dave@lsuc.on.ca (David Sherman) (07/05/89)
The deductibility of legal fees depends on what they are spent on.
In general, unless you are carrying on business, they are not
deductible unless a specific provision of the Income Tax Act
allows them. For example, expenses of pursuing an objection or
appeal against an income tax assessment from Revenue Canada are
explicitly deductible. So are the costs of recovering unpaid wages,
or of enforcing an existing order for alimony or child support.
A new provision was proposed in the April 1989 budget, and is
reflected in the tax bill (Bill C-28) which was tabled in Parliament
on June 20. This will allow a deduction for legal fees spent in 1986
or later on securing a right to a "retiring allowance", which is defined
in the Income Tax Act so as to include what people normally call
severance pay or termination pay.
This means that if you were fired from a job, and retained a
lawyer to bring a wrongful dismissal action, you can deduct the
legal fees spent since 1986.
However, you can only deduct the legal fees against the income
from the "retiring allowance". It doesn't matter whether you are
actually awarded an amount by the court or, as in most cases, you
settle with your former employer for a cash payment. In the year
in which you receive the award, you can deduct all of your legal
fees paid after 1985 against it.
Note that a retiring allowance can normally be rolled into an
RRSP, for up to $2,000 per year of service plus $1,500 for years
before 1989 for which no employer contributions to your registered
pension plan have vested. However, if you have legal fees to deduct,
you should deduct them and NOT transfer that amount to an RRSP.
Otherwise the deduction will be lost, since when you subsequently
take the funds out of the RRSP they are no longer a retiring allowance.
David Sherman
Tax Lawyer
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