The real world indicates that at some point we will likely need legal support. Because this can lead to a sizable expense, it’s gratifying to know that in some cases Canada Revenue Agency (CRA) allows legal fees to be tax deductible. Here are some situations in two common areas of life that yield deductible legal costs.
Family law is one area where legal fees may be deductible.
Although legal expenses associated with family breakdown including legal proceedings for child custody and support and for spousal support are not deductable, once an agreement is in place, future matters requiring legal fees for the enforcement of, or alteration to, a child or spousal support agreement may be deductible.
I say “may be” because the legal fees incurred by the recipient person are deductible. However, the legal fees of the payer of support are not deductible whether the payer is acting as a defendant or as an applicant for change to the agreement – an obvious point of contention.
The second area of deductibility of legal fees involves earning income.
If owed money from an employer, any legal expense incurred to collect is deductible. Likewise, if legal services are retained to aid in collecting severance pay, a wrongful dismissal award, or a pension benefit including a work related disability pension benefit, these fees are 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 – obviously an issue if it’s retirement year.
A footnote to this one. Sometimes legal fees are deducted from a settled benefit claim prior to the benefit payment to the recipient. In this case, it appears the necessity to have earned income in the year of payment of the benefit is not necessary.
When moving to another job that is more than 40 kilometers away from your current home, or moving 40 kilometers closer to your current job, the legal fees associated with the selling of your home and the purchasing of a new home are deductible.
Commissioned sales representatives, whether working independently or as an employee, can deduct legal expenses as they pertain to earning income.
For a proprietor operating a business who retains the services of a lawyer to advise on 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 – lobbying in other words.
Speaking of the government, any taxpayer, be it an individual or a business, that needs or chooses to go before CRA should know that “the taxman” allows the deductibility of legal and accounting fees paid to prepare and present the 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 choose to go no further.
Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services. Email him at ron.clarke@JBSbiz.ca. To read previous Tax Tips & Pits columns visit www.JBSbiz.net.