Legal Fees Paid to Collect Wages

Recovering unpaid wages can be a challenging and often costly process for employees. Many find themselves needing to hire legal representation to fight for their rightful compensation. The good news is that in many cases, the legal fees incurred for this purpose can be tax-deductible. Here’s what you should know about deducting legal fees paid to collect wages.

The Canada Revenue Agency (CRA) allows you to deduct legal fees paid for the following wage-related purposes:

Collecting late salary or wage payments.

To collect or establish the amount of salary or wages owed to you.

Negotiating severance packages or wrongful dismissal claims.

To respond to reassessment of your taxes related to employment income.

Limitations and Reductions on Legal Fee Deductions

While the ability to deduct legal fees for wage-related matters is straightforward, there are important considerations that may affect your claim. Let’s take a closer look:

1. Legal Fees for Establishing the Right to Collect Wages

Legal fees incurred to establish a right to collect salary or wages are deductible, regardless of whether the attempt is successful.

2. Amount Awarded for Legal Fees

Any amount awarded to cover legal fees must be deducted from your claim. For example:

Your total legal fees are $3,000.

The amount awarded for legal fees is $1,000.

The amount you are eligible to deduct will be $2,000 ($3,000 - $1,000).

3. Reimbursements for Legal Expenses

If you receive any reimbursement for your legal expenses, such as payments from your employer or coverage from legal insurance policies, these must also be subtracted from your deduction.

4. Claim Legal Fees in the Tax Year Paid

Legal fees should be claimed only in the tax year they were paid. If you are reimbursed in a different year, you may need to adjust your previous year’s return.

5. Mixed Legal Cases

If your legal case involves both deductible and non-deductible matters, you will need to determine the appropriate proportion of legal fees that can be claimed as a deduction for wage-related legal fees. For example:

Total legal fees are $5,000.

Estimated time spent on wage-related issues is 50%.

The deductible portion will be $5,000 * 50% = $2,500.

6. Record-Keeping

Maintaining thorough records is very important when claiming legal fees for wage collection. Keep all detailed records of legal services, bills from lawyers, and other associated costs.

Where to Claim the Legal Fees

Include these expenses on the “Accounting & Legal Fees” line (8862) of form T777, Statement of Employment Expenses. Enter the allowable amount of your employment expenses from the total expenses line of Form T777 on line 22900 of your tax return.

It’s very important that you report the reductions accurately. This ensures that you are claiming the correct amount on your tax return, staying compliant with tax regulations while maximizing your eligible deduction.

For more information, visit the CRA’s official page on this topic: Tax Return: Accounting & Legal Fees for Salaried Employees