated (s.6(b)). However, he noted (at pp. 499-135-6) that "in the ordinary course, it is true, legal expenses are simply current expenditure and deductible as such".

Kerwin J., after noting that the language of s. 6(a) was relatively liberal and comprehensive, found that the expenditures were capital expenditures because they were made "'with a view of preserving an asset or advantage for the enduring benefit of a trade'".

See Also

Agence du revenu du Québec v. 102751 Canada Inc., 2021 QCCA 605

legal fees incurred to recover a misappropriation of substantially all the taxpayer's assets were currently deductible

The taxpayer (Mobile), which was owned by a German family, sold its two Toronto properties in 2002 and 2003 for $7.3 million, with most of that sum being diverted by one of its directors (Black), without the authorization of the family, by lending it at 2% interest to his company, which was or became insolvent. After this was discovered in 2004, an action was commenced against Black and the other director (Black’s mother), with the action being settled in 2012 by the payment by Black of a sum plus interest thereon at 5%. The ARQ reassessed to deny the deduction by Mobile of legal and accounting fees incurred by it in investigating the disappearance of the sales proceeds and in relation to the Superior Court action, primarily on the basis that they were capital expenditures (TA, s. 129, similar to ITA s. 18(1)(b) – although TA s. 128, similar to ITA s. 18(1)(a), was also invoked).

In affirming the finding below that the professional fees were currently deductible, the Court stated (at paras.18-20, TaxInterpretations translation):

An expense to maintain a capital asset in good order will be deductible in computing business or property income as a current expense. In this case, the legal fees were incurred to recover the money misappropriated by Mr. Black, which capital existed long before the misappropriation. Therefore, these expenses did not increase the market value of the asset, replace a lost asset or create a new asset. As the judge stated, the fees had to be incurred to prevent the loss of the asset in order to make it grow. He decided that the primary purpose of the respondent was to generate income from its assets, which it could not have done but for the expense incurred to remedy the situation.

Since the settlement provided for interest to be recovered first (it provides for compound interest), the purpose of the professional fees was to generate income.

The judge committed no reviewable error when he stated that the non-recurring nature of the expense was not determinative.

Richards v. The Queen, 2019 TCC 289

legal fees incurred in an oppression action were both on capital and income account
Style of cause changed from Richards v. The Queen to Mader v. The Queen by amended judgment

The main source of income of the taxpayer and her husband until they separated in 2010 was dividends paid by two family corporations (“JEL” and “Holm”) to a family trust, and then distributed by it to them. However, shortly after the separation, her husband refused to consent to the payment of dividends, to him and the taxpayer. This left the taxpayer with no source of income other than her RRSP, and she commenced an action including a claim for spousal support and an oppression remedy. At issue was the deductibility of legal expenses identified by CRA as relating to the oppression litigation. This was settled with a settlement agreement pursuant to which the taxpayer “received a dividend payment of $1,533,469.16 as a result of her transferring 237 preferred shares of JEL to Mr. Richards” (para. 20).

After having noted (at para. 19) that, regarding the oppression action, the taxpayer “agreed on cross-examination that the main relief she sought was the redemption of her shares, McPhee J allowed the deduction of only about 25% of the legal expenses, on the grounds that the balance were capital expenditures, stating (at paras 38, 44-45):

Legal expenses incurred for the purpose of preserving capital assets are not deductible [citing Keating].

… [T]he fees incurred pursuing the Oppression litigation had as its dominant purpose, the intention to protect the Appellant’s interest in her shares in the corporations. Therefore, for the majority of the Oppression litigation expenses, I do find they were capital in nature, and therefore not deductible under paragraph 18(1)(b) of the Act.

But in this very particular fact situation, there is no question that professional fees were incurred seeking both the support and/or the payment of dividends by the corporations and the redemption of the Appellant’s shares. These costs were intermingled. Therefore, I have apportioned the fees in issue. … I will make an estimate that 25% of amount paid in the Oppression litigation was incurred in order to receive income.

Rio Tinto Alcan Inc. v. The Queen, 2016 TCC 172, aff'd 2018 FCA 124

investment dealer fees incurred respecting the advisability of making hostile takeover were fully deductible under s. 9

The taxpayer, a Canadian public company listed on the TSX, NYSE and LSE, incurred fees (mostly of investment dealers, law firms, and a French lobbying and public relations firm (“Publicis”)) in connection with its decision to make a hostile bid for a French public company (“Pechiney”) and the subsequent making and completion of that bid late in 2003. In 2004, the taxpayer determined to effect a butterfly spin-off of a portion of its (laminated products) assets, held through subsidiaries, which resulted in the receipt by its shareholders of shares of a new public company (“Novelis”) in January 2005.

After quoting Bowater and Wacky Wheatley, and referring (at para. 72) to "fees for services that assist the board in the decision-making process and in the fulfilment of its oversight function" as “Oversight Expenses,” Hogan J stated (at para. 88):

Simply put, Oversight Expenses are current expenses because they relate to the management of a corporation’s income‑earning process. ... This is to be contrasted with expenses incurred as part of the implementation of a transaction leading to the acquisition of capital property.

Applying this principle, 35% of the $8.2 million fee paid to Lazard Frères related to work leading to advice to the taxpayers’ board of directors respecting whether, and on what terms, an offer should be made for the Pechiney shares and, therefore, was fully deductible under s. 9, whereas the balance, which related to the negotiation and revision of the offer, was a capital expenditure (which CRA accepted was part of the cost of the Pechiney shares). The same approach indicated that 65% of the $26 million fee paid to Morgan Stanley (including respecting a fairness opinion) was fully deductible, as relating to the work culminating in the advice to the board, as well as indicating that Novelis-related fees of Lazard Frères (to the extent allocable to the work on divestiture options incurred up to the time of board approval of the butterfly spin-off) were fully deductible - with the balance (relating to the Novelis-transaction implementation) being incurred on capital account.

