Legal fee deduction for severance

Tax Topics
1

Hi there

I have a family member who was wrongly terminated by a federally regulated employer without cause. Case escalated to Canada Labor Code with the presumption of reinstatement with back pay.

However at adjudication, he decided on accepting a settlement instead of going back to work for the same employer.

And the lawyer fee was paid out of severance but was not included in income as they structured to have only 10k taxable.

In this case CRA denied legal fee deduction based on the reason that he didn’t pay. However the argument here is that he had to sign a letter of direction to have the bank to pay lawyer directly from his severance.

The ITA 8.1(b) suggests as long as the legal fee is incurred to establish a right to claim employment related income; then it is deductible. Also the relevant part where requires income inclusion doesn’t suggest a settlement (tax free damage) need to be included in income.

From insurance claim cases where the employer or insurance company pays the lawyer directly, case law allowed the deduction; wonder if CRA is wrong in denying the deduction. Can anyone share opinions and insights please? Thank you

2

The severance agreement was such that he received the deduction by not having to include the legal fees part of the severance in his income.

3

That makes sense, thank you. Although the reason by CRA is that “he didn’t pay”

ITA 6(1)j regarding income inclusion says rewards and reimbursements need to be included, however, the amount of settlement was based on net payment to the recipient. Even if the lawyer didn’t charge anything, it will still be the same amount. That to be seems disqualify the legal fee paid by the bank as “reimbursement or reward” as defined by the ITA.

Aside from this particular section, is there any other section requiring income inclusion of legal fee that may address similar situations?

Thank you very much!

4

Probably best to ask a tax lawyer. This kind of thing is exactly what they do.

https://www.canadiantaxlawyer.com/

5

Will try, thank you.