You can deduct the costs of suing your employer

National Post


So, you think you're underpaid. Have you ever considered suing your employer for
more money? Well, here's some good news: even if you lose your case, at least
your legal fees will be tax deductible, according to a Federal Court of Appeal
decision released last month.

John Loo is one of more than 40 lawyers who are suing their employer, the
British Columbia regional office of the federal Department of Justice, for
higher wages. The case, scheduled to be heard in the B.C. Supreme Court this
September, dates back to a June, 1990 decision by the Treasury Board of Canada
to increase the pay of Justice lawyers working in the Toronto regional office.

The decision was based on the fact that lawyers in Toronto generally
commanded higher salaries than lawyers in other parts of the country.
Subsequently, the Vancouver staff lawyers argued that failing to pay them the
same salaries as Toronto lawyers constituted a breach of their employment

In preparation for the upcoming trial, Mr. Loo incurred legal expenses, which
he proceeded to deduct on his tax returns since the Income Tax Act specifically
permits employees to deduct legal expenses paid "to collect or to establish a
right to salary or wages owed by their employer."

The Canada Revenue Agency denied his deductions on the basis that the wages
the lawyers are seeking to be paid to him are not "owed." Although Mr. Loo
performs the same type of work as a Department of Justice lawyer in Toronto, he
is not "owed" the wages in question because the lawyers in the Vancouver office
have negotiated a yearly salary and have been paid exactly according to their
employment contract.

The appeal court carefully examined the definition of the word "owe," which
is defined as "an obligation to pay or repay (something, especially money) in
return for something received."

An obligation to pay salary or wages is determined by the terms and
conditions of an employment contract, which generally stipulates both the
services to be performed and the amount of salary or wages payable for those
services. Salary or wages are legally "owed" to the employee once the services
have been performed.

The court found that while Mr. Loo performed services for his employer and
was paid "some salary" for those services, he has been paid at the rate that his
employer alleged was payable, and not at the rate that Mr. Loo felt was payable.

As the Appeal Judge wrote: "Mr. Loo's claim may or may not be well founded in
law, and it may or may not succeed. But his claim, regardless of its merits,
falls squarely within the words of the Act because Mr. Loo is trying to
establish by litigation that, for the services he has rendered to his employer,
the law requires that he be paid more than he has been paid."

Mr. Loo's success in being able to deduct his legal fees may ultimately pave
the way for other employees to seek legal counsel if they, too, feel they are