| 921969 | |
| L. Holloway | |
| (613) 957-2104 |
July 20, 1992
Mississauga D.O. Business and General Enquiries & Office Examinations DivisionPublic Information Counter
Attention: Rita Charlebois
Deductibility of Legal Fees
This is in reply to your memorandum dated June 24, 1992, regarding the deductibility of legal fees in a particular fact situation.You have requested our opinion on how these legal fees should be treated for tax purposes.
Our comments
Paragraph 14 of IT-99R4 states that "Legal and accounting fees that are "eligible capital expenditures" within the meaning of that term in paragraph 14(5)(b) are included in the cumulative eligible capital of the taxpayer in the manner provided in paragraph 14(5)(a). Paragraph 2 of IT-143R2 states that
"An eligible capital expenditure within the meaning of 14(5)(b) may be broadly defined as an outlay or expense made or incurred by a taxpayer
(a) in respect of a business,
(b) as a result of a transaction occurring after 1971,
(c) on account of capital, and
(d) for the purpose of gaining or producing income from the business.
...An outlay or expense made or incurred with respect to income from property (e.g., non-business rental or investment income) or with respect to a capital gain or a capital loss will not be an eligible capital expenditure since it does not meet the purpose stated in (d) above."
The purpose test in (d) would be met and the legal fees would be considered to be eligible capital expenditures only where the taxpayer is carrying on a business and the legal fees could be considered as being incurred for the purpose of gaining or producing income from that business. From the brief facts provided, this does not appear to be the case.
In our opinion, the legal fees cannot be regarded as expenses of disposition of the property as they were not incurred by the taxpayer "for the purpose of making the disposition" as required by subparagraph 40(1)(a)(i) of the Act.
Therefore, based on our limited knowledge of the facts of this situation, it appears that the legal fees would not be deductible as either eligible capital expenditures or expenses of disposition but rather would be considered 'nothings' for tax purposes.
E. Wheelerfor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch