4.0 Income Tax Issues
 
 
Are Legal Fees Relating to Support Payments Deductible?
By Andrew J. Freedman, C.A., C.B.V and Vivian M. Alterman C.A., C.B.V.

Cole & Partners, Toronto

 
 
 
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When the Child Support Guidelines came into effect most practitioners thought at the time that since child support would not be included in income, legal fees paid with respect to obtaining these amounts would not be deductible. This logic was premised on the principle that the Income Tax Act (The "Act"), denied deduction of an expense that related to amounts received that were not included in income for tax purposes (these amounts referred to as exempt income in the Act). However, Revenue Canada has advised us that as a result of a 1997 amendment which changed the definition of exempt income to exclude child support amounts, legal fees paid relating to obtaining, enforcing or varying an order for child support are deductible. Therefore, notwithstanding the non-taxability of child support receipts, related legal fees as described in this article will be deductible in the year that they are paid.

This article focuses on the deductibility of legal fees relating to taxable spousal support and taxable/non-taxable child support payments. A summary of legal fee deductibility appears at the end of this article in chart form. The reasoning behind the summary follows in the balance of this article.

The right to spousal support is considered a capital asset. A capital asset is one which produces income. A common analogy compares a capital asset to a tree which produces income in the form of fruit. For example, if legal fees are incurred to obtain a right to support, therefore, on account of capital, they are not deductible for tax purposes. However, in some situations (described below) legal fees which are incurred to establish the amount of support or to enforce or collect payment are deductible for tax purposes.

In R. v. Burgess, the court held that legal fees incurred in obtaining spousal and child support in a divorce action were not deductible. The court reasoned that the legal fees were incurred for the purpose of bringing into existence the right to support, and that this right was considered capital property. Since the expenditure was incurred on account of capital, it was not deductible for tax purposes. A later case, discussed below (Wakeman) took a different view regarding child support and permitted the deduction of related legal fees.

The Burgess decision also indicated that the right to be supported during marriage is established at the time of marriage. Pursuing support under provincial legislation is considered to relate to the determination of the amount pursuant to a pre-existing right provided by law, and not the creation of a new right. Therefore, legal fees which are incurred when one party sues the other for spousal or child support in a Family Court or under provincial legislation, such as Part III of the Family Law Act, are deductible in the year of payment.


In Wakeman v. R , the court stated that there was no distinction between legal fees which are incurred to obtain an order for child support pursuant to the Family Law Act, or the Federal Divorce Act. The court stated that in both cases the legal fees are deductible.

The decision of the court in Wakeman was consistent with the courtís decision in Burgess which determined that the right to spousal support arises on marriage and remains during marriage, but that right terminates upon the dissolution of marriage. Under the Divorce Act, the right to spousal support flows from the divorce. Accordingly, the legal costs incurred in obtaining the right to spousal support in a divorce action lead to the creation of a right. Therefore, these legal costs are capital in nature and are not deductible.

Wakeman distinguishes the Burgess decision by stating that a suit for child support does not create the right to the child support but rather simply establishes the amount based on the conditions set forth in the statutes. Both parents have an obligation, at least in Ontario to support a child before and after a divorce and accordingly any legal fees incurred to obtain an order for child support, whether under the Family Law Act or the Federal Divorce Act, are deductible.

Legal expenses incurred by the payor to vary a right to spousal or child support payments are non-deductible. In Bayer v. Minister of National Revenue , the court stated that legal expenses incurred by the payor to reduce the spousal support payments under an existing agreement were not deductible.

Legal expenses incurred by the recipient to vary or to resist the payorís attempt to vary a right to spousal support payments under the Divorce Act are non-deductible. These expenses are on account of capital and therefore not deductible. However, legal fees incurred by the recipient to vary or resist the payorís attempt to vary a right to i) spousal support under the Family Law Act, or ii) child support under either the Divorce Act or the Family Law Act are deductible. These expenses relate to the determination of the amount subject to a pre-existing right provided by law and not the creation of a new right.

According to Revenue Canadaís Interpretation Bulletin IT-99R4, legal fees paid to enforce or collect payments where the right to support has already been established (for example, by written agreement or court order) are deductible. Your client cannot claim legal fees relating to: (i) the custody of children; (ii) obtaining a divorce or negotiating a separation agreement; (iii) establishing a right to spousal support after divorce, even if subsequently provided for under a court order or written separation agreement; and (iv) lump sum spousal and child support amounts.

The chart below summarizes our discussion:

When are Legal Fees Paid by Support Recipients Deductible? *

Type of Legal Procedure

Statute

Type of Support

Deductible?

1. Obtain order

FLA **

Spousal

Yes

2. Obtain order

DA ***

Spousal

No

3. Obtain order

FLA/DA

Child

Yes

4. Enforce existing order

FLA/DA

Spousal/Child

Yes

5. Vary existing order

FLA

Spousal/Child

Yes

6. Vary existing order

DA

Spousal

No

7. Vary existing order

DA

Child

Yes

* Note: Legal fees paid by the support payor are never deductible.** Means Family Law Act, Part III

*** Means Divorce Act, s. 15.1 or 15.2