Can I deduct legal fees I paid to dispute a CRA reassessment?

The deductibility of legal fees incurred to dispute a CRA reassessment depends on the nature of the income at issue. Under the Income Tax Act, legal fees paid to dispute an assessment of income tax — that is, fees paid for a tax objection or Tax Court appeal about your income tax — are generally not deductible as a business or personal expense. The logic is that these fees are not incurred to earn income; they are incurred to reduce a tax liability.

However, there are situations where legal fees related to tax matters are deductible. If the dispute is about whether certain amounts constitute business income (as opposed to capital), and the legal fees are incurred in the course of earning that business income, a deduction argument may be available. Similarly, legal fees paid in connection with establishing entitlement to employment income or pensions can be deductible. GST/HST registrants may be able to claim input tax credits on legal fees incurred for GST/HST disputes.

For most individuals objecting to an income tax reassessment, the legal fees are not deductible, which is one reason the cost-benefit analysis of fighting a reassessment matters. Confirm the specific tax treatment of your legal fees with your accountant or tax lawyer.