Non Deductible Legal Fees Class 14.1

Non Deductible Legal Fees Class 14.1

In Rio Tinto Alcan Inc. v. The Queen, 2016 TCC 172 (Alcan), the Tax Court of Canada (TCC) partially dismissed the CRA`s decision, with Presiding Justice Robert J. Hogan characterizing some service fees as “regulatory costs” and others as “enforcement costs.” 1 After reviewing the TCC`s findings and related jurisprudence, the Federal Court of Appeal (FCA) upheld the TCC`s decision. The FCA agreed with the TCC`s approach of dividing expenses into two categories: Would it be possible for you to claim start-up costs as legal fees instead of recording them as an asset and then amortizing them? You must remember that a foundation is an asset, not an expense. Generally, mining, oil and gas companies are allowed to make a 100% deduction for exploration costs at the base. Other development costs are deductive at 30%. In general, pre-production costs of mineral development are treated as “Canadian Development Costs” (CDS) (30% declining balance) rather than “Canadian exploration costs” (CEE) (100% deduction). In addition, mining costs related to environmental studies and community consultations required to obtain an exploration permit or to comply with a legal or informal obligation under the terms of the permit are treated as PECs that can allow for an immediate deduction of 100%. Business expenses that are reasonable and paid to generate income are deductible for income tax purposes, unless prohibited by a specific provision of the Income Tax Act. Some expenses are deductible subject to restrictions (e.g., charitable donations, entertainment expenses, costs of providing a car to employees).

The deduction of investments is expressly prohibited, but special provisions may allow for the amortization or depreciation of these expenses. Alcan deducted all advisory fees paid to investment banks on the basis that the expenses were of a routine nature and incurred for the purpose of generating income from a business or property. However, the Canada Revenue Agency rejected all of these expenditures on the basis that they were capital expenditures. The CEC balances as at December 31, 2016 were transferred to the new Class 14.1 reserve effective January 1, 2017. The CCA depreciation rate for property transferred under Class 14.1 is 7 per cent until 2027. Revenue received after December 31, 2016 from properties acquired, expenses incurred or goodwill generated before January 1, 2017 reduces the Class 14.1 account by 75%. Line 418 of Schedule 1 is a manual entry that allows you to deduct up to $3,000 for start-up costs, provided you have entered the incorporation costs on your balance sheet (Schedule 100). If the cost of incorporation exceeds $3,000, claim $3,000 on line 418 of Schedule 1 and can invest the remaining balance as Class 14.1 assets in Schedule 8. According to the Ways and Means Motion communication dated March 21, 2016, the new CCA class is Class 14.1 and has a rate of 5%. However, for eligible investments made before 2017, the rate is 7% for the first 10 years. In addition, for expenses prior to 2017, CCA taxpayers can deduct the greater of $500 per year and the otherwise deductible amount. This additional deduction will be available for taxation years ending before 2027.

As a result of the amendments made in the 2014 federal budget, expenditures currently added to the JRP at 75 per cent of their cost would be included in a new CCA category at 100 per cent of their cost. The new class would have an annual depreciation rate of 5% instead of the current 7% of 75% of eligible capital expenditures. The current CCA rules would apply generally, including the memory, capital gains and amortization provisions (e.g., the “half-year rule”). These changes can be found in Schedule 2 of Budget 2014 under Corporate Income Tax Measures. Property in this new Class 14.1 is excluded from the definition of capital ownership for GST/HST purposes. The 2016 federal budget repealed the tax treatment of ownership of eligible capital (BDP) in effect at the time and replaced it with a new cost of capital supplement (CCA) class and included rules for the transfer of taxpayers` existing cumulative eligible capital blocks (CCBs) to the new CCA class. This proposal was not intended to affect the application of the Goods and Services Tax/Harmonized Business Tax (GST/HST) in this area. See information at the bottom of the proposed changes page. Overall, the good news is that Alcan is setting a precedent that transaction costs associated with the purchase of capital assets are not automatically locked-in in nature (and are therefore not fully deductible in the year in which they are incurred).

It is important to note that the ICC took into account Alcan`s long tradition of acquisitions when deciding to classify a portion of transaction costs as regulatory costs.