The Toronto Star ran a story yesterday that focused on whether legal fees should be tax deductible. The story is at:
To very briefly summarize the article, one tax expert suggests that there should be the ability for individuals to deduct legal costs while another says that this would not be fair. The first tax expert says that deductibility isn’t a pure tax issue but is as much, and likely more, a “socio-economic issue”. The second expert takes the position that tax laws should be neutral and that, therefore, it’s not fair that some people would get, in effect, extra deductions if they litigate as opposed to those who do not litigate.
I take issue with the position of the second expert. Firstly, I question whether, if tax laws are supposed to be neutral, that they are truly being neutral when a business can deduct legal fees but individuals cannot do the same. However, even if one is to assume that it is proper to distinguish businesses from individuals, is it really true that the current laws are neutral? I don’t think so. For example, individuals may be able to deduct legal fees if:
1. They are investing in real estate and the legal fees relate to income generated by the property;
2. They are suing to enforce rights under an employee stock option agreement or an employer-paid disability insurance plan;
3. They are suing for wrongful dismissal or termination or severance pay;
4. They are disputing rulings relating to the Canada Pension Plan or Employment Insurance entitlements;
5. They are disputing income tax assessments;
6. They are litigating for spousal or child support; or
7. In some instances, the legal fees relating to the sale and purchase of a house may be deductible as part of a moving expenses deduction.
(For what it is worth, the situation in
Now, the first thing I can hear people complaining about is that this would cost the government far too much in terms of tax losses. The second thing is that there would be complaints that this would foster or increase the number of outrageous lawsuits out there if the current costs regime could be reduced through the deductibility of legal costs. For the first issue, my response is “yes, and … what?” Decisions are made all the time that result in government losing tax revenues. For the second issue, and also the first one I suppose, the answer seems to be simple: only permit the deduction where the person has successfully won his or her case. In that case, only those with truly meritorious claims would be permitted to use the deduction and the outrageous lawsuits would not get to deduct the legal costs. OK, but what about the 90% plus of the cases that settle? Suppose the plaintiff with the outrageous lawsuit gets a settlement from the other side for a nuisance amount (say, $2,000) just to make the lawsuit go away. Wouldn’t that make it so that the outrageous litigant could still claim that he/she “won” and therefore should be able to deduct the legal costs? I suppose. Unless, however, we also make it so that on any settlement the other side agrees that the settlement is valid for tax deductibility purposes. This is not entirely without precedent. Section 60.1 of the Income Tax Act permits the deduction of payments for spousal and child support pursuant to a separation agreement or a settlement agreement relating to support. In that instance, both parties to the litigation can agree on the amounts and they are therefore deductible. Similarly, if the side making the payment on a nuisance claim can be convinced to agree that there should be tax deductibility, then the deduction can be made. How many truly unmeritorious, self-represented people will know enough in negotiating their nuisance settlements to request the agreement to deductibility of legal fees? Probably not a lot, so the risk is relatively minor.
There is also the access to justice issue which is somewhat touched upon in the article. Under the costs regime in effect in
In the end, it may well be worth giving further consideration to the deductibility of legal fees in