Toronto Tax Lawyer Guidance on Deduction of Legal Expenses for Employees
December 09, 2020
Red Meat & Samulovitch PC
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Introduction – Tax advice on legal costs for employees
In certain circumstances, taxpayers who earn employment income may be able to deduct employment-related expenses from their income in order to reduce the income tax they owe to Canadian Revenue. However, the types of expenses that can be deducted as employment expenses are strictly limited to those expressly listed in the Income Tax Act. Canada’s Income Tax Act allows employees to claim deductions in relation to certain employment-related legal expenses, which can result in significant tax savings for taxpayers. This article contains tax advice about these deductible expenses.
Gathering or establishing a right to salaries or wages – tax advice for legal costs of employees
According to Section 8 (1) (B) of the Income Tax Act, employees can deduct the amounts paid in a year based on the legal costs paid by the employees in order to collect an amount or to establish a right to it that would be paid to the employee under Canadian income tax law as labor income taxed. The relevant type of amounts include salaries and wages, but also other types of earned income such as taxable employee benefits or employee stock option benefits.
The relevant amount must be an amount that the employee has allegedly already owed in connection with services provided in the past. Paragraph 8 (1) (b) does not cover expenses related to protecting an employee’s job or establishing a right to future income through employment. Legal costs in connection with the negotiation of an employment contract or the establishment of a right of transport are also not deductible. Another provision of the law, discussed below, addresses cases of wrongful dismissal.
The courts have repeatedly found that legal expenses of the type described above are deductible, regardless of whether the employee’s right to wages is legal or likely to succeed. However, the rating agency has taken the view that the deductibility of legal costs for claiming retrospective benefits depends on whether the lawsuit is successful. If the Canada Revenue Agency has denied your employment-related legal expense allowance, you should contact an experienced Toronto tax attorney to see if there are reasons to contest CRA’s decision to deny the allowance.
When an employee’s qualified legal costs exceed their earned income, that employee has an employment loss that can be offset against other types of income. If there is insufficient income to use the loss in that year, the loss can be carried over to other years as a non-capital loss.
Pensions and old age pensions – legal advice for employees legal advice tax advice
Pursuant to Section 60 (o.1) of the Income Tax Act, employees can, within certain limits, deduct legal costs that were paid for the establishment or establishment of a claim to pension benefits or an “old-age allowance”. This deduction does not apply to legal action in relation to retirement benefits under the Canada Pension Plan or the Quebec Pension Plan. Legal costs related to the division or liquidation of property resulting from the breakdown of a marriage or partnership under common law are expressly excluded from coverage under this paragraph of the Income Tax Act. Most legal costs related to separation, divorce and family disputes are not deductible. An important exception is some legal costs related to legal action to collect or increase the support payments made by the support recipient. Full details of the legal deductibility of family legal expenses are beyond the scope of this article. The deduction can only be claimed for a tax year if the legal costs were paid in that year or one of the previous seven tax years.
A retirement pension is an amount that a person has received:
- when or after the individual leaves the employment relationship in recognition of their longstanding activity; or
- in relation to the loss of employment of the individual, whether or not it was obtained as a result of or in lieu of the payment of damages or as a result of an order or judgment of a competent court.
Note that this means that damage caused by unlawful dismissal or loss of employment can often qualify as a retirement pension and entitle you to deduct the associated legal costs.
If a person dies and an amount of any of the types described above is received by the person’s dependent, relative, or legal guardian, the receipt may also be an old age allowance. In these circumstances, the dependent, relative or legal guardian may claim a deduction for legal costs incurred in establishing or establishing a right to the deceased person’s old-age pension, provided all other criteria are met.
The amount of costs that can be deducted is subject to certain restrictions. In particular, the amount of the claimed expenses must not exceed the amount of the pension benefits or retirement pension received by the taxpayer and included in his income, plus any amounts reimbursed to the taxpayer for legal costs and included in the taxpayer’s income . Effectively, this means that the taxpayer’s ability to recover legal costs largely depends on the extent to which the taxpayer successfully carries out their legal action and that unsuccessful taxpayers may not have access to the deduction at all. In fact, the employee loses twice: no amount received and no deduction for legal costs. The amount of the costs that the taxpayer can claim will also be adjusted downwards, provided that one of the amounts received as a result of the legal action has a deduction for the taxpayer in connection with the transfer of the relevant amount to a registered or registered pension plan results in a pension plan.
Pro Tax Tips – Tax advice on legal costs for employees
Employment cases can concern issues relevant to both Paragraph 8 (1) (b) and Paragraph 60 (o.1). In such cases, it may be important for taxpayers to keep track of how much legal work is being done on specific issues in order to maximize their legal expense allowance and defend their legal expense allowance claims against CRA tax audits. Great care may also be required in negotiating a settlement, as the way the settlement divides damages between different disputes can affect the amounts that taxpayers can deduct. If the legal costs of an employment case are likely to be significant, it is important to consult an experienced Toronto tax advisor for advice on these issues.
The content of this article is intended to provide general guidance on the subject. You should seek advice from a professional about your particular circumstances.
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