There is an important distinction between the deduction provisions of subsection 60(o) of the Income Tax Act (Canada) (“ITA”) and other deduction provisions.
Subsection 60(o) allows for amounts paid for objections or appeals against assessments of tax, interest or penalties under the ITA or similar provincial legislation to be deducted in computing a taxpayer’s income for a taxation year.
The language of the subsection restricts the deduction to the year that the costs are paid without providing any provision for carrying forward or back. This is in contrast to subsection 60(o.1) of the ITA which allows for deductions for legal expenses paid to establish a right to a benefit under the Canada Pension Plan or a retiring allowance to be carried forward for 7 years.
This is important to note, as the timing of any objections or appeals may not always coincide with taxation years with sufficient income to offset such expenses. If the deduction cannot be used in a taxation year it will be lost.
As subsection 60(o) uses the word “paid” as opposed to “incurred” or other similar language there may be an opportunity for taxpayers to time the payments of their legal expenses to optimize the deduction permitted.
It is worthwhile to note, however, that the CRA is of the view that subsection 60(o) applies to legal or accounting fees that are incurred before a notice of objection or appeal has been filed. See CRA’s interpretation bulletin IT-99R5 paragraph 7.
If you have incurred or expect to incur expenses relating to a possible notice of objection or appeal you should contact your tax advisors.