Are Legal Fees Deductible Expenses?
Deduction of Legal Fees for Tax Objections & Appeals
Under Canada’s self-assessment tax system, taxpayers are required to care for their tax affairs themselves, and to bear the burden of these costs personally. While taxpayers earning income from business or properties may be able to deduct expenses for the preparation and filing of returns, others have no such luck. However, if an individual is unfortunate enough to need to fight an assessment or reassessment for income tax, they can deduct fees and expenses incurred in doing so against their income.
Legal Fees Relating to a CRA Appeal are Deductible
Section 60 of the Income Tax Act provides taxpayers with miscellaneous deductions that, unlike, for example, business expenses, do not relate to any specific source of income. These are part of how taxpayers go from their “total income” to their “net income” for tax purposes. Paragraph (o) allows them to claim a deduction for “preparing, instituting or prosecuting an objection to, or an appeal in relation to” income tax assessments and assessments under some related legislation. CRA extends this treatment to fees for responding to audits, as well as related expenses and disbursements.
While taxpayers operating businesses would likely be permitted to claim many expenses of tax disputes as business expenses, this would not be available for employees or people without income.
This is not restricted to the person claiming the deduction; provided that the person claiming the deduction has an interest in another person’s taxes, they can claim expenses for financing their objection or appeal (for example, a director of a company could likely claim expenses for financing the company’s defense against an income tax audit).
Are Legal Fees in Relation to a GST/HST Audit Deductible?
The restriction of this benefit to income tax can cause problems, particularly given CRA’s recent escalation of enforcement in the housing sector. For example, fees for a taxpayer’s defense against a denied New Housing Rebate for an owner-occupied home would not generally be deductible. Where the CRA audits for HST on the sale of a new property, the seller may be able to argue that they can claim fees as a business expense. However, they may not be able to do so without first losing their appeal, as to succeed they generally need to demonstrate that they are not running a business. More difficult would be claiming input tax credits, the HST analogue to expenses, as statutory language suggests that the business must remain operating.
Call a Tax Lawyer
If you need assistance contesting or preventing an assessment of your income taxes, contact Kalfa Law for a consultation to discuss the best way forward. We are happy to discuss the deductibility of our own fees or those of other professionals with our clients. However, specific advice regarding fees in any given situation can only be provided in the course of a lawyer-client relationship, and the discussion above is for general information purposes only.
– James Alvarez, Tax Counsel
© Kalfa Law 2019