Taxpayer Wins:  Legal Fees Deductible for Employees

Chagnon v The Queen, (2011) TCC 268

A recent case heard at the Tax Court of Canada may have a profound impact for employees and legal advisors alike. The court agreed with obiter comments of Woods J in Fenwick v The Queen, 2008 TCC 243 that paragraph 8(1)b) should extend to legal fees incurred by an employee defending himself in an action by an employer, or a member of a related employer group, seeking to reclaim an amount of salary received by the employee. It is likely that this extension of paragraph 8(1)(b) will lead to an increase in litigation by aggrieved employees who incur legal expenses whilst establishing a right to salary earned.

This case arose out of the sale of Vidéotron to Quebec Media Inc and the unsuccessful rival bid by Rogers Communications Inc.

The scope and application of paragraph 8(1)(b) of the Income Tax Act was the main issue to be decided. This provision pertains to the deduction available to employees for salary-related legal expenses.

The expenses in question related to an unsuccessful defense of an action brought against the appellant two years later by Vidéotron and QMI reclaiming $23,237,627 on the basis that he had inside information relating to Rogers' interest in Vidéotron when the options were granted and that he therefore breached a duty of loyalty to Vidéotron. $383,005 in legal expenses relating to the action was in issue.

It was held that paragraph 8(1)(b) extends to legal costs incurred by an employee to retain salary already received when faced with litigation seeking to reclaim that amount.

ADDITIONAL EDUCATIONAL RESOURCE: EverGreen Explanatory Notes, Make Sure It's Deductible