17 November 1995 Internal T.I. 9529606 - LEGAL FEES RRSP PROPERTY RESTITUTION

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:

treatment of legal fees incurred on settlement of law suite

Position:

general comments provided. referred TP to TSO

Reasons:

Factual case. additional information required

			November 17, 1995

HEADQUARTERS HEADQUARTERS
Client Assistance Directorate W.C. Harding
957-8953
Attention: Paul Emberley
Correspondence Section
952960

Minister's Mail Insert 95-06994M

This is in reply to your facsimile transmission of October 10, and November 3, 1995, in which you asked us to provide an insert for a reply to a letter of September 25, 1995, from XXXXXXXXXX.

We believe the attached letter responds to his concerns. However, as discussed in our telephone conversation of November 16, 1995, (Harding-Emberly) the information provided did not clearly establish whether the investments involved in this case were wholly or partially held in RRSPs, whether the restitution received was paid directly to the XXXXXXXXXX or to a trustee of one or more RRSPs and whether the XXXXXXXXXX personally paid the fees in question. Accordingly, since the resolution of the case rests on the determination of these factors, we could not provide any definitive answers specific to the XXXXXXXXXX situation. Instead we provided some general information and advised that an officer of the St. John Tax Services Office will contact XXXXXXXXXX to determine the additional information needed and to resolve the case. Please note, however, that when an officer is assigned to the case, we will be pleased to assist in any way we can. The officer should be directed to call Wayne Harding at (613) 957-8953.

C.B. Darling
Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

MINISTER/DM'S OFFICE YS #
ADM'S OFFICE
PENDING
RETURN TO 15TH FLOOR, ALBION TOWER

XXXXXXXXXX

Dear XXXXXXXXXX:

I am replying to your letter of September 24, 1995, on behalf of your constituents, XXXXXXXXXX concerning the deductibility of the fees paid in respect of a legal action they undertook to recover certain investment losses.

There are a number of questions that must be answered in order for the Department to determine the extent the XXXXXXXXXX may deduct the fees they incurred. I have therefore requested to contact XXXXXXXXXX to discuss the problem with him, and to take such corrective action as is necessary. may be contacted by phone at
. In the meantime, I hope the following comments may be of assistance to the XXXXXXXXXX

XXXXXXXXXX have indicated that they sued to recover losses incurred on investments held as part of their retirement savings. However, it is not clear from the information they provided, whether they held the property personally or through self directed registered retirement savings plans (RRSPs). This information is critical.

When an investment is held in an RRSP, any expenses incurred in respect of the investment can not be deducted by the annuitant of the RRSP. The RRSP owns the investment property and the expenses are expenses of the RRSP. However, when the annuitant later withdraws amounts from the plan, the taxable amounts the annuitant must include in income will reflect the amount of the expenses paid by the RRSP. In effect, the expense will be recognized for tax purposes through a reduction of the taxable income received by the annuitant on the plan's maturity.

On the other hand, when a taxpayer owns the property personally, the taxpayer can generally deduct fees incurred if they were to earn income from a business or property, or deduct them in computing the investor's capital gains and losses from the investment if the investment is a capital property. In the latter case, the fees are either added to the cost of the capital property or deducted from the proceeds received when the property is sold, depending on the circumstances.

The fees XXXXXXXXXX incurred through their legal action, were to collect compensation for property that was injuriously affected. Accordingly, they were, for the most part, paid with respect to capital property. If the property was owned by them and not by an RRSP, the costs incurred will be deductible in computing capital gains and losses on disposition of the property as noted above. However, a portion of the fees may have been incurred by the XXXXXXXXXX to collect income from property. This portion may be allowed as a deductible expense. Mr. of the St John Tax Services Office will be able to assist XXXXXXXXXX in determining the proportion of the fees paid in respect of capital and income.

Apart from the deduction of the expenses incurred by the XXXXXXXXXX additional problems may also have arisen with respect to how the XXXXXXXXXX law suit was settled. In particular, if the XXXXXXXXXX personally paid any expenses on behalf of their RRSPs, or, if any of the funds received on the settlement were not returned to the RRSPs, there could be additional tax implications. These are complex issues, however, and I would suggest the XXXXXXXXXX may wish to discuss them with Mr < name > of the tax services office.

I would like to thank you for the assistance your staff provided in obtaining the additional information I needed to review the XXXXXXXXXX concerns and I trust that these comments will assist you in responding to them.

		      Yours sincerely,

		      David Anderson, P.C. M.P.
W.C.Harding
957-2131
November 14, 1995
952960