Employee pharmacist could not deduct legal fees to preserve employment
Under the Income Tax Act, an employee can deduct legal fees that are incurred to collect, or to establish a right to, an amount that would otherwise be in-cluded in the employee’s income from employment. For example, if you take legal action against your employer or former employer for wages that are owed to you, the legal fees are deductible.
In the recent Ross case, the taxpayer was employed as a pharmacist for several years at various pharmacies. In one year, she was disciplined for mis-conduct by the provincial College of Pharmacists, and her license as a pharmacist was suspended for six months. She incurred legal fees in defending herself against the misconduct charges.
The taxpayer argued that she should be able to deduct the legal fees, since they were necessary for her to establish her right to continue to be employed as a pharmacist and earn employment income. The CRA denied the deduction.
On appeal to the Tax Court of Canada, the Court upheld the CRA decision. The Judge held that the legal fees were not incurred by the taxpayer to collect or establish a right to salary or wages, but rather to allow her to preserve a future right to work as a pharmacist. These two reasons were different; under the former, the legal fees would be deductible, whereas under the latter reason the legal fees were not deductible because the deduction did not fall into the specific wording of the Income Tax Act.
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.