When Are Professional Fees Tax Deductible

Evelyn Jacks

Based on CRA income tax filing statistics to August 13, 2023, just under 60% of all the 30.8 million tax returns filed in Canada this year were E-filed, which means the vast majority of Canadians are using the services of a professional EFILER to get their tax returns filed.   That’s good news for the industry, which has the opportunity to grow even more, especially if receiving referrals from other financial advisors, always on the look-out for trusted, knowledgeable and highly skilled tax talent.  Common question:  are tax accounting and legal fees tax deductible?  There are some specific rules to know:

Indeed, accounting fees are tax deductible by business owners as a business expense.  However, for investors they may be deductible as carrying charges, on line 22100 of the T1 return, but only to the extent they are incurred for bookkeeping and/or recordkeeping for an investment or investment portfolio. Therefore tax professionals will need to separate those costs from other tax preparation fees for these purposes.

As mentioned, the cost of preparing a tax return is also deductible if the investment income a taxpayer generates produces income from a business or property. In that case, it is necessary to deduct these expenses as accounting fees on Form T2125 Statement of Business or Professional Activities or Form T776 Statement of Real Estate Rentals.

Here’s an example, excerpted from Knowledge Bureau’s Tax Tip Toolkit, which includes the Knowledge Bureau Discovery Calculators and EverGreen Explanatory Notes.

Issue: Bob has accumulated several rental properties that earn him a nice investment income each year. He pays his accountant $750 this year to do the bookkeeping for his properties, and to prepare his tax return. Can Bob deduct the accounting fees?

Answer: Yes. Since the accounting fees were paid for bookkeeping and tax preparation for purposes of earning investment income, Bob may deduct these fees on his tax return for the year in which they are paid.

Legal fees, on the other hand, are deductible if they meet the one of the following criteria:

• They were incurred in the ordinary course of a business. This would include legal fees paid for annual filings and regular business matters.
• They were incurred in the course of appealing, or objecting to, an income tax assessment from CRA.
• They were incurred to obtain financing for an investment:  20% of such fees are deductible annually over 5 years.
• They were incurred to make representation in relation to a business carried on by the taxpayer. This could include lobbying government to obtaining licensing, permits, franchises or trademarks.
• They were incurred in the course of collecting money owed to a taxpayer as a severance, pension benefit, or retiring allowance. The amount deductible is limited to the amount of the payment actually received by the taxpayer, less any amount transferred to a Registered Retirement Savings Plan (RRSP). Legal fees in excess of this limit may be carried forward up to 7 years if additional payments are received.

Make a Difference.  Taxpayers who incur professional tax, accounting and legal fees when making investments in business or property will be happy to know of the tax deductibility of those costs.  It’s a way to mitigate wealth erosion and increase real returns.