All of the $19 million fee paid to Publicis was a capital expenditure (added to the Pechiney share cost) as its “underlying purpose ... was to facilitate a smooth implementation of the Pechiney takeover.” (para. 112). Various miscellaneous legal and other expenses also were on capital account given the absence of convincing evidence that they were for other than facilitating the acquisition.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb) investment dealer fees re advisability of making hostile takeover were fully deductible 529
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(cc) legal fees incurred in securing regulatory approval for a hostile bid related to the bidder's business of earning income from shares and interaffiliate sales 182
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(g) takeover bid circular costs did not qualify 102
Tax Topics - Income Tax Act - Section 14 - Subsection 14(5) - Eligible Capital Expenditure fees incurred in order to acquire shares were excluded/butterfly expenses excluded as taxpayer was not in the business of implementing corporate reorganizations 365
Tax Topics - Income Tax Act - Section 169 - Subsection 169(2.1) raising general question of deductibility of fees and listing s. 20(1)(e) did not satisfy s. 165(1.11) 246
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e) failure to advance evidence showing allocation of fees to share consideration 139
Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(i) expenses incurred in butterfly spin-off recognized as disposition expenses 63
Tax Topics - Statutory Interpretation - French and English Version finding common meaning of 2 versions of s. 20(1)(bb) 108

Mills v. The Queen, 2014 DTC 1138 [at 3371], 2014 TCC 153 (Informal Procedure), aff'd 2015 DTC 5127 [at 6377], 2015 FCA 255

legal expenses to reduce support not deductible

The taxpayer incurred over $40,000 in legal expenses in an unsuccessful attempt to reduce child support payments made to his ex-wife. Masse DJ stated (at para. 20) that he agreed with the taxpayer "that it is not right that a parent who incurs legal expenses in order to obtain child support is entitled to deduct the legal expenses from income whereas the parent who incurs legal expenses in order to prevent child support from being established or increased or to decrease or terminate child support cannot deduct these legal expenses from income." However, as "the Tax Court of Canada is not a court of equity" (para. 21), the taxpayer's appeal seeking deduction of these expenses was dismissed.

Kondor v. The Queen, 2014 DTC 1215 [at 3870], 2014 TCC 303 (Informal Procedure)

legal fees to preserve illiquid investment through delaying spouse's claim

The taxpayer owned 50% of the shares of a corporation ("DPX") which made heavily leveraged investments. The taxpayer's wife expected to receive $2.1M cash following their separation. Because of the risky nature of DPX's portfolio, borrowing this sum was infeasible. The taxpayer instead incurred legal fees in order to delay the process for reaching a final settlement (which took three and a half years).

Graham J accepted that "the predominant purpose for which Mr. Kondor incurred the legal fees was to protect the value of his shares in DPX" (para. 11). Therefore, the fees were incurred for the purpose of producing income from property.

Nevertheless, Graham J disallowed the taxpayer's deduction of the legal fees because they were incurred to preserve a capital asset, and were therefore on capital account.

Ironside v. The Queen, 2014 DTC 1002 [at 2505], 2013 TCC 339

threat to professional accounting designation was too remote

The taxpayer incurred substantial legal fees to defend unsuccessfully against proceedings by the Alberta Securities Commission respecting false or misleading disclosure in the financial statements of a public company for which he was the CFO. He was fined by the ASC and prohibited from trading, and six years later the Alberta Institute of Chartered accountants rescinded his professional designation.

Campbell J found that the taxpayer (who at the time of the ASC investigation earned income from employment and also looked to earning gains from private placements) could not deduct the legal and professional fees in computing income from a business (namely, chartered accountancy as an alleged source of income), as the two were not substantially connected. She stated (at para. 54):

In both Leduc and in the appeals before me, the professional licenses were in no immediate risk at the time the expenses were incurred, despite the possibility that failure to defend the allegations could lead to future disciplinary action that had the potential of removing the professional designations.

And at para. 48:

[T]he Fees ... arose due to his conduct and actions in the capacity of President and director ... [and] were not incurred as a result of his business activities as an accountant.

Lacroix v. The Queen, 2014 DTC 1056 [at 2941], 2013 TCC 312 (Informal Procedure)

bankrupt corporation not a source of income to shareholder

The taxpayer was a shareholder in a corporation ("Canadevim"), and incurred legal fees contesting Canadevim's assignment in bankruptcy, a GST/QST assessment against Canadevim, and a personal tax appeal.

Bédard J found that the taxpayer could not deduct the fees as property expenses under s. 9. The fees could not have been for earning income from the Canadevim shares, as Canadevim was bankrupt. Moreover, they were capital in nature, and therefore not deductible as per s. 18(1)(b).

Kelso Patry v. The Queen, 2013 DTC 1142 [at 757], 2013 TCC 107 (Informal Procedure)

no connection with medical practice

The taxpayer, a physician, sought retribution against an arbitrator who had ruled against her in a medical dispute. The arbitrator successfully sued the taxpayer for what amounted to a "vendetta" to sabotage his professional standing and have him criminally prosecuted, and he was awarded punitive damages.

Hogan J found that the taxpayer's legal fees incurred in the arbitrator's suit were not a business expense, as there was no connection between the relevant legal expenses and the business. He noted in particular that the expenses could not have been incurred to enable the taxpayer to continue her professional practice, given that her practice had continued even though the arbitrator's suit could not have turned out worse for her (para. 37).

Audet v. The Queen, 2012 DTC 1208 [at 3556], 2012 TCC 162 (Informal Procedure)

fee to recover capital proceeds

The taxpayer sold his shares in a corporation for $300,000 but was only paid $25,000. In subsequent debt restructuring proceedings under the Bankruptcy and Insolvency Act, he personally paid $3000 to his bankruptcy trustee's counsel, who was charged with recovering the $275,000 in unpaid amounts for the shares.

Lamarre J. found that the $3000 payment was a capital outlay rather than a business expense. The payment had been made in order to recover proceeds of disposition of the shares, and those proceeds would have given rise to a capital gain.

The taxpayer's argued that he had a business purpose in incurring his expenses, given that his goal was to avoid bankruptcy and thereby keep his professional title (as a certified general accountant) and thereby preserve his source of income. In light of the above analysis, this argument was irrelevant to the conclusion that the payment was capital in nature.

Sarophim v. The Queen, 2012 DTC 1124 [at 3131], 2012 TCC 92 (Informal Procedure)

fee incurred to reduce support

Lamarre J. disallowed the taxpayer's deduction of legal fees connected with defending against an action to vary spousal support orders. Lammare J. found that it is "settled law" that legal fees incurred to prevent or reduce support payments are not made for the purpose of earning income (para. 8).

