Legal fees can be a burden, but they’re only tax deductible in certain circumstances

legal fees - Legal fees can be a burden, but they're only tax deductible in certain circumstances

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In February 2015, his company was forced into bankruptcy, yet continued to operate until it was discharged from bankruptcy in May 2016 and was dissolved. In June 2016, the insolvency coordinator with the Financial Services Commission of Ontario appointed an administrator to wind up the taxpayer’s IPP.

In August 2016, a second court order stated that one-half of the amount accrued under the taxpayer’s IPP was to be transferred to his spouse, net of legal, accounting and professional fees that totalled the $33,653. All required distributions from the IPP were completed on Nov. 10, 2016.

The only issue in the tax case was whether the legal, accounting and other professional fees paid were tax deductible. The taxpayer took the position that the expenses claimed were legitimate business expenses related to the company and, more particularly, related to the administration of his IPP. He argued that, “they were incurred for the sole purpose of gaining or producing income from business or property.” He testified that the IPP had incurred expenses of this nature for “around 15 years and such had always been allowed as deductible business expenses.”

The CRA argued that the expenses were not incurred for the purpose of producing income from a business and that they were “personal in nature and were incurred only for the purpose of satisfying the Court Order requiring (the taxpayer) to wind up his IPP in order to effect equalization payments upon the dissolution of his marriage.”

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