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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Whether an additional contribution to an investment to help pay for legal fees in an action to recover losses of the investment are a deductible business expense.
Position: Not enough information provided, but likely not.
Reasons: The investment does not appear to have a source of income following the collapse of its only project.
XXXXXXXXXX 2002-013408
J. Gibbons, CGA
May 8, 2002
Dear XXXXXXXXXX:
We are replying to your letter sent by facsimile on April 10, 2002, concerning additional contributions made by your clients to a certain investment ("Investco"). Our comments are of a general nature only since we cannot confirm the tax implications of particular transactions unless the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular IC 70-6R4.
As we understand it, Investco was proposing to XXXXXXXXXX (the "Project"); however, the Project collapsed because XXXXXXXXXX. The investors have been asked to contribute an additional $XXXXXXXXXX towards a legal action against XXXXXXXXXX. You wish to know whether the additional contribution is part of the cost of the investment or a carrying charge of the investment?
Without knowing the legal nature of either the original investment (i.e., partnership, joint venture, corporation, etc.) or the additional contribution (i.e., capital contribution, loan, etc.), we are unable to provide a definitive answer. However, it is unlikely that the additional contribution can be treated by the investors as a deductible business expense, since Investco does not appear to have a source of income following the collapse of the Project. As indicated in paragraph 1 of IT-99R5, "Legal and Accounting Fees", unless there is a specific provision in the Act providing for their deduction, legal and accounting fees are only deductible to the extent that they are incurred for the purpose of gaining or producing income from a business or property and are not outlays of a capital nature.
We trust that these comments will be of assistance.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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