Potash Corporation of Saskatchewan Inc. v. The Queen, 2011 DTC 1163 [at 873], 2011 TCC 213

improved tax efficiency was enduring (3 year) benefit

The taxpayer incurred legal and accounting fees in 1997 and 1998 of approximately $1.9 million in connection with a complicated reorganization of the manner in which it financed its investment in its US subsidiaries. The end result of the reorganization was that it financed that investment through a Luxembourg subsidiary so that cash flow paid out of the US subsidiaries was subject to US withholding tax of 5% and to Luxembourg income tax of 5% - whereas if it had continued to maintain its previous structure, such distributions would have been subject to a 30% US withholding tax rate due to an adverse change in the US tax regime.

In finding that these were capital expenses, Hershfield J noted (at para. 88) that they were paid in order to create an entirely different "pipeline" or structure for maintaining the after-tax cash flow of the taxpayer, noted (at para. 92) that in Imperial Tobacco (and similarly in Kaiser Petroleum) "that an outlay made in the course of a corporate reorganization to achieve an assurance that some end goal will be completed or achieved in a manner that will have value, will be on capital account," and that although the tax benefits of this new structure would last only three years due to impending changes in the US-Luxembourg treaty, this nonetheless represented an enduring benefit because more than the current period was benefited (para. 98).

Trignani v. The Queen, 2010 DTC 1153 [at 3301], 2010 TCC 209 (Informal Procedure)

incurred to receive child support

The taxpayer incurred legal costs in the course of his 2006 divorce proceedings, which centered around custody of the couple's child. An interim court order on consent in 2001 gave the taxpayer sole interim custody and the spouse 50% access with supervision, and imposed an obligation on the taxpayer to pay $350 in monthly child support to the spouse. Nevertheless, the child in fact stayed with the taxpayer alone because appropriate supervision at the spouse's house was not available.

The Minister disallowed the taxpayer's deduction of legal costs incurred in the taxpayer's unsuccessful claim to receive child support payments, on the grounds that because of the 2001 order the taxpayer had no pre-existing right to child support. Woods J. disagreed at para. 23: "The legislative obligation to support children does not cease with a court order, and especially a court order providing for interim support only." The Minister also argued, but could not establish in evidence, that the taxpayer had abandoned his claim for child support.

Bilodeau c. La Reine, 2008 DTC 2870, 2004 TCC 685

indecent act defence linked to work activities

Before going on to find that legal fees incurred by the taxpayer in successfully defending its president from criminal charges laid on the basis of an indecent act allegedly performed by him in the course of his employment were deductible, Lamarre Proulx J. stated (at para. 44):

"In the case of an alleged act that is not inherently linked to work activities, if the person is found guilty, the person has committed an act that is outside the sphere of work. A sexual act is necessarily outside an employee's sphere of activity."

Mackinnon v. The Queen, 2008 DTC 2052, 2007 TCC 658

After noting (at para. 25) the distinction "between fees incurred to affirm a right and those incurred to acquire a right", Angers J. found that legal fees incurred by the taxpayer in connection with recovering an amount equal to the value of her son's RRSP which was wrongfully paid to his estate rather than to her, plus interest thereon, were fully deductible given that these fees were incurred "in order for the appellant to have returned to her that which was rightfully hers after the passing of her son, and they were not incurred for the purpose of acquiring a right" (para. 26).

Loewig v. The Queen, 2006 DTC 3500, 2006 TCC 476 (Informal Procedure)

Legal fees incurred by the taxpayer in order to obtain a court order confirming that the taxpayer no longer was required to make child support payments were not deductible.

Truckbase Corporation v. The Queen, 2006 DTC 2930, 2006 TCC 215 (Informal Procedure)

shareholder agreement expenses deductible

In finding that professional fees incurred by a corporation for the preparation of shareholder agreements were fully deductible with the exception of the portion acknowledged by the taxpayer to be eligible capital expenditures, McArthur J. found that the revised Shareholder Agreements gave rise to a corporate structure that made the business of the corporation more profitable and, respecting an argument that the expenditures were on capital account, indicated (at p. 2934) that he would "liken the redrafting of the Shareholder Agreements as the maintaining of an asset and (at p. 2935) the Shareholder Agreements were "amended to function as originally intended".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) corporate payment of shareholder agreement fees 98

Keating v. The Queen, 2005 DTC 743, 2005 TCC 296 (Informal Procedure)

fees incurred in oppression action re stripping of corpoate assets were capital expenditures

Legal fees incurred by the taxpayer in bringing an oppression action against her estranged husband and his companies for depleting her company of assets were incurred for the purpose of preserving a capital asset, and were not deductible.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 50 - Subsection 50(1) no obligation to take collection steps if collection not reasonably possible 110

Mulja v. The Queen, 2005 DTC 256, 2005 TCC 60

The taxpayer, who was employed by an Indonesian firm for part of 1998 until his employment was terminated, was found to have remained a factual resident of Canada given the significant ties he maintained with Canada.

Leduc v. The Queen, 2005 DTC 250, 2005 TCC 96

$140,000 in legal fees incurred by the taxpayer, a practising solicitor, to defend against sexual abuse charges, were found not to have been incurred for an income-producing purpose and to have their deduction denied by s. 18(1)(h). He would have incurred the expenses irrespective whether or not he was engaged in his profession, and it was not established that successful prosecution of him would have caused him to be disbarred.

BJ Services Company Canada, the successor to Nowsco Well Service Ltd. v. The Queen, 2004 DTC 2032, 2003 TCC 900 (TCC)

maximizing shareholder value

After receiving an unsolicited hostile bid from another public company (BJ"), the taxpayer retained legal and accounting advisers (whose fees were admitted to be deductible) and financial advisers, and after it secured a higher bid from another public company ("GLCC"), the first bidder responded with a higher bid, which was accepted, with the result that ultimately all the shares of the taxpayer were acquired by BJ, which merged with it. In finding that the financial advisory fees, together with fees payable by the taxpayer to GLCC (including a "break" fee) were deductible, Campbell J. noted (at p. 2041) that these expenses "not only satisfied a need of the company but were necessitated in dealing with the practicalities of a takeover bid environment", that "it is a basic common sense approach to view maximizing share price as inexplicably interwoven with the business of any company, whether that be public or otherwise" (p. 2042) and that "given the circumstances, the expenses were part of the general overall costs, a corporation must incur to earn income, even though these expenses have no direct link to revenue generating activities but are related to shareholder interests"(p. 2043).

