Are Lawyer Fees Deductible in Canada?
Yes. Lawyers can be paid under several different classifications, but they are all considered deductible business expenses with proper documentation. They can be paid through operating, capital, or outside business financing if the terms are favourable enough. This is why many businesses choose to have private funding with their legal representation.
Taxpayers with any questions about deducting fees should contact their accountant to decide whether it fits their situation and how much to deduct. The Canadian income tax deduction specifics differ state by state within the United States, so professional advice is necessary when filing taxes in both countries.
When someone knows they need a lawyer to complete specific tasks, it is good to find financing through a private firm or bank. Public funding for law firms has not been readily available as alternative options have become more popular.
Fees can be deducted so long as they are considered "reasonable." It's all in the details when filing taxes, with many classifications of work being acceptable with proper documentation attached. This includes small tools that may be required to complete the job correctly, including legal pads and pens, among other classifications.
Lawyer fees can be claimed correctly if someone is willing to hire an accountant along with any representation they may need with their case. Some lawyers will also help people file their tax returns when required, so getting the right advice during the preparation process is possible.
Taxpayers can deduct their legal costs in Canada if they defend or sue for their rights under a statute or an award such as pension benefits, employment insurance (EI), old age security (OAS), and veterans' pensions.
Lawyers may also charge fees to help you recover income tax refunds, GST/HST rebates, home relocation loans, and goods and services tax/harmonized sales tax (GST/HSP) credits. But the fee must be directly related to these claims and not deductible elsewhere on your return.
You cannot deduct any amount of the fee that relates to seeking a benefit beyond what you are entitled to receive under the law. So if your employer failed to deduct CPP contributions from your salary, you could not include any fees related to claiming the CPP contributions on your income tax return.
The Canada Revenue Agency (CRA) has specific criteria for legal costs. It classifies them as either personal or general, depending on which taxpayer they benefit. You can only deduct private legal fees.
If you paid your lawyer by cheque, credit card, or other means of payment where there is a record of the transaction, you might be able to claim the whole amount charged as long as it's for deductible purposes (e.g., recovering OAS payments). If this is not possible, your deduction will be limited to the portion used for deductible purposes only.
You cannot claim more than $3,000 in legal fees each year. However, you can claim any amount of your legal costs that exceed this limit as long as the fees incurred were for personal purposes (i.e., reducing or eliminating a tax debt).
If part of your legal bill is classed as general and part as personal, you can only deduct the personal portion.
Canadians who have received an extra income tax reassessment letter for class action settlement awards should know that no specific provision in the Income Tax Act (Canada) prohibits them from deducting legal costs relating to their class action award when filing their income tax return.
Some taxpayers think they cannot claim class action legal expenses as deductions since class actions are lawsuits by representative groups that could endanger class members' right to total compensation or other benefits. However, class action lawsuits are an effective way to receive just compensation for class members and, as such, should not be excluded from tax planning opportunities.
Make sure you claim those class action lawsuit costs on your tax return next year if it's allowed, and consult a legal professional first. You could deduct all ordinary and reasonable expenses in the year you incurred them even if they were paid in a different year. Legal fees to recover taxable alimony or child support received may be deductible as well. Don't forget to keep copies of receipts and records for three years after filing your income taxes.
Individuals with any questions about class action lawsuit tax deductions should speak to their accountant. The Canadian taxation classifications are different than in America, so it might be best to speak with someone who specializes in both countries before filing taxes throughout the year.