Principal Issues: [TaxInterpretations translation]
A director was assessed to pay the GST and QST unpaid by the corporation of which he was also a shareholder. Are the legal fees incurred by the director to make representations to the tax authorities and to file notices of objection deductible in computing income?
Position:
No.
Reasons:
Those legal costs are not covered by paragraphs 8(1)(b), 60(o) or 60(o.1) of the Act. Furthermore, we are of the view that such an expense was not incurred by the director with a view to earning income from a business or property.
January 9, 2001
Jonquière Tax Centre Headquarters Danielle Bouffard Attention: M. Gilles Bouchard (613) 957-8953
2000-005804
Request for an opinion on the deduction of legal fees
This is in response to the fax of Ms. Annie Tremblay dated November 23, 2000, in which you requested our opinion on the above subject.
Unless otherwise indicated, all legislative references below are to provisions of the Income Tax Act (the “Act”).
Situation
1. Mr. XXXXXXXXXX was a director and shareholder of a Corporation.
2. According to the Corporation's accounting representatives, the Corporation has been inactive since XXXXXXXXXX.
3. Mr. XXXXXXXXXX was required to pay, pursuant to section 24.0.1 of the Act respecting the Ministère du Revenu [Quebec Ministry of Revenue Act] and subsection 323(1) of the Excise Tax Act, the Quebec sales tax (“QST”) and the goods and services tax (“GST”) unpaid by the Corporation.
4. Between XXXXXXXXXX , Mr. XXXXXXXXXX incurred legal fees in the amount of $XXXXXXXXXXX for negotiations with the tax authorities and for the preparation of notices of objection against the notices of assessment issued in his name in respect of GST and QST.
Question
You wish our opinion as to whether the legal fees incurred by Mr. XXXXXXXXXX are deductible in computing his income for the XXXXXXXXXX taxation year.
Our Comments
Mr. XXXXXXXXXX incurred legal fees in an attempt to reduce his obligation arising from his joint and several liability with the Corporation and to defend his rights. We are of the view that such costs do not meet any of the specific provisions of the Act allowing the deduction of legal costs, i.e. paragraphs 8(1)(b), 60(o) or 60(o.1). Furthermore, we are of the view that such an expense was not incurred by Mr. XXXXXXXXXX to earn income from a business or property and consequently is not deductible pursuant to paragraph 18(1)(a).
Please note that in a number of files, including E9930565, F9809347 and E9608715, we discussed the tax treatment of the debt paid by directors in discharge of their joint and several liability with a corporation. Based on the facts provided in those particular cases, we were of the view that the debt arising to the directors from their obligation had not been acquired with a view to earning income from a business or property. Consequently, given the application of subparagraph 40(2)(g)(ii), the directors could not claim a capital loss or a business investment loss.
For your information, a copy of this memorandum will be severed using the Access to Information Act and will be available in the Legislative Access Database (LAD) located on the mainframe of the Canada Customs and Revenue Agency. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the Legislative Access Bank version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Should you require any additional information concerning this document, please do not hesitate to contact us.
Ghislaine Landry, CGA
Manager
Individuals and Business Section
Business and Publications Division
Income Tax Rulings Directorate
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