LEGAL EXPENSES – DEDUCTIBILITY

Issue 446, October 2018

claiming in the year the fees are paid

In an April 11, 2018 Technical Interpretation (2017-0699751E5, McCarthy, Kathryn), CRA discussed a number of issues related to the deductibility of legal expenses from employment income (Paragraph 8(1)(b)). CRA first noted that such fees must be paid and incurred by the taxpayer to collect (or establish the right to collect) amounts which will be taxable as employment income. The deduction must be made in the year the legal fees are paid, which may not be the same year in which any employment income is reported.

the limited purposes which will permit a deduction

The claim need not succeed in generating employment income. CRA noted that their Interpretation Bulletin IT-99R5, Legal and Accounting Fees, is incorrect in this regard, as determined in a Federal Court of Appeal case (John Loo vs. H.M.Q., A-206-03) decided subsequent to the most recent update of the Interpretation Bulletin. However, the purpose must still be to collect employment income owing. Other purposes, such as obtaining a raise or promotion or reinstatement of employment with no retroactive pay, would not qualify for a deduction.

Like this article? Click here to become a Monthly Tax Update Newsletter subscriber.