Principal Issues: [TaxInterpretations] Request regarding the deductibility of legal fees incurred by certain taxpayers to defend themselves before various courts for various fines and penalties other than those prescribed.
Position: Possibly deductible. A question of fact.
Reasons: Legal costs incurred by a taxpayer in defending against fines and penalties, which are otherwise non-deductible, may be deductible. Section 67.6 denies the deduction of fines and penalties, except for those prescribed, but does not address the associated legal costs. As a result, the reasonableness of the expense as well as its purpose must be examined. The deductibility of legal fees is conditioned on their being incurred to earn income.
Jean-Luc Proulx Audit Technician Rimouski Tax Services Office 180, Cathédrale Street Rimouski, QC, G5L 5H9 2008-027180 Nancy Turgeon, CGA April 10, 2008
Dear Sir,
Subject: Deduction of legal costs related to non-deductible fines and penalties under section 67.6 of the Act.
This is in response to your email of March 20, 2008 requesting our opinion on the deductibility of legal fees incurred by certain taxpayers in defending themselves before various courts for various fines and penalties, other than those prescribed.
Our Comments
Section 67.6 of the Income Tax Act (the "Act") denies any deduction for fines and penalties, except for those prescribed by regulation, but does not deal with legal costs related to them. Legal costs incurred by a taxpayer to defend against fines and penalties, which are otherwise non-deductible under section 67.6, may be deductible. Since section 67.6 does not prevent the deduction of legal fees per se, we must examine the reasonableness of the expense as well as its purpose. The deductibility of legal fees is subject to the fact that they must be incurred to earn income. However, the decision in 65302 British Columbia Ltd v The Queen, 99 DTC 5814 qualifies this link. Indeed, if an offence is so egregious or repugnant that the fine or penalty subsequently imposed cannot be justified as having been incurred for the purpose of earning income, we may also conclude that the legal fees associated with it were not incurred for the purpose of earning income from business or property and are not deductible by virtue of paragraph 18(1)(a).
In our view, if the payment of legal costs is not clearly intended to earn income, there can be no question of allowing it as a deduction. In view of the scenarios you have submitted to us, please note that this position applies regardless of whether the amount of the fine and/or penalty is ascertained before or after the judgment.
Best regards,
Randy Hewlett
Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate.