Legal fees can be expensive. In some instances, you can reduce the out-of-pocket cost by deducting the fees from your income, thereby lowering your taxes. The deduction can be claimed directly on your income tax return.
General Rule for Deduction of Legal Fees
As a rule, legal fees are deductible just like any other business expense you have paid the fees to earn income. For example, if you operate a small business and you hire a lawyer to draft a contract for you or collect unpaid debts, those fees are deductible. Fees paid for personal reasons, such as a divorce, are not deductible.
Dealings With the Canada Revenue Agency
However, there are several instance when legal fees that are not paid to earn income can still be deductible. These instances are specifically described in the Income Tax Act. They often have to do with fees incurred to deal with the Canada Revenue Agency and meet tax obligations.
You can deduct legal fees if you paid them for advice or assistance to respond to the CRA as part of a review of your taxes. Also, any fees you have paid to object to or appeal an assessment or decision under the Income Tax Act, the Unemployment Insurance Act, the Employment Insurance Act, the Canada Pension Plan or the Quebec Pension Plan are deductible.
If you earn business income, reasonable expenses incurred for advice and assistance in preparing and filing your tax returns are normally deductible. If you only earn employment income, then those particular costs are not deductible.
Establishing Your Right to Income
Legal fees paid to establish your right to salary or wages are deductible. In such instances, you do not actually have to be successful in your claim. As such, if the nature of your original claim is for salary or wages, the fees are deductible regardless of the end result.
If you are trying to establish your right to a retiring allowance, your fees are also deductible, but only against the actual amount you collect. Therefore, contrary to salary or wages, you do have to be successful in your claim for a retiring allowance. However, fees paid for a retiring allowance can be carried forward for up to seven years.
Other Special Situations
While you cannot claim legal fees you incurred to get a separation or divorce or to establish custody of or visitation arrangements for a child, you can deduct certain other fees paid . These include fees paid to collect late support payments or obtain an increase in support payments.
If you are moving to get closer to a new place of work, legal fees, such as those incurred for the purchase of a new home, may qualify as moving expenses and be deducted as such if you meet all of the other criteria for this deduction.