Rona Inc. (anciennement Groupe Rona Dismat Inc.) c. La Reine, 2003 DTC 979, 2003 TCC 121

incurred to expand distribution network

Professional fees incurred by the taxpayer in seeking to expand its distribution network by making acquisitions (typically through share acquisitions) in order to add franchised stores to its network or acquire corporate stores, were on capital account. In the case of successful acquisitions, the professional fees were added to the costs of acquisition. Where the projects instead were abandoned (including a contemplated takeover bid), the costs nonetheless were capital outlays (which the Minister had treated as eligible capital expenditures).

Continental Lime Ltd. v. The Queen, 99 DTC 1154, [1999] 3 CTC 2525 (TCC)

defence protected income stream

The taxpayer was the successor by amalgamation to a holding company ("SB Holdings") and its subsidiary ("SB Canada"). When a minority shareholder of SB Canada ("Candou") became bankrupt, SB Holdings purchased those shares from Candou for $6 million, and sold them six years later for $34 million.

The taxpayer incurred legal fees in successfully defending a frivolous action brought by a creditor of Candou alleging that the $6 million purchase price was fraudulently undervalued. In finding that the fees were deductible, McArthur T.C.J. indicated that in defending the suit the taxpayer was not acquiring or preserving an enduring benefit but was protecting its income (the creditor was after money that the taxpayer required to carry on its normal operations and the action had to be defended to protect its profitability and reputation) and that SB Holdings had not committed any deliberate delict.

Coté v. The Queen, 99 DTC 5215 (FCTD)

incurred when grants terminated

A research program supervised by the taxpayer, who was associated with a Montreal hospital, was found to be a business in itself that was intended to produce exploitable intellectual property. Conversely, the taxpayer was not an employee of the hospital or an associated institute, notwithstanding that research grants were received by him from the institute. Accordingly, legal fees incurred by him when the institute terminated research grants were deductible.

Kruco Inc. v. The Queen, 98 DTC 1568, [1998] 3 CTC 2319 (TCC)

oppression action restored dividend income

The taxpayer, which held 32% of the outstanding common shares of another privately owned corporation ("Kruger") brought a statutory oppression remedy against Kruger as a result of Kruger ceasing to pay significant dividends on its shares. In addition to seeking the payment of the special dividend and a resumption of the ordinary dividends, alternative remedies were requested in order to bring additional pressure to bear on Kruger. The action was settled by Kruger agreeing to redeem the taxpayer's common shares for a substantial amount.

In finding that various legal and other fees incurred by the taxpayer in connection with the oppression remedy and various collateral actions were deductible, Archambault T.C.J. noted that the taxpayer's purpose was to receive more income for a relatively short period of time and that in applying for a remedy against oppression, the taxpayer was only exercising its right created by a statute rather than seeking the creation of a new right.

Neeb v. The Queen, 97 DTC 895 (TCC)

legal fees to defend against criminal charges for conducting an illegal narcotics business were personal

Legal fees incurred by the taxpayer in unsuccessfully defending narcotics charges were non-deductible as being of a personal nature (he was not seeking to justify the manner in which he carried on his business but, rather, to keep himself out of jail and to put the Crown to the proof that he carried on the business in question at all).

Graham Construction Engineering (1985) Ltd. v. The Queen, 97 DTC 342 (TCC)

Professional fees incurred in connection with a share reorganization of the taxpayer in which its shareholders transferred their shares to a holding company were found not to be incurred in connection with any activities which formed part of the business by which the taxpayer earned income and were incurred in connection with its dealings with its own shareholders as shareholder. Accordingly such fees were for capital purposes and, as capital expenditures, were to be treated in accordance with a concession of the Minister, as eligible capital expenditures.

Professional fees relating to proposed acquisitions of other corporations that did not proceed also were outlays on capital account.

Boulangerie St-Augustin Inc. v. The Queen, 95 DTC 164 (TCC), briefly aff'd 97 DTC 5012 (FCA)

Legal and accounting fees paid by the taxpayer in connection with the preparation of management circulars, which were sent to shareholders in response to three take-over bids, were fully deductible. The circulars were required to be prepared by section 134 of the Securities Act (Quebec), whose purpose was to ensure that all shareholders were given equal access to adequate information in the course of a take-over bid, and "having to look after one's shareholders is part of the periodic administrative duties of a company doing business" (p. 171). In addition, respecting s. 18(1)(b), the expenditures did not give rise to an identifiable enduring benefit. However, in obiter dicta, Archambault T.C.J. indicated (at p. 174) that if, contrary to the facts in this case, the board had been hostile to the take-over bids and had incurred expenses in order to fight the bids and maintain the status quo, s. 18(1)(b) would have applied.

412237 Ontario Ltd. v. The Queen, 94 DTC 1022, [1994] 1 CTC 2177 (TCC)

The taxpayer paid legal and accounting fees of $110,844 and $19,940, respectively, incurred by its principal shareholder as a result of his breach of an agreement with the other shareholder of the taxpayer. These amounts were non-deductible given the inability of the taxpayer to establish some connection between the earning of income and the payment of the fees.

Sommers v. The Queen, 93 DTC 1489, [1993] 2 CTC 3122 (TCC)

Legal expenses incurred by the taxpayer in successfully defending against charges brought under s. 239 arising out of his failure to report commission income from a business of selling electrical generators for a U.S. corporation, were non-deductible. Such expenses could not be characterized as "money spent to defend a normal business activity carried out in the course of business operations or which had been carried out for the purpose of gaining or producing income" (p. 1491). Rather than defending his way of doing business, he was defending a personal decision not to declare the United States income.

Bayer v. MNR, 91 DTC 1035, [1991] 2 CTC 2304 (TCC)

Legal expenses incurred by the taxpayer in obtaining a court order which reduced the amount of alimony payments which he was required to make to his former wife, were non-deductible. "A spouse enforcing a right to obtain a court order for reducing alimony payments is not enforcing an income producing right, but is enforcing a right to sue to diminish the amount to be paid by virtue of an obligation to pay" (p. 1037).

