Deducting Tax Representation Fees

Advisor's Edge

2013-11-01


Clients often come to us with tax questions: how to report foreign investments; what to do about a missing mutual fund T3 slip or, perhaps, an RRSP or TFSA overcontribution.

While we may be able to provide information in some instances, often we refer them to their accountants or, in some cases, a tax lawyer. But are those professional fees tax deductible?

A taxpayer may deduct any fees or expenses incurred to object to or fight a federal or provincial tax assessment, and related interest or penalties. A recent tax court case (Ridout v The Queen, 2013 TCC 260) looked at whether a taxpayer could use this provision to deduct more than $7,100 paid to DTS Disability Tax Services Ltd. (DTS) for consultation and preparation of claims for the disability tax credit and a supplemental personal credit in respect of her son. The claims were for the 2000 through 2009 tax years, and CRA approved them.

At trial, the president of DTS, who noted several of his firm’s clients deduct its fees, represented the taxpayer. CRA argued that since DTS’s fees don’t relate to an objection or appeal of an income tax assessment, they aren’t deductible.

What the taxpayer claimed

The taxpayer claimed the “unusual circumstances in her case justify the allowance of the deduction.” She explained that CRA had previously allowed a similar deduction for fees other DTS clients paid. Also, the disability tax credit is unique in that it requires a “pre-assessment.” The taxpayer must first submit “Form T2201—Disability Tax Credit Certificate,” which must be signed by a qualified medical practitioner before claiming the credit.

The taxpayer felt that since the rules surrounding eligibility for the credit are complex, “relief should be given for the costs of expert advice that is required at a pre-assessment stage.”

The judge stated that for the taxpayer to be entitled the deduction, the fees must relate to “the preparation, institution or prosecution of an objection or appeal with respect to a federal or provincial income tax assessment.” The judge’s issue is the taxpayer didn’t file an objection or an appeal.

In fact, she was actually precluded from doing so for most of the taxation years in question because the statute of limitation periods had expired. The taxpayer’s claim for disability tax relief was made via a series of T1 Adjustment Requests for each of the years in question under the “Taxpayer Relief Provisions.” These provisions permit the CRA to effectively ignore the limitation period at the taxpayer’s request and accept late-filed requests that result in a reduction of tax payable or generate a refund, for up to 10 prior years.

As the judge wrote, “This is a different procedure from the objections process.” While the judge was sympathetic to the taxpayer’s circumstances, she dismissed the appeal since the Tax Act simply doesn’t permit the deduction she seeks. She concluded: “The fact that a legislative provision may produce a harsh result in a particular case is not a sufficient ground to allow an appeal. As often mentioned by judges of this Court in appeals involving sympathetic circumstances, it is the prerogative of Parliament to write the law as it sees fit and it is the duty of the Court to apply it.”