When can a taxpayer deduct fees paid to contest an assessment or reassessment? As is usual in tax matters, the answer is neither simple nor obvious.
Paragraph 60(o) of the Income Tax Act (the ITA) provides that a taxpayer, in computing income for the purposes of the Act, may deduct
amounts paid by the taxpayer in the year in respect of fees or expenses incurred in preparing, instituting or prosecuting an objection to, or an appeal in relation to […] an assessment of tax, interest or penalties under this Act or an Act of a province that imposes a tax similar to the tax imposed under this Act
The CRA, in IT-99R5, also permits taxpayer to deduct
amounts expended in connection with legal and accounting fees incurred for advice and assistance in making representations after having been informed that the taxpayer’s income or tax for a taxation year is to be reviewed, whether or not a formal notice of objection or appeal is subsequently filed.
The CRA also points out that the fees in question need not be paid to a lawyer; fees paid to an accountant in the course of an audit or objection should be deductible as well.
Paragraph 60(o) permits a taxpayer who appeals a reassessment to a court to deduct fees awarded against him by the court. See CRA technical interpretation number 2000-0042175 dated November 20, 2000.
Paragraph 60(o) does not apply to GST or provincial sales tax assessments. Fees incurred to contest such an assessment could be deductible under subsection 9(1) of the ITA, but only if the person assessed is carrying on the business. In a case considered by the CRA, an individual was assessed as a director of a corporation that had failed to remit Quebec sales tax. The CRA took the position that the director could not deduct legal fees paid to defend against the assessment because paragraph 60(o) did not apply to Quebec sales tax appeals and the director did not carry on the business of the corporation. See CRA technical interpretation 2004-0101351I7 dated January 26, 2005.
