October 10, 2017
All Tax Articles

Legal fees to defend criminal charges not deductible employment expense

In the recent Geick case, the taxpayer was a police officer who was charged with several criminal offences. He hired a lawyer to defend him and incurred legal fees in contesting the charges, some of which were subsequently withdrawn. He was suspended from employment pending the outcome of the charges, but with pay, so he continued to collect his salary.

The taxpayer attempted to deduct the legal fees in computing his employment income, under Income Tax Act paragraph 8(1)b), which permits legal fees paid to "collect or establish a right to" employment income. He argued that any criminal conviction would have resulted in the loss of his employment and therefore his employment income. As such, he argued that the legal fees were deductible because they protected his right to employment income.

The CRA denied the deduction, taking the position that the legal fees were paid solely to defend criminal charges.

The Tax Court of Canada agreed with the CRA and dismissed the taxpayer’s appeal. The Court held that even if it could be said that legal fees were incurred to “preserve” the taxpayer's employment, that did not constitute an effort to "collect" or "establish" a right to collect an amount of employment income owed. 

The Court made a similar finding in response to the taxpayer’s argument that the legal fees were incurred to preserve the pension he would receive upon retirement as a police officer (so that they would qualify under a different provision of the Act paragraph 60(o.1). 

As a result, none of the legal fees were deductible. 

This letter summarizes recent tax developments and tax planning opportunities from a third-party affiliate; however, we recommend that you consult with an expert before embarking on any of the suggestions contained in this blog post, which are appropriate to your own specific requirements. Please feel free to get in touch with Lee & Sharpe to discuss anything detailed above, we would be pleased to help.
Douglas K. DeBeck

Hello, my name is Douglas K. DeBeck, I am a partner at Lee & Sharpe.

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