Can You Claim Your Legal Fees?
Who doesn’t love tax deductions? No one, that’s who. People claim tax deductions for everything they can: child care expenses, business expenses, donations, and anything else that can be spun into a deductible - which is much easier if you own a business. It would be stupid not to!
The same is true for legal fees. If you own a business, and you paid legal fees for that business, you can definitely deduct those. Legal fees paid for personal issues, however - not so much. We’ll cover the few situations where personal legal fees are deductible, but let’s start with the good news.
Are legal fees tax deductible for a business?
Yes! Just like any other business expense, legal fees are tax deductible for businesses in Canada. The legal fees you pay for a business are paid for the purpose of earning or continuing to earn income from the business, and that makes them tax deductible!
Can you claim personal legal fees as a tax deduction?
Most legal fees paid for personal reasons are not tax deductible. However, similar to business expenses, legal fees that were paid for the purposes of earning income (to collect or establish your right to income, for example) can be deducted under Line 23200 - Other Deductions: Legal Fees.
What types of legal fees can be deducted for tax purposes in Canada?
1. Legal fees paid related to dealings with the Canada Revenue Agency
Again, because these issues have to do with your income, or maybe because they are specifically related to taxes, CRA allows you to deduct these expenses. Some examples of times when you may want to hire a lawyer who specializes in tax law:
- To get advice if the CRA is reviewing your taxes or benefits
- To fight a decision under the Income Tax Act, Employment Insurance Act, or the CPP (Canada Pension Plan)
2. Legal fees paid to establish your right to income
If you’ve paid legal fees to fight for your right to wages, salary, pension benefit, or a retiring allowance, those fees are tax deductible! In the case of wages, you don’t even have to win the claim to be able to deduct the expense.
3. Legal fees paid to get late support payments or to get an increase in support payments from your ex-partner or child’s parent
So even though you cannot claim legal fees for the initial divorce or separation, to establish custody, or make visitation arrangements, you can claim any legal expenses you paid later if your ex or the other parent wasn’t making their support payments. Again, the theme here is legal fees paid specifically to get income are claimable.
4. Legal fees paid related to the purchase of a new home, maybe
Under certain circumstances, CRA allows a person to claim moving expenses as a tax deduction. For example, if you moved to be closer to a new job and your new home is at least 40km closer than your previous home, then you are allowed to claim your moving expenses. In this case, any legal fees you paid for your purchase and sale to a real estate lawyer are claimable under those moving expenses. This is because, you guessed it, the cost of the move and any related legal expenses were incurred to aid you in the earning of income.
In most cases, legal expenses are not tax deductible, unless the legal fees were paid for a business or fall into one of the above categories that are able to be claimed as a deduction. Legal expenses can be costly, so when you are able to use them as a deduction on your taxes, that’s a bonus!
Whether you’ll be able to claim the expense or not, when you need professional legal services, get the help you need!