Pappas Estate v. MNR, 90 DTC 1646, [1990] 2 CTC 2132 (TCC)

Legal expenses incurred by an estate with an extensive portfolio of investments in connection with obtaining probate; determining the extent of the entitlement of various beneficiaries; managing and supervising the investments; devising and carrying out plans to minimize taxation of the estate, beneficiaries and companies within the group; and investing in liquid assets; were non-deductible.

National Starch and Chemical Corp. v. Commissioner of Internal Revenue (1990), 93 T.C. 67

The petitioner, whose shares were traded on the NYSE, incurred legal fees of $490,000 and a fee of $2.2 million from Morgan Stanley (primarily for a fairness opinion) in connection with the friendly take-over bid of the petitioner by the Unilever Group pursuant to which shareholders of the petitioner had a choice between receiving cash or exchanging their shares on a rollover basis for shares of a Unilever company. These, and related fees, did not qualify for deduction under s. 162(a) of the Code as being "ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business":

"Petitioner's directors determined that it would be in petitioner's long-term interest to shift ownership of the corporate stock to Unilever. The expenditures in issue were incurred incident to that shift in ownership and, accordingly, lead to a benefit 'which could be expected to produce returns for many years in the future.' E.I. Du Pont De Nemours and Co. v. United States, 432 F. 2d 1052, 1059 (3d), Cir. 1970. An expenditure which results in such a benefit is capital in nature."

Belair v. MNR, 89 DTC. 429, [1989] 2 CTC 2186 (TCC)

Legal and accounting fees which the individual taxpayer incurred in the enforcement of his rights under a shareholders' agreement, which culminated in the receipt by him of deemed dividends on the purchase for cancellation by the corporation of his common shares, were "like expenses incurred to collect rents, royalties or other income from property," and were fully deductible.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) deemed dividends arose only as the shares were actually redeemed 110

Les Laiteries Leclerc Inc. v. MNR, 71 DTC 702, [1971] Tax ABC 1061

Professional fees which were incurred for the purpose of a bond issue which did not take place, and which issue would have been the means of acquiring the assets of a company similar to the taxpayer, were non-deductible. Because the professional fees were to have assisted in acquiring the total assets of another company, they were not operating expenses and instead were paid on account of capital.

C.I.R. v. Carron Co. (1968), 45 T.C. 18 (H.L.)

The day-to-day conduct of the business of the taxpayer was significantly hampered by its 1773 charter, which limited its borrowing powers to £25,000, and contained restrictions on the transfer of shares coupled with stringent qualifications for voting that effectively precluded the management of the company by a salaried official with a status equivalent to that of a managing director. In order to obtain a supplementary royal charter which removed these restrictions on profitable trading, the company first had to pay £88,000 to two of its shareholders in settlement of their opposition to such a change, and then obtained the supplementary charter itself at a cost of £3,107.

The expenditures were deductible. In finding that the expenditures were incurred on income account, Lord Reid stated (p. 68):

"This money was spent to remove antiquated restrictions which were preventing profits from being earned. It created no new asset ... 'The benefit was essentially of a revenue character because the Company became able more easily to finance its day-to-day transactions, and more efficiently to carry on its day-to-day manufacture.'"

Morgan v. Tate & Lyle Ltd., [1955] A.C. 21 (H.L.)

A company engaged in a sugar refining business was entitled to deduct expenses of propaganda campaign directed against the nationalization of the sugar refining business, on the basis that such expenses were "wholly and exclusively laid out or expended for the purposes of the trade" within the meaning of rule 3(a) of the Rules applicable to Schedule D, Cases I and II. Lord Morton stated (p. 39):

"If the assets are seized, the company can no longer carry on the trade which has been carried on by the use of these assets. Thus the money is spent to preserve the very existence of the company's trade."

It was also noted (by Lord Reid at p. 55) that if the proposed nationalization had entailed an acquisition of the shares of the company rather than its assets, the expenditures would have been non-deductible.

Hallstroms Pty Ltd. v. Federal Commissioner of Taxation (1946), 8 A.T.D. 190 (H.C.)

The taxpayer reorganized its affairs in order to commence manufacturing and selling a superior type of refridgerator upon the expiry of the patent for that refridgerator that had been granted to the competitor. In finding that legal fees incurred by the taxpayer in opposing a petition by the competitor to extend the life of the patent were deductible, Latham C.J. stated (at p. 191):

"A right enjoyed in common with all persons is not a capital asset of any single person ... . [E]xpenditure in the defence of a right enjoyed in common with all His Majesty's subjects is not expenditure incurred in obtaining anything. It is an outgoing of the business incurred in keeping the business going on the same basis as in the past, without any change in the constituent elements of the profit-yielding structure."

Archibald Thomson, Black and Co. Ltd. v. Batty (1919), 7 T.C. 158 (Ct. of Ses. (2nd Div.))

A company, which after a history of losses had become profitable, was precluded from paying dividends because of a substantial deficit. In order to permit the company to resume the payment of dividends, it incurred legal and other expenses in accomplishing a reduction of the capital of its issued shares. These expenses were found to have not been "made for the purposes of the trade of this Company, but for the purposes of distributing the profits of its trade, after these profits have been earned" (p. 162). Accordingly, the expenses were non-deductible.

Administrative Policy

25 July 2019 External T.I. 2018-0787011E5 - Spousal support - legal expenses & lump-sum awards

general deductibility of legal fees incurred for periodic support (but not for a lump sum settlement)

In prior years, an individual had deducted legal fees incurred to obtain spousal support. However, such proceedings resulted in a lump sum award that did not qualify as a “support amount.” Did this outcome require adjustments to the prior years’ tax returns to reverse the deductions?

After making the assumption that the individual had a pre-existing right to spousal support, and after also noting that support amounts generally were periodic in nature, CRA stated:

[A]n individual who starts a support claim to establish or collect support amounts (whether prospectively, retroactively, or both) would generally be able to deduct legal fees they incurred for that purpose. This would be the case as long as the support claim is bona fide and … with a reasonable chance of success, and even if the claim for support is unsuccessful … . Conversely, where an individual starts a support claim for the purpose of collecting a lump-sum payment that does not qualify as a support amount …, the individual is not entitled to deduct legal and accounting fees incurred for that purpose.

