Principal Issues: Whether the payment of an employee's legal fees by an employer results in a taxable benefit to the employee
Position: Question of fact.
Reasons: Depends on whether the costs incurred relate to an action of the employee carried out during the normal course of performing the duties of employment.
2005-013133
XXXXXXXXXX Charles Rafuse
613-957-8967
June 9, 2005
Dear XXXXXXXXXX:
Re: Legal Fees
This is in reply to your letter of May 10, 2005, concerning legal fees paid by the XXXXXXXXXX on behalf of a school principal.
Specifically, you have indicated that XXXXXXXXXX terminated the employment of a teacher who subsequently made allegations to the XXXXXXXXXX regarding the behaviour of the principal where she was teaching. The XXXXXXXXXX feels that these allegations would not have been made if the teacher's employment had not been terminated and would therefore cover the legal cost of the principal in defending himself. You have asked if this would be considered a taxable benefit to the employee.
Our Comments
As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions other than in the form of an advance income tax ruling. However, we are prepared to offer the following general comments, which may be of assistance.
The income tax treatment of the legal expenses of an employee that are paid by the employer, is discussed in Interpretation Bulletin IT-99R5, Legal and Accounting Fees (Consolidated). In general terms, where personal legal expenses of an employee are paid or reimbursed by the employer, the amount paid is a taxable benefit to the employee. To the extent that the amount does not exceed a reasonable amount, it will normally be deductible by the employer as a business expense on account of the employee's salary and benefits.
When the legal costs are paid or reimbursed by the employer and relate to an action of the employee carried out during the normal course of performing the duties of employment, a taxable benefit does not normally result. However, where the legal expenses relate to an action of the employee that is outside the scope of what may reasonably be expected of the employee during the normal course of performing the duties of employment, the payment could result in a taxable benefit pursuant to paragraph 6(1)(a) of the Income Tax Act. Generally, provided the amount is reasonable in the circumstances, it will be deductible by the employer as a business expense.
We trust this information is helpful.
Yours truly,
Charles Rafuse
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch