The taxpayer incurred legal fees in (1) pursuing his lawsuit, (2) defending against the corporation’s counterclaim against him and (3) defending against the lawsuit against the family trust. The CRA allowed the portion of fees relating to (1) and (2). However, it disallowed the legal fees Mr. Kurnik paid for defending the lawsuit against his family trust.
Upon appeal to the Tax Court of Canada, the Court allowed the deduction of all of the legal fees. The Court found that the second lawsuit resulted from the first, and that the taxpayer had to incur legal fees with respect to both in order to collect the bonus. In the Court’s words, “Both lawsuits were litigated together, resolved contemporaneously and funded by the employee directly from the proceeds of the settlement from which Mr. Kurnik was fully successful in receiving his promised, but unpaid bonus… As such, he should be entitled to the deduction for all the legal fees.”