Assuming that the support claim … was started to establish or collect support amounts … no adjustments to the individual’s prior years’ tax returns would be warranted to exclude the legal expenses previously deducted in computing the individual’s income.

22 May 2014 Ponoka Liason Meeting Roundtable, 2014-0528451C6 - Cost of Making Voluntary Disclosure

costs of voluntary disclosure incurred by business

This was a follow-up query on 2012-0437831E5, indicating that voluntary disclosure costs were not deductible, as they were neither incurred to earn income from business or property, nor in relation to an objection or appeal. After confirming this position, CRA stated:

However, where a taxpayer earns income from a business, the cost of making a voluntary disclosure relating to that business may be deductible as a cost of representation pursuant to paragraph 20(1)(cc).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(cc) costs of voluntary disclosure incurred by business 80
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(o) costs of voluntary disclosure incurred by business 80

17 October 2014 External T.I. 2014-0532121E5 F - Frais professionnels - Divulgation volontaire

voluntary disclosure fees generally non-deductible

Are legal or accounting expenses incurred respecting a voluntary disclosure deductible? Before indicating that fees incurred once CRA indicates that it will reassess generally are deductible under s. 60(o), CRA stated (TaxInterpretations translation):

[P]rofessional fees incurred in this context are not intended to produce income, because the VD instead permits a taxpayer to correct omissions made in the context of dealings with the CRA. Consequently, the deduction of the professional fees incurred in this context is restricted by paragraph 18(1)(a). However…certain of the professional fees incurred in this context which are directly linked to the reporting of property or business income, such as expenses of preparing the tax returns, could be ["pourraient être"] deductible.

See summary under s. 60(o).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(o) fees become deductible from CRA indicating it will reassess 122

16 June 2014 STEP Roundtable, 2014-0523061C6 - Trust audit issues

legal and accounting expenses

In a discussion of common audit issues, CRA stated:

In document 2013-047756117 we provided advice on the deductibility of carrying charges (specifically legal and accounting expenses), with respect to an individual's T1 final return and an estate trust return. …

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(21) capital gain distributed to different beneficiary 137
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) benefit conferred when trust shares redeemed at undervalue 196
Tax Topics - Income Tax Act - Section 112 - Subsection 112(3.2) taxpayer stuck with two-transaction form 155
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts executors lacked power to make gift 92
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2) settlor taking back undervalued freeze shares 76

5 December 2012 Internal T.I. 2012-0451331I7 F - Déductibilité de frais juridiques

legal expenses incurred to minimize responsibility under guarantee were not connected to operations which were necessary or incidental to the earning of income

Legal expenses incurred by the individual taxpayer when X (likely, a corporation of which the taxpayer was a shareholder, although this is not clear) defaulted, were not deductible. CRA stated (TaxInterpretations translation):

As was decided in Byram and MacCallum, when legal expenses are incurred in order to obtain [sic, as a result of] a guarantee respecting a debt of a corporation, the CRA is of the view that they are deductible as having been for the obtaining of necessary financing for the corporation so that it can continue its operations.

However, in this case, the legal expenses were incurred in order to contest and minimize the taxpayer's responsibility under the contract of guarantee. In such a situation, the legal expenses are not connected to operations which are necessary or incidental to the earning of income from a business or property These expenses instead are incurred in order to establish whether the taxpayer is liable and not for the producing of income or for the disposition of property (namely, the debt in this case).

Other legal expenses incurred in an action to defend against a demand that the taxpayer assume a debt, with such defence then being abandoned, were non-deductible given the personal nature of the expenses.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(o) sales tax disputes not covered; expenses start running from audit review 120

27 February 2012 External T.I. 2012-0435081E5 - Act'ing Fees for Private Entpr BusCombinationCosts

Legal and accounting fees associated with a business combination which would have been required to be capitalized under old Canadian GAAP but which, under Accounting Standards for Private Enterprises would be treated (per ASPE 1582.55) as deductible expenses nonetheless would be required to be treated as part of the cost of the capital property acquired.

6 February 2012 External T.I. 2012-0434071E5 F - Honoraires professionnels - PDV

professional fees incurred in applying under the VDP are not deductible

After noting that professional fees incurred under the voluntary disclosure program are deductible under s. 60(o) once CRA commences its review, CRA went on to state:

Thus, professional fees incurred by a taxpayer to make an application by virtue of the Program would be deductible only to the extent that:

a) they are incurred to earn income from a business or property;

b) they are not capital expenditures.

In general, reasonable fees and expenses incurred for the purpose of obtaining advice and assistance in preparing and filing income tax returns for income tax purposes are usually deductible by virtue of section 9. However, the fees for applying under the VDP should not, in our view, receive the same treatment, as they are not expenses that are part of the income-earning process of a business or property. These expenses are instead incurred to determine if the taxpayer is eligible for the VDP and with a view to regularizing the taxpayer’s tax situation.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(o) professional fees incurred under VDP are deductible under s. 60(o) once CRA commences its review 109

31 March 2011 Internal T.I. 2011-0291701I7

acceptance of BJ Services; merger a capital transaction

Expenses incurred by a public corporation with respect to an unsuccessful bid to acquire another public company were capital expenditures on the basis that there was a plan to merge with the target's business and on the basis of "CRA's long-standing position that expenditures incurred in an unsuccessful transaction will be accorded the same treatment as if the transaction had been successfully completed." Such expenses were eligible capital expenditures.

However, expenses incurred by a corporation (i) in respect of a proposed combination with another corporation, and (ii) in responding to an unsolicited takeover bid, were deductible under s. 9. Respecting the first category of expenses, CRA stated:

The proposed XXX combination would appear to have been negotiated in circumstances that are very similar to those considered by the Tax Court in BJ Services, which found that the costs were deductible in computing income under subsection 9(1). While we believe that an argument could be made that these transaction costs were on account of capital as the proposed combination represented a capital transaction relating to the structure in which XXX 's business would be carried on, such an argument is contrary to the decisions in BJ Services and International Colin Energy.

