When the business pays for outside expertise — legal, accounting, consulting — that fee is a business expense. On Form T2125, it goes on line 8860, Professional fees, which the CRA's page titles "Professional fees (includes legal and accounting fees)".
What belongs here
- fees you incurred for external professional advice or services, including consulting fees
- accounting and legal fees you incur to get advice and help with keeping your records
- fees you incur for preparing and filing your income tax and GST/HST returns
- accounting or legal fees you paid to have an objection or appeal prepared against an assessment for income tax, Canada Pension Plan or Quebec Pension Plan contributions, or employment insurance premiums
That last one comes with two conditions. The deductible amount must first be reduced by any reimbursement of those fees you received, and the difference is entered on the Other deductions line of your income tax return rather than here. And if a reimbursement arrives in a later year for fees you deducted before, you report the amount received as other income for that year.
What does not belong here
Fees to buy capital property. You cannot deduct legal and other fees you incur to buy a capital property, such as a boat or a building. Instead, add these fees to the cost of the property, where they are recovered over time through capital cost allowance (CCA).
This is the mix-up worth watching for, because the invoice looks identical either way: a law firm's bill for a purchase closing and its bill for a contract review are the same kind of paper. What the fee was for is what decides, and that is settled when you file.
What to keep
Keep a record of all your income and expenses, with the documents behind them. For this line, keep the itemized bill rather than only the payment. A firm's statement of account usually describes the work, and that description is what separates a deductible advisory fee from a fee that belongs in the cost of a property.
Don't send it in with your return. Keep it in case the Canada Revenue Agency (CRA) asks to see it. Business records follow the same six-year retention rule as your personal documents.
Official CRA sources
- Line 8860 – Professional fees (includes legal and accounting fees)
- Interpretation Bulletin IT-99, Legal and Accounting Fees
Source: Canada Revenue Agency (canada.ca). Not tax advice.