Can I deduct legal fees?

By Randall Orser | Personal Income Tax

Seller contract TNThere are times in our lives when we need to engage the services of a lawyer. Of course, lawyers cost money, sometimes quite a bit of money. Lawyer’s fees can become a tax deduction, however, you usually have to be going after monies in relation to earning income.

For personal taxes, you can deduct legal expenses in the following situations.

You paid fees (including any related accounting fees) for advice or assistance to respond to Canada Revenue Agency when they reviewed your income, deductions, or credits for a year or to object to or appeal an assessment or decision under the Income Tax Act, the Unemployment Insurance Act, the Employment Insurance Act, the Canada Pension Plan, or the Quebec Pension Plan.

You paid fees to collect (or establish a right to) a retiring allowance or pension benefit. However, you can only claim up to the amount of retiring allowance or pension income you received in the year, minus any part of these amounts transferred to a registered retirement savings plan or registered pension plan. You can carry forward, for up to seven years, legal fees you cannot claim in the year.

You incurred certain fees to try to make child support payments non-taxable. Fees relating to support payments that your current or former spouse or common-law partner, or the natural parent of your child paid to you must be deducted on line 221. You cannot claim legal fees you paid to get a separation or divorce or to establish custody of or visitation arrangements for a child.

You can also deduct on line 229 legal fees you paid to collect (or establish a right to) salary or wages. It is not necessary for you to be successful; however, the amount sought must be for salary or wages owed. You must reduce your claim by any amount awarded to you for those fees or any reimbursement you received for your legal expenses. You can deduct on line 229 legal fees you paid to collect or establish a right to collect other amounts that must be included in employment income even if your employer does not directly pay them

You must reduce your claim by any award or reimbursements you received for these expenses. If you are awarded the cost of your deductible legal fees in a future year, include that amount in your income for that year.

For business, legal fees are allowable deductions where they are incurred in connection with normal activities, transactions or contracts incidental or necessary to the earning of income from a business or property. A deduction may therefore be taken for legal expenses in connection with a broad range of routine business functions, such as:

  1. Preparing contracts in relation to the sale of inventory,
  2. Obtaining security for and collecting trade debts owing,
  3. Preparing financial records and minutes of shareholders’ and directors’ meetings,
  4. Making annual corporate filings,
  5. Routine or regular audits of financial statements,
  6. Conducting appeals in respect of, for example, sales tax including Goods and Services Tax/Harmonized Sales Tax, excise, municipal, or property taxes, and
  7. Watching legislation (including customs and other regulations) affecting the business operations of the taxpayer.

Legal fees can be a deduction for tax purposes as long as it’s for monies you may or may not eventually claim as income. For the business, legal fees incurred in the normal course of business are also a deduction.

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