13 May 1994 External T.I. 9404425 - DEDUCTIBILITY OF LEGAL FEES

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be
correct at the time of issue, may not represent the current

Position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Are legal fees incurred in opposing efforts by a Medical
Association to prevent physician from practising medicine as well
as legal fees incurred with respect to defending criminal charges

deductible?

Position TAKEN:

Question of Fact. Information should be provided to local

District Taxation Office for a determination.

Reasons FOR POSITION TAKEN:

Legal fees are only deductible if they are incurred for the
purpose of gaining or producing income from a business or

property, and are not outlays of a capital nature. In each case,

the question of whether or not the payment of legal fees to
defend against criminal charges can meet the deductibility
criteria set out above is one of fact which depends upon the
relationship of the conduct in question to the taxpayer's income

earning activities.

940442
XXXXXXXXXX D. Zion

May 13, 1994

Dear XXXXXXXXXX:

Re: Deductibility of Legal Fees

We are writing in response to your correspondence of February 11, 1994, wherein you requested a ruling regarding the deductibility of legal fees paid by XXXXXXXXXX We apologize for the delay in replying.

More specifically, you have asked whether or not

XXXXXXXXXX

We have enclosed for your information a copy of Information Circular 70-6R2 (IC 70-6R2) and the subsequent special release dated September 30, 1992 which sets out the guidelines under which advance income tax rulings are issued. As the situation briefly outlined in your correspondence involves completed transactions and the main issue is dependent on the facts of a specific case, the deductibility of the legal fees in question should be discussed with an audit official of your local district taxation office. We are therefore not in a position to give you a ruling nor a definitive response. We will however, provide the following general comments which may be of assistance to you. In the comments that follow unless otherwise stated, all statute references are to the Income Tax Act S.C. 1970-71-72, c.63 as amended, consolidated to June 10, 1993 (the Act).

Our Comments

Except where there is a specific provision in the Act, such as paragraphs 8(1)(b) or 60(o.1), legal fees are only deductible if
they:

1. are incurred for the purpose of gaining or producing income from a business or property, and

2. are not outlays of a capital nature.

In each case, the question of whether or not the payment of legal fees to defend against criminal charges can meet the
deductibility criteria set out above is one of fact which depends upon the relationship of the conduct in question to the taxpayer's income earning activities. For your information we have also enclosed IT-99R4, Legal and Accounting Fees which contains a general discussion regarding the tax treatment of legal fees.

In addition, a court decision which you may find relevant to the situation at hand is St-Germain v. MNR (83 DTC 36). This case involved the deductibility of legal fees incurred by a medical practitioner in defence of criminal negligence. The Court concluded that the legal fees were incurred for the purpose of gaining or producing income from the practice of medicine which is a profession, and by the definition under section 248(1) of the Act "business" includes a profession, and consequently the fees were deductible by virtue of section 18. Whether or not the case is similar to XXXXXXXXXX case will be a question of fact to be determined upon a review of all the relevant circumstances and documentation.

We hope that the information we have provided will be of assistance to you. As indicated earlier, a more definitive
determination with respect to XXXXXXXXXX by the XXXXXXXXXX District Taxation Office would be possible upon a review of all the specific facts.

Yours truly,

J.A. Szeszycki
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch