Principal Issues: [TaxInterpretations translation] Are the professional fees incurred to make an application under the Voluntary Disclosures Program deductible?
Position: Professional fees incurred to make an application under the VDP are not deductible under paragraph 60(o). However, as soon as the CRA has informed the taxpayer that it will be reviewing the income of or tax payable by the taxpayer by virtue of the VDP, we are of the view that the professional fees incurred by the taxpayer from that time to support its claims are deductible under paragraph 60(o). In order for expenses incurred to be claimed as deductible, it is necessary that they be expenses that are part of the process of earning income from a business or property.
Reasons: Income Tax Act. Longstanding position of the CRA.
XXXXXXXXXX 2012-043407
February 6, 2012
Dear Sir,
Subject: Deduction of professional fees
This is in response to your letter of January 19, 2012, in which you asked for our opinion regarding the deductibility of professional fees incurred in connection with a voluntary disclosure of undisclosed foreign investments.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the “Act").
Our Comments
The Voluntary Disclosures Program ("VDP") allows taxpayers to correct inaccurate or incomplete information, or to disclose information not previously reported to the Canada Revenue Agency ("CRA") without being subject to penalties or prosecution.
A valid disclosure must satisfy four conditions: it must be voluntary, complete, involve the application or potential application of a penalty, and generally include information that is at least one year past due. If the CRA accepts the disclosure, the taxpayer is required to pay the taxes owing plus interest. However, the taxpayer will not be subject to penalties or prosecution for the amounts disclosed.
As noted in Interpretation E9217287, professional fees incurred to make an application under the VDP are not deductible under paragraph 60(o). However, once the CRA has informed the taxpayer that it will be reviewing the income or the tax payable of the taxpayer under the VDP, we are of the view that the professional fees incurred by the taxpayer from that time onward in support of the taxpayer’s position are deductible under paragraph 60(o) in accordance with CRA policy set out in Interpretation Bulletin IT-99R5.
Thus, professional fees incurred by a taxpayer to make an application by virtue of the Program would be deductible only to the extent that:
a) they are incurred to earn income from a business or property;
b) they are not capital expenditures.
In general, reasonable fees and expenses incurred for the purpose of obtaining advice and assistance in preparing and filing income tax returns for income tax purposes are usually deductible by virtue of section 9. However, the fees for applying under the VDP should not, in our view, receive the same treatment, as they are not expenses that are part of the income-earning process of a business or property. These expenses are instead incurred to determine if the taxpayer is eligible for the VDP and with a view to regularizing the taxpayer’s tax situation.
We hope that our comments will be of assistance.
Best regards,
François Bordeleau, Advocate
Manager
Business and Trusts Section
Income Tax Rulings Directorate