Deductible Legal Expenses
Legal expenses are allowed to be fully deducted when they are $10,000 or less. This eliminates the need to analyse whether an item is capital expenditure or not. The legal fees however must have a connection with the business activities of the taxpayer to be deductible.
If Legal fees were to exceed $10,000, the general principles apply to deny any amount of expenditure that is of capital nature. The capital or revenue test must be applied to full amount of legal fees.
There are two specific sections in the income tax act that provide deductions for certain types of legal fees
- Section DB 3 permits a deduction for legal fees associated with tax calculation and litigation costs. This section supplements the general permission and overrides capital, private and employment limitations.
- Section DB18 permits a deduction for legal fees associated with leases of property, such as preparation and registration fees. This section overrides the capital limitation but provides that the general permission must still be satisfied.
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