If the Canada Revenue Agency (CRA) denies the legal fees you deducted after a wrongful dismissal, you generally have exactly 90 days from the date on your Notice of Reassessment to file a formal Notice of Objection. You must prove to the CRA that your employment lawyer’s fees were spent specifically to collect a retiring allowance or unpaid salary.
Losing your job is an incredibly stressful experience, and having to hire an employment lawyer to fight for your fair severance pay only adds to the financial burden. Fortunately, under the Canadian Income Tax Act, taxpayers are allowed to deduct legal expenses incurred to collect or establish a right to a “retiring allowance” (severance pay) or unpaid wages. However, the Canada Revenue Agency (CRA) frequently audits and denies these deductions, leaving terminated employees with unexpected and massive tax bills.
When the CRA issues a denial, it is usually because the invoice provided by the law firm is too vague. If your legal bill simply says “For Professional Services Rendered,” the CRA auditor cannot determine if the money was spent fighting for severance, or if it was spent fighting for non-taxable general damages (such as human rights violations or personal injury). To successfully appeal a CRA denial in Canada, you must provide clear, itemized evidence separating these costs.
Step-by-Step Process in Canada
Whether you live in Toronto, Vancouver, Calgary, or Halifax, the CRA operates under federal tax laws, meaning the appeal process is identical across the country. Because tax disputes are highly technical, many Canadians choose to hire a dedicated tax lawyer to manage the communications and legal arguments on their behalf.
Step 1: Review the Notice of Reassessment
Your timeline begins the moment the CRA issues a formal Notice of Reassessment denying your legal fee deduction. You must carefully read the explanation provided. Usually, the CRA will state that you failed to provide sufficient documentation to prove the expenses were incurred to collect a retiring allowance under paragraph 60(o.1) or salary under paragraph 8(1)(b) of the Income Tax Act.
Step 2: Request an Itemized Breakdown from Your Employment Lawyer
You cannot win an appeal with a generic receipt. You must contact the employment lawyer who handled your wrongful dismissal case and request a highly detailed letter or a revised, itemized invoice. This document must clearly allocate exactly what percentage of the legal fees were dedicated to pursuing severance pay versus pursuing non-taxable general damages. Only the portion related to taxable employment income is deductible.
Step 3: File a Formal Notice of Objection
You have a strict 90-day limitation period from the date on your Notice of Reassessment to file a Notice of Objection (Form T400A). This form can be submitted online through your CRA My Account or sent via registered mail to the Chief of Appeals at your designated CRA Tax Centre. Filing this document legally halts most CRA collection actions while your dispute is under review.
Step 4: Communicate with the CRA Appeals Officer
Once your file is assigned, a CRA Appeals Officer will contact you or your tax lawyer. This officer is supposed to be impartial and independent from the original auditor who denied your claim. You will present your itemized legal bills, a copy of your final settlement agreement or court order, and your legal arguments justifying the deduction.
Step 5: Appeal to the Tax Court of Canada
If the Appeals Officer still refuses to allow the deduction, your final option is to escalate the matter to the Tax Court of Canada. You generally have 90 days from the date of the CRA’s final confirmation letter to file your Notice of Appeal. Depending on the amount of tax in dispute, you can file under the Informal Procedure (faster and less formal) or the General Procedure (which typically requires a tax lawyer).
How Much Does it Cost in Canada?
Fighting the CRA involves both administrative and legal costs. However, successfully restoring a large tax deduction can save you tens of thousands of dollars. Below are estimated costs in CAD as of May 2026.
| Filing a Notice of Objection | $0 CAD (Free to file) |
| Tax Lawyer Consultation | $300 – $600 CAD |
| Lawyer Drafting the Objection | $1,500 – $3,500 CAD |
| Tax Court Filing Fee (Informal Procedure) | $0 CAD (No filing fee) |
How Long Does the Process Take?
Dealing with the CRA Appeals division requires significant patience. After you file your Notice of Objection, it usually takes 6 to 12 months just to be assigned to an Appeals Officer, due to massive national backlogs. Once assigned, the review process generally takes another 3 to 6 months. If you must proceed to the Tax Court of Canada, expect the litigation process to take an additional 1 to 2 years before you get a hearing date.
Frequently Asked Questions (FAQ)
Can I deduct legal fees if I lost my wrongful dismissal case?
Generally, yes. The Income Tax Act allows you to deduct legal fees incurred “to collect or establish a right to” a retiring allowance or salary. Even if your lawsuit was ultimately unsuccessful, the money you spent trying to establish that right is typically still deductible, provided you can prove it was a legitimate claim.
What if my settlement included human rights damages?
Human rights damages are generally considered non-taxable capital receipts in Canada. Because you do not pay tax on this money, you are legally prohibited from deducting the legal fees spent to obtain it. Your lawyer must apportion the bill, and you can only deduct the percentage of fees that relates to the taxable severance portion.
Do I need to pay the disputed tax while I appeal?
In most standard personal income tax disputes, filing a Notice of Objection places your account into “collections restriction.” This means the CRA cannot force you to pay the disputed amount or garnish your wages while the appeal is pending. However, interest will continue to compound daily if you eventually lose the appeal.
Can my employment lawyer handle the CRA dispute?
While your employment lawyer is crucial for providing the itemized breakdown of your file, most employment lawyers do not practice tax litigation. It is highly recommended to consult a dedicated Canadian tax lawyer or a Chartered Professional Accountant (CPA) to draft your formal Notice of Objection.
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