LTD Settlement and Legal Fees - CRA

Disability Insurance
1

In March, my accountant helped me claim my legal fees for a case I won against my LTD provider to reinstate my benefits and pay past LTD benefits owed to me. I won the case in April 2020.

My LTD benefits are taxable and my accountant believed I should probably be able to get 100% of the legal fee deducted. Unfortunately his office is closed and I haven’t been able to reach him.

This week I got a Review Letter from the CRA questioning the legal fees entered in Box 22900.

I know at least some of the legal fee is tax deductible and submitted a letter, correspondences with my attorneys, and statement of settlement to the CRA online.

The wording on the CRA tax site is odd.

Legal fees

You can deduct any legal fees you paid in the year to collect or establish a right to collect salary or wages.

You can also deduct legal fees you paid in the year to collect or establish a right to collect other amounts that must be reported in employment income even if they are not directly paid by your employer. However, you must reduce your claim by any amount awarded to you for those fees or any reimbursement you received for your legal expenses.

Link: CRA Definition - Legal Fees

I don’t quite understand the last part. What does ‘However, you must reduce your claim by any amount awarded to you…’ mean?

From doing some research, I believe it was this case: Court rules in favour of disabled person on taxing legal fees that got the CRA wording changed to include that legal fees from wage-loss replacement plans (ie: LTD benefits) to also be tax deductible.

I’m just really confused about the above wording.

Thanks so much

2

I think it means that if you are out of pocket to pay legal fees to sue someone for employment income, then you can deduct the legal fees from the employment income you got. However if you win and get awarded your employment income PLUS some amount towards your legal fees, then you can only deduct from your income the amount that you weren’t already paid by the people you sued.

By way of example -

Your employer doesn’t pay you $10,000 of overtime.

You spend money on legal fees to get your overtime.

Example 1
You spend $2,000 on legal fees to get your $10,000.
Your income to be reported for taxes is $10,000 - $2,000 = $8,000 of taxable income

Example 2:
You spend $2,000 on legal fees to get your $10,000, and the court makes your employer pay all of your legal fees.
Your income to be reported for taxes is $10,000.

Example 3:
You spend $2,000 on legal fees to get your $10,000, and the court makes your employer pay half of your legal fees for $1,000.
Your income to be reported for taxes is $10,000 - $2,000 + $1,000 = $9,000

3

hmm… that makes more sense but still confused lol. Tax law is so awkward to understand.

30% of my settlement went to legal fees. I just don’t know what amount the CRA cares about I guess.

Thanks for the reply!

4

I think you can claim the amount not paid by the court settlement.
So any amount of legal fees above 30% of the settlement you got.
I’m not a lawyer or accountant.