Finding the tax answers to legal fees

Legal fees … Argh.

The reality is we come across the need for legal support from time to time, and it can be a sizable bill at the end of the day. The question often asked is, can these fees be used as a tax deduction?

There are a couple of common examples, and some not so common.

If you own your own business and retain the services of a lawyer to advise you on most matters surrounding the earning of income (or prevention of a loss), these legal fees are deductible. Included are legal fees needed to make representation to the government or its agencies, often referred to as lobbying.

Another common example is the ability to deduct legal fees associated with the selling of your home and purchasing of a new home if you are moving closer to your place of work and that move is at least 40 km.

Commissioned sales representatives, whether working independently or as an employee, can often deduct legal expenses as they pertain to earning income.

If owed money from an employer, any legal expense incurred to collect on it is deductible.  Likewise, if legal services are retained to aid in collecting severance pay, a wrongful dismissal award, or a pension benefit, these fees are also deductible.

However, you must have earned income the year in which they are collected otherwise this deduction has to be carried forward until such time as income is earned from employment, sometimes an issue if it’s retirement time.

One of the more contentious issues concerning the deduction of legal fees involves family break-down and support proceedings.  Legal expenses associated with divorce are not deductible. This includes the legal costs associated with custody and support, both child and spousal, proceedings.

However, once there is an agreement established for child or spousal support, any future matter requiring legal fees for the enforcement of, or alteration to, the agreement on the part of the support recipient are deductible expenses by the recipient.

It is noteworthy to mention that this legal fee deduction is not available to the paying party of child or spousal support if they find they have to defend against payment or an increase in payment, or choose to apply for a reduction or elimination of the support.

This is a tax issue that is sometimes misreported to CRA.

Speaking of CRA, if you ever have, or perhaps choose, to take on CRA, you may take solace in knowing that “the taxman” allows you to deduct the legal fees (and accounting fees) paid to prepare and present your case to CRA.

This includes the filing of a Notice of Objection, negotiations with CRA and even taking an appeal all the way to the Tax Court of Canada. In fact, these expenses are deductible even if you only internally investigate your options for appeal to CRA, and you choose to go no further.

On an unrelated matter, a reminder that this year’s deadline is special since April 30 falls on a Saturday.  The Tax Act states that when April 30 is on a Saturday, Sunday or holiday, the due date for personal taxes is the first business day following.  So that means Monday, May 2 is the deadline … ELECTION DAY, how ironic.

This is the last in my series of tax columns this year. It has been a pleasure to present tax matters over the past two months that may have aided in your tax preparation. For a review of all the columns, visit www.jbsbiz.net.

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