AROUND THE COURTS
Deduction allowed for legal fees incurred by former employee
Under paragraph 8(1)(b) of the Income Tax Act, a taxpayer may deduct legal fees incurred to collect or establish a right to receive an amount that would be considered employment income if it were received.
In the recent Kurnik case, the taxpayer Mr. Kurnik was promised an employment bonus from his former employer corporation upon the closing of the sale of the corporation. After the sale, the corporation refused to pay the bonus. The taxpayer sued for the bonus. The corporation countered with two parallel lawsuits of its own – one a counterclaim against the taxpayer and the other a lawsuit against the taxpayer’s family trust for amounts paid to it while the taxpayer was employed there.
The taxpayer incurred legal fees in (1) pursuing his lawsuit, (2) defending against the corporation’s counterclaim against him and (3) defending against the lawsuit against the family trust. The CRA allowed the portion of fees relating to (1) and (2). However, it disallowed the legal fees Mr. Kurnik paid for defending the lawsuit against his family trust.
Upon appeal to the Tax Court of Canada, the Court allowed the deduction of all of the legal fees. The Court found that the second lawsuit resulted from the first, and that the taxpayer had to incur legal fees with respect to both in order to collect the bonus. In the Court’s words, “Both lawsuits were litigated together, resolved contemporaneously and funded by the employee directly from the proceeds of the settlement from which Mr. Kurnik was fully successful in receiving his promised, but unpaid bonus... As such, he should be entitled to the deduction for all the legal fees.”