The deductibility of legal fees incurred to file a voluntary disclosure

Subparagraph 60(o)(i) of the Income Tax Act (ITA) allows a taxpayer to deduct legal fees paid to contest an assessment of tax, interest or penalties including, but not limited to, fees incurred to provide the Canada Revenue Agency (CRA) with submissions or representation at the audit, objection and appeal stages. Moreover, in Flood v. HMQ (IP), the Tax Court of Canada held that a taxpayer who incurs legal fees to contest another taxpayer’s proposed reassessment or reassessment may deduct those fees under paragraph 60(o)(i) if he has some financial interest in the proposed reassessment or reassessment.

“The Crown’s position is that the only person who can deduct the costs of objecting to an assessment under paragraph 60(o) is the person against whom the assessment was issued. I think this is an unnecessarily narrow view of the provision. For one thing, paragraph 60(o) contains no such restriction. I think it would be unreasonable to permit a stranger or volunteer who had no pecuniary interest to deduct the fees of contesting someone else’s assessment. However, if someone has a pecuniary or other interest in the outcome that was not too remote, I see no reason for prohibiting such a person from deducting this expense insured by him or her.”

Accountants, tax professionals and clients often ask our firm whether we believe that legal fees incurred related to the Voluntary Disclosures Program (VDP) are deductible under subparagraph 60(o)(i) of the ITA. We have not uncovered any case in which Tax Court has considered the deductibility of voluntary disclosure legal fees. In addition, our experience is that the CRA’s treatment related the deductibility of voluntary disclosure legal fees has been inconsistent. Simply put, the answer is unclear. However, we offer our readers the following thoughts.*

It is submitted that taxpayers’ disclosures under the VDP may involve several steps including:

1. advice to discuss the taxability and proper reporting of various amounts;
   
   
2. establishing and producing tax returns;
   
   
3. preparing and filing the voluntary disclosures application;
   
   
4. disputing, if necessary, the CRA’s decision to deny the taxpayer’s application under the voluntary disclosure (i.e., disputing the potential assessment of penalties); and
   
   
5. disputing, if necessary, the CRA’s proposed decision — or decision — to increase the amounts the taxpayer reported under the VDP (jointly referred to as the “VDP Steps”).

The CRA has outlined its position regarding the deductibility of voluntary disclosure fees in Technical Interpretation** Nos.: 2012-0434071E5*** and 2012-0437831E5. The CRA’s position is that legal fees to file the initial voluntary disclosure application are not deductible. “[It is the CRA’s] view that any legal or accounting fees or expenses relating to the filing of a voluntary disclosure are not deductible by the taxpayer under subsection 60(o) of the Act as they do not relate to an objection or appeal”. However, the CRA does acknowledge that reasonable fees and costs incurred to obtain advice and assistance to establish and produce tax returns for the income tax are generally deductible under section 9; and if the CRA revises — or proposes to revise — the amounts reported under the VDP, taxpayers may deduct fees incurred to dispute those proposed reassessments or reassessments under subparagraph 60(o)(i) of the ITA.

We believe that it is arguable that all or a portion of the fees related to the VDP Steps are deductible. Moreover, it is arguable that a careful reading of the CRA’s Technical Interpretations reveals that the CRA’s position is narrow. If the CRA’s position that “the filing of a voluntary disclosure are not deductible by the taxpayer under subsection 60(o)” is narrow and correct in law — which is not admitted and expressly denied — we believe that it is arguable that the portion of fees related to the preparation of the VDP application may not be deductible (i.e., VDP Steps No. 3) but the fees related the other VDP Steps are deductible (i.e., VDP Steps Nos. 1, 2, 4 & 5).

*First, we remind readers that this blog is for information purposes only; this is not legal advice. We encourage readers to retain a tax lawyer to discuss their unique circumstances and obtain a legal opinion based on a complete review of the law and their unique circumstances.

**Second, we remind readers that CRA Interpretation Circulars and Technical Interpretations do not have the force of law. CRA Interpretation Circulars and Technical Interpretations simply provide insight into the CRA’s administrative policy and interpretation of the law.

***Please note that Technical Interpretation No.: 2012-0434071E5 is in French. Our French is far from perfect and we attempted to translate the documents using our grade 9 French immersion skills and Google translate. We have posted the Google translate version of Technical Interpretation No.: 2012-0434071E5. We warn the reader that our translation of the CRA’s position may not be wholly accurate.