Legal expenses incurred by employee to avoid criminal charges not deductible
Under the Income Tax Act, employees can deduct from employment income only those expenses that are expressly permitted by the Act. One such deduction under paragraph 8(1)(b) of the Act is for legal expenses incurred for the purpose of collecting salary or wages owed to the employee.
In the recent Dauphin case, the taxpayer was the Mayor of Lachine, Quebec. He was the subject of a criminal investigation and incurred legal expenses in defending himself against those charges. He attempted to deduct the legal expenses, essentially on the grounds that they were necessary to keep his job and therefore to collect his salary or wages as required by paragraph 8(1)(b) of the Act. The CRA denied the deduction and the taxpayer appealed to the Tax Court of Canada.
The Tax Court agreed with the CRA and denied the deduction. The Court did not accept the argument that the taxpayer was trying to preserve his employment income. Rather, the legal fees were incurred to “save his reputation and to avoid criminal proceedings” and were therefore personal in nature.
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This letter summarizes recent tax developments and tax planning opportunities; however, we recommend that you consult with an expert before embarking on any of the suggestions contained in this letter, which are appropriate to your own specific requirements.