Principal Issues: The issue is whether an amount paid by an individual to collect or establish a right to payments from a workers' compensation board is deductible in computing net income.
Position: Question of fact but in this case probably not.
Reasons: It is unlikely that any individual has a pre-existing right to amounts under applicable workers' compensation legislation. If the costs were incurred to establish a right to an amount from the WCB then it would appear that such costs would be non-deductible capital expenditures.
XXXXXXXXXX 2008-028975 Michael Cooke, CA December 9, 2008
Dear XXXXXXXXXX :
Re: Deductibility of Legal Expenses
This is a response to your correspondence of August 7, 2008, concerning whether fees paid to an advisor by an individual would be deductible in computing income under the Income Tax Act (the "Act") in the circumstances described below.
Briefly, you indicate that an individual (the "Taxpayer") received a settlement, including what is referred to as a pension, from the Workers' Compensation Board of XXXXXXXXXX ("WCB"). The individual incurred $6,000 in expenses for the cost of an advisor who filed the Taxpayer's appeals and represented the Taxpayer at the WCB hearings. It is understood that the payments the Taxpayer received from the WCB are included in the Taxpayer's income under paragraph 56(1)(v) of the Act and are deducted in computing the Taxpayer's taxable income under subparagraph 110(1)(f)(ii) of the Act.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Canada Revenue Agency ("CRA") Tax Services Office.
Deductions for the above-described types of expenditures are discussed in Interpretation Bulletin IT-99R5, "Legal and Accounting Fees (Consolidated)". As indicated in paragraph 1 of IT-99R5, unless there is a specific provision in the Act (such as paragraphs 8(1)(b) or 60(o.1) of the Act), legal or accounting fees or other similar types of fees (see for example, paragraph 28 of IT-99R5) are generally only deductible to the extent that they are incurred for the purpose of gaining or producing income from a business or property and are not outlays of a capital nature. This general position also presumes that paragraphs 18(1)(c) and (h) of the Act do not otherwise apply to deny any deduction. In our view, costs incurred by a taxpayer for establishing a right to an amount under workers' compensation legislation would not be deductible as such costs would be on account of capital (i.e. the creation of the property). However, costs incurred by a taxpayer to enforce collection of an existing award that is owed to the taxpayer under the applicable workers' compensation legislation would generally be deductible in computing income from such property. Typically, however, deductions for collection expenses would be rare since ordinarily once an award has been finally determined by a workers' compensation board, the actual payment of the particular award would not be in dispute.
While a question of fact, in the above situation, it appears that the $6,000 paid by the Taxpayer to the advisor was paid for the purpose of establishing a right to certain amounts under the WCB and not simply to collect amounts already owed. Assuming this assumption is correct, then the $6,000 would not be deductible.
We trust our comments will be of assistance.
Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch