Can I Deduct Paying a Lawyer for Taxes

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                                                    Tax Letter
                              Marcil Lavallée                                  September 2010

30½ years and going strong!   Legal fees that you pay may be deductible       corporation, to the extent you pay them
                              for income tax purposes. Listed below are       personally.
                              some of the situations where you can de-
                              duct legal fees against other sources of in-    Legally, it is the corporation that is carrying
                              come, thus reducing your federal and pro-       on business, not you. From a tax point of
                              vincial tax payable for the year.               view, what you own is shares—a capital
                                                                              asset—and legal fees associated with the
                              Business expenses                               shares are not deductible unless they relate
In this issue:                                                                to earning income from the shares
                              Legal fees of a business you carry on are       (dividends).
                              deductible if they relate to earning income
                              from (or preventing a loss from) the busi-      If you pay the lawyer with a personal
• GST INPUT TAX CREDITS,      ness. However, legal fees that relate to        cheque, you should instead record this as a
  HST AND QST                 capital assets are normally not deductible;     shareholder loan from you to the company,
                              they are instead included in your cost base     and an expense of the company.
                              of the capital asset, on which you can
                              claim capital cost allowance (depreciation)     The company can then deduct the expense
                              if the asset is depreciable property. They      against its own income (or increase its loss
• TFSA TIPS AND TRAPS         will also reduce a future capital gain by       to carry over to other years), and can repay
                              being included in the cost.                     you at any time by paying off the loan you
• ERRATUM — COMPUTER                                                          made to it, with no tax cost to you.

                                You retain a lawyer to help you buy
                                some machinery for your business. The
                                legal fees are not deductible. Instead,
                                they are included in the capital cost of
                                the machinery, on which you can claim
                                capital cost allowance. Thus, you can
                                effectively deduct the fees over time.

                                You retain a lawyer to help you buy
                                land on which to build a factory. The
                                legal fees are not deductible. Instead,
                                they are included in the cost of the land.
                                Thus, if you eventually sell the land for a
                                capital gain, they will reduce that gain.
                                                                              Expenses of making representations to gov-
                              Note that if you have a corporation that        ernment, such as lobbying, are generally
500-214 ch. Montreal Rd.      runs your business, you might not be able       deductible even though they may relate to
Ottawa, ON K1L 8L8            to deduct legal fees associated with the        capital assets or goodwill.
Telephone: 613 745-8387
Fax :        613 745-9584
Page 2                                                                           Marcil Lavallée - Tax Letter


                     Property expenses                deductible, though there        Your entire $4,000 of
                                                      are some conflicting deci-      legal fees is deductible in
                     Legal fees relating to prop-     sions from the Tax Court        2010 against the $20,000
                     erty are generally deducti-      of Canada on this issue.        of income.
                     ble on the same basis as for
                     a business. If the fees relate   Collecting severance pay      Collecting a pension
                     to income generated by the       or a wrongful dismissal       benefit
                     property (e.g., legal fees       award
                     incurred to collect unpaid                                     Legal expenses paid to
                     rent), they are deductible.      Severance or termination      collect benefits from a reg-
                     If they relate to the acqui-     pay, and awards for wrong-    istered pension plan are
                     sition of capital property       ful dismissal, are called     deductible against the
                     (e.g., legal fees incurred to    “retiring allowances” un-     income from the pension
                     buy a rental condomin-           der the Income Tax Act,       plan, with a 7-year carry-
                     ium), they are not, but          and are taxable. Legal ex-    forward, on the same basis
                     instead form part of the         penses paid to collect such   as for “retiring allowances”
                     cost of the property.            amounts are deductible,       discussed immediately
                                                      but only to the extent you    above.
                                                      have income in the year
     At work,        Commission employees             from the “retiring allow-     Divorce and support
    work thinks                                       ance” that is not trans-      proceedings
                     If you are an employee           ferred to your RRSP
         for us.
                     who sells on commission,         (which can be done to a       Legal fees paid in divorce
                     and you are permitted to         limited extent if you         proceedings are not de-
                     deduct expenses associated       worked for the employer       ductible where they relate
   Michel Chaillou   with your employment,            since before 1996).           to the divorce itself, or to
                     then you may deduct legal                                      property and custody dis-
                     fees as part of those ex-        If you do not have income     putes.
                     penses. The fees must be         from that source (because
                     normally incidental to the       you are still trying to re-   Legal fees are deductible if
                     income-earning activity.         solve the case), you can      you already have a right to
                                                      carry the expenses forward    support from your spouse
                     Collecting salary or             and claim them against        or former spouse, and you
                     wages                            such income in a future       incur expenses in enforcing
                                                      year for up to 7 years.       payment. Thus, if you go
                     Legal expenses paid to                                         to a lawyer because your
                     collect (or to establish a         EXAMPLE                     former spouse is late in
                     right to) employee salary                                      alimony or spousal support
                     or wages are deductible.           You were fired from         payments, your fees in ob-
                     The same principle applies         your job in 2009. You       taining such payments are
                     as above: the expenses             spend $3,000 in legal       deductible.
                     relate to an amount that is        expenses in 2009 and a
                     taxable as income to you,          further $1,000 in 2010.     Since children have a pre-
                     and so they can be de-             In 2010 you receive a       existing “right” under
                     ducted.                            $20,000 settlement from     family law legislation to
                                                        your former employer,       support, legal costs to
                     Legal expenses paid to             which under the Income      obtain an order for child
                     protect your job (i.e., to         Tax Act is classed as a     support are also deductible.
                     keep yourself from being           “retiring allowance”.       Furthermore, legal costs
                     fired) are generally not                                       incurred to obtain spousal
Marcil Lavallée - Tax Letter                                                                            Page 3


support, or to make child       later as a director of the      Organ or bone marrow
support non-taxable, are        corporation — those fees        transplant
deductible (CRA Income          are deductible. Similarly, if
Tax Technical News #24).        you contribute towards the      Where a person needs an
However, the costs of de-       legal costs of a tax shelter    organ transplant or bone
fending a claim for support     in which you have invested      marrow transplant and
are non-deductible.             and which is being reas-        finds a suitable donor, the
                                sessed, then you can de-        transplant recipient may
Fighting the CRA                duct your contribution          reimburse the donor for a
                                even if it is another tax-      number of expenses includ-
Amounts paid to prepare,        payer who is going forward      ing legal fees. The amount
institute or prosecute an       with the appeal while           paid qualifies as a medical
income tax objection or         yours is put on hold await-     expense credit for tax pur-
appeal are deductible,          ing the result.                 poses.
whether paid to a lawyer,
an accountant or any other      Expenses of defending           Medical expenses are not
representative.                 against a prosecution for       deductible against income,
                                tax evasion have tradition-     but to the extent such ex-
This includes, for example,     ally been considered non-       penses exceed a certain
filing a Notice of Objec-       deductible, but based on        threshold, they generate a
tion, negotiating with the      the case law, they might be     credit that is worth about
CRA, and taking an appeal       deductible as ordinary          21% of the amount paid
to the Tax Court of             business expenses if the        (the percentage varies by
Canada. Under the CRA’s         evasion was related to          province).
                                                                                                Moving fast
administrative policy           ongoing business profits.
(Interpretation Bulletin IT-    Penalties and fines are not     Adoption expenses                 is not the
99R5), it also includes ex-     deductible (Income Tax
                                                                                                same as going
penses of dealing with an       Act section 67.6).              A credit is available for up
auditor who is reviewing                                        to $10,975 (for 2010) of        somewhere.
or auditing your tax return,    Moving expenses                 adoption expenses, in the
even if you never actually                                      year in which the adoption
file a Notice of Objection.     If you move more than 40        is finalized. These expenses    Robert Anthony
Expenses of objections or       km closer to your new           can include legal fees. The
appeals of foreign income       place of employment or          federal credit is 15% of the
tax are also generally de-      business than your old          expenses paid. Some prov-
ductible.                       home was (to your new           inces offer a similar provin-
                                place of employment or          cial credit. Quebec pro-
The Income Tax Act provi-       business), you can deduct a     vides a refundable tax
sion allowing this deduc-       wide range of “moving           credit of 20% of up to
tion (paragraph 60(o)) does     expenses”, using Form           $15,000 of qualifying ex-
not limit it to contesting an   T1M, on your personal           penses.
assessment of your own          income tax return. In-
taxes. Therefore, if you pay    cluded in the allowable         Note that when an adop-
legal fees to contest a cor-    deductions are the legal        tion is arranged by a char-
poration’s income tax           costs associated with buy-      ity, the tax authorities will
assessment — which you          ing a new home. As well, if     normally disallow claims
might do to protect your        you do buy a new home,          for “donations” to the
shareholding in the corpo-      your legal fees on the sale     charity that are, in sub-
ration, or to protect your-     of your old home are de-        stance, fees for arranging
self from being assessed        ductible.                       the adoption.
Page 4                                                                            Marcil Lavallée - Tax Letter

                     GST INPUT TAX CREDITS, HST AND QST

                     If your business is regis-       an HST province. If you         Revenue Agency will
                     tered for GST/HST, then          pay 12% HST on a                assess you to recover those
                     you are generally entitled       Vancouver hotel room            amounts plus interest, if
                     to claim input tax credits       while on a business trip,       your business is audited.
                     (ITCs) on your GST/HST           you can claim the full 12%      (Businesses that are regis-
                     return, to recover in full all   back as an ITC on your          tered for the QST will
                     GST or HST that have             GST/HST return. The             charge QST to Quebec
                     been charged to you.             GST and HST are fully           customers, and can claim
                                                      integrated in this way.         “input tax refunds”, essen-
                     In general, ITCs are avail-                                      tially the same as ITCs, but
                     able for GST and HST             Similarly, if you are selling   only on their QST return,
                     paid on inputs to your           goods or services to resi-      not on their GST/HST
                     business (including capital      dents of Ontario, you will      return.)
                     costs), except to the extent     in most cases be billing
                     you are making “exempt”          them the 13% HST. If you        Note that the other provin-
                     supplies, such as health         pay 5% GST on supplies          cial retail sales taxes
                     care services, financial ser-    that you buy for your busi-     (Manitoba, Saskatchewan,
                     vices, residential rents or      ness while in Calgary, you      PEI) are also not integrated
                     selling used residential         can claim that 5% back as       with the GST/HST.
   Certainty?        property.                        an ITC on your GST/HST
                                                      return.                         As with Quebec, if you do
  In this world      If your sales are taxable for                                    not actually carry on busi-
nothing is certain   GST/HST purpose, or a            However, it is just as im-      ness in the province you
                     “zero-rated” (such as sales      portant to note that the        normally do not need to
    but death        of basic groceries, most         Quebec Sales Tax is not         charge these retail sales
   and taxes.        medical devices and ex-          integrated with the GST/        taxes, which apply to
                     ports), you can claim full       HST, even though it is a        goods and some services
                     ITCs.                            very similar tax and is ad-     sold by businesses that
 Benjamin Franklin                                    ministered by Revenu Qué-       operate in the province.
                     It is important to realize       bec together with the GST
                     that ITCs are available for      in Quebec.                      Note that the question of
                     both GST and HST that                                            whether you need to
                     you pay, regardless of           If you are not carrying on      charge GST or HST on a
                     whether you are collecting       business in Quebec, so that     particular sale is quite
                     GST or HST on your sales.        you are not registered for      complex, although in very
                     Now that the HST has             QST, you cannot recover         general terms it usually
                     been extended to Ontario         QST that you pay (it is         depends on the location of
                     and British Columbia             simply a business expense       the customer.
                     (since July 1, 2010), this       for income tax purposes).
                     will come up more and                                            For details see CRA Tech-
                     more.                            Thus, for example, if you       nical Information Bulletin
                                                      go to Montreal on business      B-103 , available at
                     For example, if you are          and the hotel charges you
                     charging customers or            5% GST plus 7.875% QST
                      clients in Alberta, in most     on your hotel bill, you can     The rates of GST/HST
                     cases you will be billing 5%     claim an ITC for the 5%         that you charge to custom-
                     GST, not a higher rate of        GST but not for the QST.        ers in each province are:
                     HST. But you might pay           If you claim ITCs for any
                     HST on goods or services         QST your business is
                     your business purchases in       charged, the Canada
Marcil Lavallée - Tax Letter                                                                              Page 5


    British Columbia                                                 12 % HST

    Alberta                                                          5 % GST
                                                                     5 % GST
    (there is also a provincial retail sales tax)
                                                                     5 % GST
    (there is also a provincial retail sales tax)
    Ontario                                                          13 % HST
                                                                     5 % GST
    (there is also the Quebec Sales Tax)
    Nova-Scotia                                                      15 % HST

    New-Brunswick                                                    13 % HST
    Prince-Edward Island
                                                                     5 % GST
    (there is also a provincial retail sales tax)
    Newfoundland-and-Labrador                                        13 % HST                     It is easier
                                                                                                  to prevent
                                                                                                  bad habits
                                                                                                    than to
                                                                                                 break them.
As you may know, the             individual income becomes       the benefit recipient’s        Benjamin Franklin
Canada Child Tax Benefit         the test for qualifying for     claim. For that reason, the
(CCTB) is available to par-      the benefit.                    CRA simplified the review
ents of children under 18,                                       process, and benefit recipi-
where the couple’s income        The Canada Revenue              ents can now assess their
is low or modest.                Agency announced last           situation and provide all
                                 year that the application       required documents in one
Although structured as a         process for the CCTB            step.
credit under the Income          would be simplified, to
Tax Act, the CCTB is actu-       make it easier for recipients   With this new process,
ally paid out monthly by         to confirm their living         benefit recipients who
the government. Some             arrangements and marital        worry that the CRA will
11 million Canadians re-         status for eligibility pur-     not receive their former
ceive the CCTB annually,         poses.                          spouse’s information may
with total payments ex-                                          immediately submit two
ceeding $16 billion.             The CRA recognized that,        letters from independent
                                 after a breakdown of the        third parties to show that
Because the CCTB is based        marriage or relationship, it    they live at a residential
on the couple’s income,          was often difficult to obtain   address different from their
taxpayers who have sepa-         the other spouse’s (or          former spouse.
rated may qualify for the        common-law partner’s)
b en efi t, si nc e thei r       information in support of
Page 6                                                                          Marcil Lavallée - Tax Letter

                     TFSA TIPS AND TRAPS
                     Every taxpayer can con-          until the next year to         generally “attributed”
                     tribute up to $5,000 to a        replace those funds, once      back to you and taxed in
                     Tax-Free Savings Account         you have hit the contri-       your hands rather than in
                     (TFSA) for each year since       bution limit. Otherwise        your spouse’s hands.
                     2009, and income earned          the funds you replace          However, income earned
                     on the funds in a TFSA is        will be subject to a 1%        in a TFSA is not subject
                     tax-free.                        penalty tax per month.         to the attribution rules
                                                                                     as long as it stays in the
                     If you have not yet opened         Example: suppose you         TFSA.
                     a TFSA, your limit is              have already contrib-
                     $10,000; if you first open a       uted $10,000 by July           Example: you earn
                     TFSA in January 2011,              2010. In September             $150,000 per year, and
                     your limit will be $15,000.        2010 you need some             your spouse has no
                     Each taxpayer has the              cash and withdraw              income and no TFSA.
                     same limit, so you and             $3,000.
                     your spouse can each con-                                         If you give your
                     tribute $5,000 per year.           If you replace any of          spouse $10,000 and
                                                        that $3,000 by recon-          your spouse invests the
                     TFSA contributions are             tributing to the TFSA          funds in stocks which
                     not deductible for tax pur-        later in 2010, you will        pay a 4% dividend, the
                     poses, but income earned           be subject to the penalty      resulting $400 of in-
                     in the TFSA is tax-free and        tax. You have to wait          come will be taxed in
    Goodness         you can withdraw the               until January 2011 to          your hands at your
                     funds at any time (subject         replace the $3,000.            high marginal rate. But
   is the only       to any restrictions on your        (Once January 2011             if you put $10,000 into
   investment        investments — for exam-            comes, you also have           your spouse’s TFSA
                     ple, if you have bought a          additional contribution        and the TFSA buys the
 that never fails.   two-year GIC, you might            room of $5,000 as you          stocks, the $400 of
                     have to wait out the two           do every year.)                income is tax-free.
                     years before you can access
   Henry David       the funds, or pay a penalty    • The Income Tax Act pro-          (Note however that the
     Thoreau         to the bank for early with-      vides “attribution rules” to     attribution rules will
                     drawal).                         prevent income splitting         start to apply if your
                                                      that can reduce tax.             spouse takes the funds
                     A few TFSA tips and traps                                         or stocks out of the
                     to be aware of:                  For example, if you give         TFSA and they con-
                                                      or lend money or prop-           tinue to generate in-
                     • You can withdraw funds         erty to your spouse, in-         come.)
                       from your TFSA at any          come earned from that
                       time, but you must wait        money or property is


                     In our July letter, we erroneously indicated that employees who work on commission
                     may be able to depreciate and deduct the cost of computers. Employees are not allowed
                     to do so. We regret the error.
 Marcil Lavallée - Tax Letter                                                                             Page 7

                                child is the one who can      The Court ruled that the
  Separated spouses with        claim the equivalent-to-      wording of paragraph 118
joint custody need to agree     spouse credit and the child   (4)(b) of the Income Tax
on who gets credits for kids    tax credit.                   Act is clear. Since the par-
                                                              ents had not agreed as to
The Income Tax Act pro-         If the parents share joint who could claim the credit,
vides an “equivalent to         custody, only one of them neither of them could
spouse” personal tax credit     can claim these credits, claim it.
worth about $2,200              and they need to agree as
(including the parallel pro-    to who gets the claim. The judge noted: “This is
vincial credit, which varies    Paragraph 118(4)(b) of the an issue that should rou-
by province). It is available   Income Tax Act specifi- tinely be addressed at the
to a taxpayer who is not        cally provides that if they time of the separation
married and has no com-         “fail to agree”, no credit is agreement, where joint
mon-law partner, but sup-       allowed to either of them.    custody is an issue... the
ports another family mem-                                     zero sum approach of de-
ber who lives with them                                       nying any credit without
(typically a young child).      In the recent Krashinsky agreement can create a
                                case, the parents were harsh and unfair result”.
As well, there is a “child      separated and had joint
tax credit” for parents of      custody of their son. They Clearly, in such a case,
children under 18, worth        could not agree as to who even though the parents
about $450 per year.            would get the equivalent-to may not be getting along, it
(These are separate from        -spouse credit and child tax is in their joint interest to
                                credit.                       agree that one of them can      Parents are
the Canada Child Tax
Benefit discussed further                                     claim the credits (and pre-    not interested
above.)                         Mr. Krashinsky claimed sumably agree on an offset-
                                these credits, and the CRA ting payment of part of the         in justice,
If parents of a child are       assessed him to deny them. amount in question by that           they're
separated or divorced, the      He appealed to the Tax parent to the other).
                                Court of Canada.                                               interested
parent with custody of the
                                                                                               in peace
                                                                                              and quiet.

                                                                                               Bill Cosby
Page 8                                                                                                     Marcil Lavallée - Tax Letter

                                                        30½ YEARS AND GOING STRONG!

                            Summer has come to an                      Actors Pier Rodier and                     play and they will receive a
                            end, school is back in ses-                Marie-Thé Morin will en-                   memento of the evening.
                            sion and everyone is back                  tertain the children with
                            at work, but Marcil                        this wonderful play created                The actors will join in the
                            Lavallée is still going                    for children aged 5 to 12.                 festivities after the play
                            strong with its 30th anniver-              The children who will at-                  and, with their usual gener-
                            sary celebrations!                         tend the evening will be                   osity, will take the time to
                                                                       chosen by our partners, the                answer the children’s ques-
                            Relying on the success of                  Centre des services com-                   tions.
                            the launch, in February, of                munautaires de Vanier and
                            the Pearl of the Commu-                    the Fondation du CSSS de                   This is one of the many
                            nity Award and of the                      Gatineau.                                  ways Marcil Lavallée is
                            reception held on June 29th                                                           partnering in the success of
                            at the Canadian Museum                     According      to   Michel                 its community during this
                            of Aviation, the firm con-                 Coulombe       and    Marc                 anniversary year.
                            tinues to move ahead with                  Brazeau, partners at Marcil
                            the celebrations.                          Lavallée and members of                    For more information:
                                                                       the Organizing Committee,
                            This fall, the Organizing                  “Some children in our                      La Nouvelle Scène :
                            Committee will finalize the                community are faced with         
                            details of a special evening               many challenges, such as
Marcil Lavallée:            that will be held later in                 illness, poverty, etc. Our                 La Cie Vox Théâtre :
 Proud to be a              December at La Nouvelle                    team wants to give them a        
 Partner in the             Scène theatre. In partner-                 chance to dream, even for
   Success of               ship with the Cie Vox                      a brief moment”.
Our Community!              Théâtre, Marcil Lavallée
                            will be giving a group of                  The children will
                            150 children and their                     be welcomed by
                            guardian a chance to                       representatives of
                            experience a night at the                  Marcil Lavallée,
                            theatre and to plunge into                 they     will    be
                            the magical world of Oz,                   treated to refresh-
                            théâtre enchanté.                          ments after the

         This letter summarizes recent tax developments and tax planning opportunities; however, we recommend that you consult with an
         expert before embarking on any of the suggestions contained in this letter, which are appropriate to your own specific requirements.

                                                        MARCIL LAVALLÉE


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