Respecting the second category of expenses, it stated:

Based on established case law, including the decisions in British Columbia Power Corp. Ltd. v. MNR 67 DTC 5258, [1968] S.C.R. 17 and Boulangerie St-Augustin Inc. v. The Queen 95 DTC 164 (TCC); affirmed by 97 DTC 5012 (FCA), the costs incurred by XXX with respect to obtaining professional advice and communicating with its shareholders concerning the XXX and XXX offers would be deductible as current expenses....

8 October 2010 Roundtable, 2010-0373641C6 F - frais juridiques engagés par des conjoints de fait

legal costs incurred by common-law partners to negotiate support are non-deductible

Although there is no legislation providing for the payment of support between common-law partners in the event of separation, Mr. X and Ms. X (Quebec residents) negotiated an agreement under which Mr. X will pay support to Ms. X (the "Agreement"), with the Agreement being approved by the Court. Are the legal costs incurred by each for the negotiation and conclusion of the Agreement deductible? CRA responded:

In … IT-99R5 … the CRA confirms that legal costs incurred to enforce pre-existing rights to interim or permanent support amounts are deductible. A pre-existing right to a support amount can arise from a written agreement, a court order or legislation such as sections 11 and 15.1 of the Divorce Act with respect to child support, or Part III of the Family Law Act of Ontario. As a result of … Gallien v. The Queen … 2000 DTC 2514 … legal costs incurred to obtain spousal support pursuant to the Divorce Act, or under provincial legislation in the case of a separation agreement, are also deductible.

However, in the case of common-law spouses, the legal costs incurred to negotiate either a … cohabitation contract or a separation agreement are for the establishment and negotiation of an entitlement to support. At that level, it is the CRA's position that the legal costs would not be deductible to either Mr. X or Ms. X.

20 June 2007 Internal T.I. 2007-0233551I7 - Deductibility of Transaction Costs

Professional fees (including fees for audit services) incurred by a Canadian-controlled private corporation in connection with a proposal to convert to an income trust that did not proceed, were found to be eligible capital expenditures. CRA noted that the Courts generally have found that "costs incurred for the creation of a business entity, structure or organization, or for the modification of such entity, structure or organization are capital in nature" and that " the purpose of the proposed conversion was to obtain an advantage of an enduring nature, including the elimination of the corporate level of tax and increasing the ability of the business to raise investment capital."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(cc) auditor fees not deductible where no report 42

6 October 2006 APFF Roundtable Q. 21, 2006-0195981C6 F - Deductibility of Professional Fees - Reorg.

Fees for legal opinions and fairness opinions obtained by a public corporation in connection with a proposed offer to repurchase a portion of its shares would be capital expenditures as such fees would be incurred in connection with a reshaping of the corporation's capital structure.

Similarly, fees paid for a fairness opinion obtained in connection with a proposed amalgamation of a corporation would be considered to be capital expenditures. CRA stated:

[M]erger costs are normally described as capital expenditures because such amounts are not expended as part of the money-earning process. These expenses rather have the effect of enlarging the structure within which the profits are earned, [with] the effect of modifying such structure permanently or in an enduring way. Finally, merger costs can be considered as expenditures made once and for all, with a view to bringing into existence an advantage of enduring benefit for the business of the merging corporations and for the business of the corporation resulting from the merger.

16 March 2006 External T.I. 2005-0133301E5 F - Arrérages pension alimentaire reçus par succession

legal fees to settle an estate are non-deductible

Legal fees incurred by an estate in reaching a settlement of its claim against the ex-husband of the deceased for arrears of support for the deceased, were non-deductible by it. CRA stated that generally, legal fees:

are deductible only to the extent that they are incurred for the purpose of gaining or producing income from a business or property, and are not outlays of a capital nature. Consequently, legal fees incurred to settle an estate are not deductible.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(b) support arrears received by estate were tax-free 26

4 November 2005 External T.I. 2004-0108271E5 F - Frais juridiques-105(2)

legal fees costs incurred to defend the right of use of the property were capital expenditures

Regarding rights that arose under the will of the taxpayer's spouse as a special legacy, CRA indicated that only the part of the legal costs that was incurred to defend the right for expenses and for the maintenance of the property was deductible in computing the taxpayer's income, whereas the part of the costs that was incurred to defend the right of use of the property was an expense of a capital nature.

11 October 2005 External T.I. 2005-0148281E5 F - Déductibilité de dépenses

accounting fees in preparing consolidated financial statements generally deductible

In finding that accounting fees related to the preparation by a parent of consolidated financial statements for the group were generally deductible, CRA stated:

… IT-99R5 … lists legal and accounting fees for a wide range of ordinary functions. We are of the view that fees incurred by a parent corporation for the preparation of its consolidated financial statements in the ordinary course of business are also considered qualifying expenses.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(24) s. 248(24) does not affect deductibility of fees for preparing consolidated financials 89
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Improvements v. Repairs or Running Expense periodic (every 3 years) required actuarial valuations were currently deductible 83

8 June 2004 Internal T.I. 2004-0067401I7 F - Dépenses d'une entreprise illégale

legal fees incurred to defend criminal charges for carrying on an illegal drug business were non-deductible

The taxpayer was charged, convicted and imprisoned regarding an illegal activity, along with having the equipment of that business seized and forfeited pursuant to section 16 of the Controlled Drugs and Substances Act. Regarding the non-deductibility of his legal fees incurred in defending against the charges, the Directorate quoted from Neeb, and stated:

[T]he taxpayer is in the same position as Mr. Neeb, i.e., the legal fees he incurred were not for the purpose of defending the manner in which he carried on his business but rather to defend himself against personal charges that could result in his imprisonment. The legal fees incurred by the taxpayer are therefore not deductible in computing his income since they are a personal expense of the taxpayer.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Computation of Profit onus on taxpayer, who did not keep records, to displace the net worth assessment method results 177
Tax Topics - General Concepts - Onus onus on taxpayer, who did not keep records, to displace the net worth assessment results, with documentation or other “acceptable evidence” 130
Tax Topics - Income Tax Act - Section 20 - Subsection 20(16) terminal loss when illegal equipment was forfeited to the Crown by court order 122
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Disposition of Property disposition when illegal equipment was forfeited to the Crown by court order, rather than when it was seized by the RCMP 167

10 May 2004 Internal T.I. 2003-005362

Professional fees incurred by two corporations in connection with their merger and incurred after they decided to commit to the transaction would be eligible capital expenditures.

8 November 2005 Internal T.I. 2004-0109351I7 F - Frais juridiques - pension alimentaire

legal expenses to obtain increased support, but not to reduce a support obligation, are currently deductible

The taxpayer incurred legal costs in order to collect arrears of support (for the benefit of children born of the marriage) from her ex-spouse, to obtain increased support from him for the benefit of the son born of their marriage, and in order to be relieved of any support obligation towards her adult daughter (who was no longer living with him).

After noting the distinction in Burgess between (deductible) expenses incurred to enforce or preserve an existing right to support and non-deductible incurred to create a new right, CRA affirmed its position in in Income Tax Technical News No. 24 (contrary to the Burgess view that there is the creation of a new right in this situation) that it accepts that “legal fees incurred to obtain spousal support under the Divorce Act, or under provincial law in the case of a separation agreement, are legal fees that were incurred to enforce an existing right to support,” so that such costs are deductible in computing the taxpayer's income. CRA further indicated that “because both the father and the mother have an obligation to support their children … where court costs have been incurred to increase child support or to make child support non-taxable, the CRA accepts that those costs are deductible in computing the taxpayer's income.”

CRA concluded:

[T]he taxpayer would be entitled to deduct the portion of the court costs incurred in collecting the arrears of support from her former spouse. Those expenses are of a current nature.

…[T]he taxpayer's right to deduct the portion of the court costs that relate to the taxpayer's objective of being relieved of any support obligation towards her adult daughter.

[W]ith respect to the taxpayer's claim for increased support from her former spouse for the benefit of the son born of the marriage … the underlying legal expenses are [not] deductible from the taxpayer's income. Although the jurisprudence indicates that the right to such support is not extinguished by the dissolution of the marriage and that the related legal fees are current in nature … the amounts claimed by the taxpayer [do not] truly constitute support, since the taxpayer has no discretion as to the use of the funds under subsection 56.1(1) and the definition of "support" in subsection 56.1(4).

… [T]he fact that the legal proceedings are currently suspended can [not] affect the deductibility of the expenses in question.

3 December 2004 External T.I. 2004-0089341E5 F - Intérêts et frais juridiques

legal fees to recovery a legacy were non-deductible

In finding that fees of lawyers and experts incurred by the taxpayer, in in connection with bringing an action to recover a legacy payable pursuant to a codicil to a will, were non-deductible, CRA stated:

[T]he taxpayer did not incur them for the purpose of earning business or property income since she incurred those fees of lawyers and experts to recover amounts owed to her in connection with a family inheritance. Consequently, those costs are not deductible because of the restriction in paragraph 18(1)(a), and also had more of the character of non-deductible capital expenditures.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(c) interest on amount held in court until judgment rendered was contingent, and non-includible, until judgment rendered 159

6 February 2002 External T.I. 2001-0105605 - Tax Treatment of Transaction Costs

Discussion of the deductibility of professional fees incurred respecting advice on issues associated with a takeover or sale, advice on the tax treatment to the shareholders and carrying out any reorganizations necessary to facilitate the takeover. "Where Pubco fights a proposed take-over, the Agency expects that Pubco will make a reasonable allocation of costs between those required to meet its obligations under a Securities Act and/or Business Corporations Act, which are deductible, and those incurred to put a defence mechanism in place, which the Agency views as non-deductible."

4 October 1994 External T.I. 9421425 - DEDUCTIBILITY OF FEES

"Legal fees incurred prior to the commencement of a business and those included with amounts paid upon a court settlement relating to a proposed business are not deductible where the proposed business has never commenced.

13 May 1994 External T.I. 9404425 - DEDUCTIBILITY OF LEGAL FEES

Whether legal fees incurred in opposing efforts by a Medical Association to prevent a physician from practising medicine, as well as legal fees incurred with respect to defending criminal charges, will be deductible will turn on the relationship of the conduct in question to the taxpayer's income earning activities.

29 October 1991 Memorandum (Tax Window, No. 12, p. 13, ¶1557)

Cost incurred in obtaining an advance income tax ruling will be deductible if they relate to a business of the taxpayer and the transactions in question are of an income nature. It is RC's practice to accept the cost of obtaining a ruling as a cost relating to the business even though there may be arguments that the proposed transactions themselves do not relate to a business carried on by the taxpayer.

90 C.R. - Q15

In the determination of business or property income, legal, accounting and other similar expenses are representation, including expenses incurred in preparing and presenting an objection or appeal concerning a federal or provincial assessment, are generally deductible.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(o) 23

89 CR - Q10

"Costs incurred by a corporation in resisting a hostile takeover attempt are ordinarily incurred for the purpose of maintaining the ownership positions of its existing shareholders or the control position of its existing management ... These costs would therefore not be incurred for the purpose of gaining or producing income from a business or property of the corporation and consequently would fail to satisfy the purpose test in paragraph 18(1)(a) and paragraph 14(5)(b)."

81 CR - Q.40

The cost of winding-up a company cannot be said to be laid out to earn income and thus is not deductible either as a current operating expense or as an eligible capital expenditure.

IT-99R5 "Legal and Accounting Fees"

IT-143R3 "Meaning of Eligible Capital Expenditure"

Discussion of legal fees incurred in connection with reorganizations (para. 13), share acquisitions (para. 23).

IT-341R2 "Expenses of Issuing or Selling Shares, Units in a Trust, Interests in a Partnership or Syndicate, and Expenses of Borrowing Money" under "Expenses Incurred in the Course of an Issuance or Sale of Shares, Units or Interests" and under "Expenses Incurred in the Course of Borrowing Money"


Gabrielle St-Hilaire, "Extinguishing One Controversy While Stoking Another in Nadeau", 14 Canadian Current Tax, Vol. 14, No. 10, July 2004, p. 109.

David W. Smith, "Corporate Restructuring Issues: Public Corporations", 1990 Corporate Management Tax Conference Report, pp. 6:39-6:51

Discussion of deductibility of legal fees incurred in connection with take-over bids.