2010-0354711E5

REASONS: (1) Generally, legal fees incurred for the purpose of settling an estate (taking possession of the property of the deceased, obtaining probate, distribution of a deceased's property) are personal expenses that are non-deductible. (2) Legal fees incurred to establish a right to income are generally considered to be capital in nature and non-deductible. Where it can be demonstrated that there is a pre-existing right to property income (such as dividends) and there is a direct connection between the legal fees incurred and efforts to enforce the payment of that property income, the expense may be deductible in the taxation year in which it was incurred.

XXXXXXXXXX

2010-035471

Brenda White

519-645-5454

June 21, 2010

Dear XXXXXXXXXX :

Re: Legal Expenses

This is in response to your letter of January 12, 2010 wherein you asked for clarification regarding the deductibility of legal expenses.

In the situation described, you are a minority common shareholder of your father's privately held company (the "Company"). Since your father's death in 2001 the Company has been operated under the direction of two unrelated trustees. You have incurred legal fees related to settling your father's estate. Subsequently, because the trustees had refused to declare dividends on the common shares, you retained legal representation to negotiate annually with the trustees to secure the payment of such dividends. You have asked whether any portion of the legal fees would be deductible in the respective year(s) incurred.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.

The CRA's position regarding legal expenses is discussed in IT 99R5, "Legal and Accounting Fees". Paragraph 1 notes that, except where there is a specific provision in the Income Tax Act (the "Act") dealing with legal or accounting fees, such as paragraphs 8(1)(b) or 60(o.1), legal and accounting fees are deductible only to the extent that they

(a) are incurred for the purpose of gaining or producing income from a business or property, and

(b) are not outlays of a capital nature.

Legal fees incurred to establish a right to income are generally considered to be capital in nature and are therefore non-deductible. However, if legal costs are incurred in connection with normal activities necessary to the earning of property income, then a deduction may be available. This is always a question of fact. The term "property" as defined in the Act includes a share, therefore it follows that income derived from a share is generally considered to be property income. Accordingly, where it can be demonstrated that there is a pre-existing right to property income (such as dividends) and there is a direct connection between the legal fees incurred and efforts to enforce the payment of that property income, the expense may be deductible in the taxation year in which it was incurred.

There is no specific provision in the Act permitting the deduction of legal fees incurred for the purpose of settling an estate (e.g. taking possession of the property of the deceased, obtaining probate, distribution of a deceased's property). Furthermore, as such fees are unrelated to the earning of income from a business or property, they are non-deductible in accordance with the comments in IT-99R5, noted above.

We trust these comments will be of assistance.

Yours truly,

Renée Shields

for Director

Business and Partnerships Division

Income Tax Rulings Directorate

Legislative Policy and Regulatory Affairs Branch