Like most good professional advice, legal fees can be costly. And, adding insult to injury, the need to seek out and obtain legal advice (and to pay for it) is usually associated with life’s more unpleasant events – a divorce, a dispute over a family estate, or a job loss. About the only thing that mitigates the pain of paying legal fees (apart, hopefully, from a successful resolution of the problem that created the need for legal advice) would be being able to claim a tax credit or deduction for the fees paid.
Unfortunately, while there are some circumstances in which such a deduction can be claimed, those circumstances don’t usually include the routine reasons – purchasing a home, getting a divorce, establishing custody rights, or seeking legal advice about making a will or managing a family estate – for which most Canadians incur legal fees. Generally, personal (as distinct from business-related) legal fees become deductible for most Canadian taxpayers only where they are seeking to recover amounts which they believe are owed to them, particularly where those amounts involved employment or employment-related income or, in some cases, family support obligations.
The first situation in which legal fees paid may be deductible is that of an employee seeking to collect (or to establish a right to collect) salary or wages. Canadian employment standards laws provide that an employee who is about to lose their job (for reasons not involving fault on the part of the employee) is entitled to receive a specified amount of notice, or salary or wages equivalent to such notice. In many cases, however, the employee can establish a right to a period of notice (or payment in lieu) greater than the statutory minimum. The amount of notice or payment in lieu of notice which is payable can then become a matter of negotiation between the employer and its former employee, and such negotiations usually involve legal representation and consequently, legal fees. In that situation, legal fees incurred by the employee to establish a right to amounts allegedly owed by the employer are deductible by that former employee. If a court action is necessary and the Court requires the employer to reimburse its former employee for some or all of the legal fees incurred, the amount of that reimbursement must be subtracted from any deduction claimed. In other words, the former employee can claim a deduction only for legal fees which they were personally required to pay in order to collect wages or salary owed and for which they were not reimbursed.
In some situations, an employee or former employee seeks legal help in order to collect or to establish a right to collect a retiring allowance or pension benefits and, in such situations, the legal fees incurred can be deducted. The maximum available deduction available for legal fees incurred is the total amount of the retiring allowance or pension income actually received for that year, minus any amount transferred to a registered retirement savings plan or a registered pension plan. “Excess” legal fees that cannot be deducted in the current year can be carried forward and claimed in any of the next seven years.
The rules covering the deduction of legal fees incurred where an employee claims amounts from an employer or former employer are relatively straightforward. The same, unfortunately, cannot be said for the rules governing the deductibility of legal fees paid in connection with family support obligations. Those rules have evolved over the years in a somewhat piecemeal fashion, and the current rules are as follows.
Legal fees incurred by either party in the course of reaching a separation agreement or obtaining a divorce are not deductible. Such fees paid to establish child custody or visitation rights, or to seek equalization of family assets, are similarly not deductible by either parent.
Where, however, one former spouse has the right to receive support payments from the other, there are circumstances in which legal fees paid in connection with that right are deductible. Specifically, legal fees paid for the following purposes will be deductible by the person receiving the support payments:
- to establish the amount of support payments from their current or former spouse or common-law partner;
- to establish the amount of support payments from the legal parent of their child (who is not their current or former spouse or common-law partner) where the support is payable under the terms of a court order;
- to seek an increase in support payments;
- to defend against a reduction in support payments;
- to collect late support payments owing; or
- to request that child support payments be non-taxable.
On the payment side of the support payment/receipt equation, the situation is not nearly so favourable, as a deduction for legal fees incurred will generally not be allowed to a person paying support. More specifically, as stated in the Canada Revenue Agency publication on the subject, a payer of support “cannot deduct legal and accounting fees incurred to establish, negotiate, contest, reduce or terminate the amount of support payments”.
Finally, where the Canada Revenue Agency reviews or challenges income amounts, deductions, or credits reported or claimed by a taxpayer for a tax year, any fees (which in this case would also include accounting fees) paid for advice or assistance in dealing with the CRA’s review, assessment, or reassessment, or in objecting to that assessment or reassessment, can be deducted by the taxpayer. A deduction can similarly be claimed where the taxpayer incurs such fees in relation to a dispute involving Employment Insurance, the Canada Pension Plan, or the Québec Pension Plan.
The final hurdle to be faced by a taxpayer seeking to claim a deduction for legal fees incurred is figuring out where on their income tax return such a deduction can be claimed. Unlike many other expenditures for which a tax deduction is available, there is no single line on the federal income tax return specifically for the claiming of a deduction for legal fees. Rather, there are several such lines, and which line the taxpayer should use in claiming a deduction depends on the purpose for which the legal expenses were incurred. The rules are as follows:
- Line 22100 – claiming a deduction for legal expenses incurred by a recipient of support payments;
- Line 22900 – claiming a deduction for legal expenses incurred to collect salary or wages owed to the taxpayer;
- Line 23200 – claiming a deduction for legal expenses and/or accounting fees incurred to respond to a CRA assessment or reassessment of income, deductions, or credits, or entitlement under the Canada Pension Plan, the Québec Pension Plan, or Employment Insurance program;
- Line 23200 – claiming a deduction for legal fees incurred to collect or establish a right to a retiring allowance or pension benefit.
Detailed information on the often confusing rules which govern the deduction of legal fees incurred is available on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-23200-other-deductions.html#toc2.