Can business expenses be tax deductible if you no longer operate said business? According to an article in the Financial Post, some business expenses can be tax-deductible even if the company doesn’t operate anymore.
However, it is subject to the business and the case’s specifics. In a detailed article by Jamie Golombek, he has said the CRA rejected a retired lawyer’s move to deduct file storage fees from her former practice, and the tax court later declared the storage fees could be allowed.
“One of the advantages of being self-employed is the ability to write off a variety of business expenses against your income. In some cases, those expenses may even lead to a loss that may be used against other income of the current year or carried back up to three years. That loss can also be carried forward for use against future income for up to 20 years,” the article said.
The tax on the storage of the files came up in a case when the CRA said it would not allow the retired lawyer to deduct the fees, but she insisted that it was a business expense even if she was not practising law anymore.
“That issue came before the Tax Court in a recent case involving a retired Nova Scotia lawyer who deducted professional dues of $57 and filed storage fees of $1,200 as expenses on her 2015 tax return. The Canada Revenue Agency allowed her annual dues, but it disallowed her storage fees,” the Financial Post said.
The Financial Post article added that The CRA maintained that not all business expenses were deductible. Quoting the Income Tax Act, which stated: “no deduction shall be made in respect of an outlay or expense except to the extent that it was made or incurred by the taxpayer to gain or produce income from the business.”
The taxpayer countered that file maintenance or storage “is an inherent risk of the profession” and necessary to practise law. Failure to do so would have resulted in “progressive sanction ascending to possible disbarment.” In addition, maintaining her closed files was needed to comply with the guidelines and standard and acceptable business practices prescribed by LIANS and the law society.
The Tax Court judge, after analysing the facts associated with the typical wind-up and discontinuance of a professional services practice, said lawyers typically accrue, annually, “run-off” responsibilities concerning file retention, accessibility and, ultimately, future storage obligations when providing legal services to clients and that the taxpayer could be sued for professional negligence arising from advice given as a legal service.
Clients could also sue the taxpayer for not keeping the appropriate files and client records, including evidence of the advice given for the required holding periods. Hence, the record-keeping services were essential.
The judge allowed the file storage fees, concluding that both the past accrual of future record-keeping services, file storage and the ongoing need to continue to protect her insurance coverage for past legal services all represent the “enduring and current provision of legal services” beyond the period in which the income was earned or received, the article said.
This essentially meant that the storage charges could be deductible even though the taxpayer was not receiving any income as a lawyer during the period.