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Tax Tips
| Deductibility of Legal Expenses |
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| Subsection 60(o) allows for the deductibility of legal payments for an objection or appeal for another person |
Legal expenses are deductible pursuant to subsection 60(o) or as a general business expense. Subsection 60(o) states that amounts paid by the taxpayer in the year in respect of fees or expenses incurred in preparing, instituting or prosecuting an objection to, or an appeal in relation to an assessment of tax are deductible.
In the recent Tax Court case of Flood (2006 TCC 186), Robert Flood attempted to deduct approximately $9,000 of legal fees. These legal fees were in respect of his mother's estate, and criminal proceedings against him related to his mother's estate. Mr. Flood had to fight the CRA with respect to the valuation of real estate that was deemed to be disposed of upon his mother's passing. The CRA felt that the valuation he used was so low that criminal proceedings were required.
Mr. Flood claimed that the legal fees were deductible for the following reasons: - There is nothing in subsection 60(o) that states that the legal fees must be in respect of an objection for that specific taxpayer.
- Mr. Flood had to pay these expenses to maintain his position as a member of The Law Society of Upper Canada. If Mr. Flood were convicted of these criminal charges, he would no longer be able to practise law. (The CRA lost the criminal case.)
The CRA's argument was that only the person who is objecting to the assessment can deduct the legal fees. The judge clearly stated that there is nothing in subsection 60(o) that states that the amounts paid in respect of the objection must be paid by the person against whom the assessment was made. He goes on to state that it would be unreasonable to permit a stranger or volunteer who had no interest whatsoever in the situation to deduct the legal fees. However, where the taxpayer's son is paying for the fees of his mother's estate, there is an obvious connection which cannot be ignored. The judge also noted that aside from paragraph 60(o), the legal fees would be deductible as ordinary business expenses since Mr. Flood had to win the criminal case in order to continue to practise as a lawyer.
It is always interesting when the CRA adds things to sections of the Income Tax Act that do not exist. There is nothing in the Income Tax Act that says that the payments must be made for the person filing the objection. However, this did not stop the CRA from putting forth that argument. Legal fees, in general, are very limited as to when they are deductible. However, when it is clear that they are made in respect of a tax assessment, or objection, they are deductible.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.
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