June 3, 1986
SMALL BUSINESS AND GENERAL DIVISION P.K. Tang (613)957-2103
RE: Legal Fees
This is in reply to your recent memorandum wherein you request our comments concerning the deductibility of legal fees incurred by a taxpayer to collect "wage loss replacement benefits" from an insurance company. You state the taxpayer has received a lump sum settlement from the XXXX and reported as "other income" on a T4A slip in filing his 1984 return. The settlement represents a "settlement of a three year period of disability".
Our Comments
In your memorandum, you discussed the possible application of paragraph 8(1)(b) of the Act. It is our view that this paragraph deals only with legal expenses incurred by a taxpayer "in collecting salary or wages owed to him by his employer or former employer". . We do not think that it applies in your situation since the lump sum amount was collected as a "settlement of a period of disability" and was from a company other than the taxpayer's employer or former employer.
Generally, unless otherwise specifically provided in the Act, legal fees incurred by a taxpayer are deductible when they are incurred for purposes of gaining or producing income from a business or property and are not outlay of a capital nature. However, in the situation described, the legal fees were incurred by the taxpayer to collect an amount from "an insured wage loss replacement plan". Such amount is specifically included as "income from an office or employment" pursuant to paragraph 6(1)(f) of the Act. By virtue of subsection 8(2), a taxpayer is not allowed to make any deduction in computing his income from an office or employment unless it is permitted by section 8 of the Act. In our view, this section does not provide a deduction for legal fees incurred by a taxpayer to collect an amount under a wage loss replacement plan.
In view of the above, it is our opinion that the legal fees incurred by the taxpayer in your situation are not deductible in computing his income notwithstanding that any amount recovered pursuant to the wage loss replacement plan is included in computing his income (from an office or employment) under paragraph 6(l)(f) of the Act.
Chief Services, Public Utilities and Exempt Corporations Section Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch