Legal Fees, Severance and Tax Filing

Spring time is just around the corner, and with the tulips and spring bulbs comes one of our most favourite things - TAX TIME.

Tax Deductions for Legal Fees

Did you know that you may be able to deduct from your income taxes a portion of legal fees incurred in your employment law matter? If you paid legal fees in relation to securing entitlements from your former employer, you may be further entitled to a deduction on your T-1 return to the Canada Revenue Agency ("CRA").

Legal Fees Relating to Payments for Notice

Where you incur legal fees relating to notice entitlements (i.e. severance) that your former employer will have to pay you, those fees can be deducted on line 229 of your return. Find some more information on the CRA web site, here.

What is Deductible?

The amount that the Canada Revenue Agency allows as a deduction may not be your entire bill. You can only deduct fees that you actually paid in the taxation year, and only the portion of your total legal fees that were related to the notice claim itself. That means that other parts of your legal bill that are related to general damages not related to the notice period are likely not eligible for deduction.

Many cases have a number of elements to them. Above and beyond your notice entitlements, your own claim may involve other claim headings, such as damages for bad faith, harassment or other issues not expressly related to your common law notice period. Only the fees actually paid and specifically related to the notice period are tax deductible.

Lawyer Confirmation

Your employment lawyer can issue a letter to provide to your accountant, or for your own records, as you prepare your tax return. Employment lawyers carefully examine your case, the issues addressed, and the portion of your fees that are properly attributable to your support claims, and confirm a specific amount for you to deduct.

Certain Claims result in a claim on line 232, for example - issues relating to pensions or retiring allowances.

Generally speaking, if your file is settled with your employer agreeing to pay your legal bill, you will not be able to deduct that cost as you have not incurred the expense. However, if your ex-employer only covers a certain portion of the fees, you may be able to claim the excess amount.

If you've settled a claim in the 2016 tax year, and paid legal fees in 2015, be sure to consult with your lawyer and accountant to see whether these fees are eligible for a deduction.