Dear Sirs:
This is in reply to your letter dated July 12, 1991 wherein you requested a technical interpretation on the application of paragraph 20(1)(e) of the Income Tax Act (Canada) (the "Act") to the following situation.
In the process of acquiring and financing the purchase of a building to be used in its business, a corporation incurred certain legal fees. The legal fees billed included fees for discussions with the mortgagor, review and assistance in drafting the mortgage documentation and the registration of title and security on the property.
You are of the view that the legal fees represent an expense incurred in the year in the course of borrowing money used by the corporation for the purposes of earning income from a business or property and, as such, the expense should be deductible pursuant to paragraph 20(1)(e) of the Act.
In your letter you have outlined what appears to be an actual fact situation related to a completed transaction. The review of such transactions falls within the responsibility of District Taxation Offices and it is the practice of this Department not to comment on such transactions when the identities of the taxpayers are not known. However, we can provide you with the following general comments which we hope will be of assistance to you.
The Department's general views concerning the treatment of legal fees for tax purposes are stated in Interpretation Bulletin IT-99R4. In order to determine whether legal fees are incurred for the purposes of
earning income from a business or property, for the purchase of a capital asset or for some other purpose, it would be essential that all of the facts pertaining to each particular situation be reviewed. Paragraph 2 of IT-99R4 discusses situations where certain legal fees may be deductible within the limitations of paragraph 20(1)(e) of the Act. We would also like to point out that to the extent that legal fees relate to the acquisition of a capital property they would be included in the capital cost of the property as stated in paragraph 1 of IT-174R.
Yours truly,
for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch