Q.2
Can a taxpayer request an amendment to a previous taxation year’s T1 return to claim a deduction for legal expenses paid in that year, if the established employment income is not paid until a subsequent taxation year? CRA responded:
If the conditions to claim a deduction under paragraph 8(1)(b) of the Act are met, a taxpayer may request an adjustment to a T1 Return for the legal expenses that were paid in the previous tax year (generally within 3 years).
Q.3
Is a deduction for legal expenses under s. 8(1)(b) only allowed when the claim is well founded in law, or is likely to succeed? CRA responded:
IT-99R5 … states that if a taxpayer is unsuccessful in court and fails to establish that an amount is owed, then no deduction is allowed. However, those comments are no longer accurate based on … Loo …[which] ruled that a taxpayer’s legal action need not be successful in order to deduct an amount under paragraph 8(1)(b)… .
However, it is still necessary to examine the nature of the action against the employer to establish whether the order sought by the taxpayer is for an amount owed to the taxpayer that would be included in income under subdivision a of Division B. Cases involving the deductibility of legal fees paid to establish a right to a promotion or a raise or where the claimant is seeking financial compensation in connection with allegations of unlawful or wrongful acts by an employer remain distinguishable.
Q.4
For the purposes of paragraph 8(1)(b) of the Act, how is it determined if the taxpayer has collected or established a right to collect an amount owed? CRA responded:
For the purposes of paragraph 8(1)(b) … the taxpayer needs to look at … if the purpose was to collect or establish a right to collect an amount owed. This approach is consistent with … Loo
Q.5
Are legal expenses paid by an individual (to reinstate the individual’s former employment position), deductible under paragraph 8(1)(b) of the Act when employment is reinstated without retroactive pay? CRA responded:
The legal expense incurred for the purposes of paragraph 8(1)(b) of the Act must be incurred by the taxpayer to collect, or to establish a right to, an amount owed. In Loo, the FCA referred to the New Oxford Dictionary of English (1998, Clarendon Press, Oxford) definition of the word “owe” as “an obligation to pay or repay (something, especially money) in return for something received.”
While the legal expenses paid may have facilitated the reinstatement of the individual’s employment, the legal expenses were not incurred to collect (or establish a right to collect) an amount that was owed and required to be included in employment income … .