BC Support Legal Fee Deductions related to BC spousal support and BC child support claims are highly technical. In today’s blog by Fraser MacLean of our downtown Vancouver office, we learn which spouses are allowed to make the tax deduction claim and when.
BC Support Legal Fee Deductions Call 1 877 602 9900
BC Support Legal Fee Deductions can make a huge difference in reducing the cost of claims for spousal and child support. Fraser MacLean wants you to be sure you ask your lawyers to keep track of the portion of expenses related to support claims in your family case and ensure you ask them to provide you with a letter for CRA when you are filing your taxes. Click here to read the CRA tax bulletin on this topic.
When are legal costs incurred in connection with obtaining and increasing child or spousal support or for resisting a claim for support payments, or resisting a claim for an increase in support payments deductible?
The CRA Rules – BC Support Legal Fee Deductions Call 1 877 602 9900
Obtaining Child and Spousal Support = YES – BC Support Legal Fee Deductions are Allowed
The CRA’s position on the deduction of legal costs relating to support payments is set out at paragraphs. 3.78 to 3.84 of Income Tax Folio, S1-F3-C3, Support Payments. Its current position is that legal costs incurred for any of the following are deductible:
- to obtain child support. The reason given is that children have a pre-existing right under legislation to be supported.
- to obtain spousal support under the Divorce Act or under applicable provincial legislation. The legal fees are deductible on an accrual rather than a cash basis (i.e., they must be incurred but not necessarily paid in the taxation year). This position has been adopted as a result of the decision in Gallien v. R., 2000 D.T.C. 2514 (T.C.C.). The Federal Court of Appeal has noted that Gallien (and certain other tax court decisions) are in conflict with the Burgess decision and that it has not considered the issue as to when the right to support arises (Nadeau v. Canada, 2003 FCA 400);
- to defend against the reduction of support payments;
- to seek an increase in support;
- to collect late support payments; or
- to make child support non-taxable.
Resisting New Support or Increases To Support = NO – BC Support Legal Fee Deductions Are Not Allowed
Generally speaking, legal costs incurred in connection with resisting a claim for support payments, or resisting a claim for an increase in support payments, are not deductible; nor are legal costs to seek a reduction in, or the termination of, support payments. This was reaffirmed by the Federal Court of Appeal in Nadeau v. Canada. A 2016 decision by the FCA also declined to review the Nadeau decision.
Pursuant to section 18(1)(a) of the Income Tax Act (the “ITA”), no deduction may be claimed for an outlay or expense except to the extent that it is incurred for the purpose of gaining or producing income from a business or property.
In Loewig v. The Queen (2006 TCC 476), the Tax Court of Canada summarized the law on the deductibility of legal fees to obtain support payments as follows:
[6] The question of the deductibility of legal fees to obtain support payments has a long history. It is comprehensively reviewed by Noël J. of the Federal Court of Appeal in Nadeau v. R., 2003 FCA 400 (CanLII), [2004] 1 C.T.C. 293. For forty years the judges of this court had held that the legal costs of establishing or maintaining a right to maintenance were deductible on the basis that the right to support income was property and therefore amounts laid out to obtain support income were deductible and were not provided by paragraph 18(1)(a) which prohibits the deduction of amounts not laid out for the purpose of gaining or producing income from a business or property. Justice Archambault refused to follow this long-established line of authority. The Federal Court of Appeal held that he was wrong but affirmed his conclusion that the expenses of the payor were not deductible. At paragraph 18, the Federal Court of Appeal said:
18 Conversely, the expenses incurred by the payer of support (either to prevent it from being established or increased, or to decrease or terminate it) cannot be considered to have been incurred for the purpose of earning income, and the courts have never recognized any right to the deduction of these expenditures (see, for example, Bayer, supra).
[7]The reasoning is that while the recipient of support payments may be incurring the cost of receiving income, the same cannot be said of the payor.
[8]Mr. Loewig, in a very thorough and carefully reasoned argument, asserted that he was seeking to establish a pre-existing right and he was seeking to recover amounts that had wrongly been deducted from his salary. He relies upon paragraph 18 of Interpretation Bulletin IT-99R5 (Consolidated) which reads:
18.Legal costs incurred to enforce pre-existing rights to interim or permanent support amounts are deductible. A pre-existing right to a support amount can arise from a written agreement, a court order or legislation such as sections 11 and 15.1 of the Divorce Act with respect to child support, or Part III of the Family Law Act of Ontario, and enforcing such a right does not create or establish a new right; see The Queen v. Burgess, [1981] CTC 258, 81 DTC 5192 (F.C.T.D.). In addition, legal expenses incurred to defend against the reduction of support payments are deductible since the expenses do not create any new rights to income; see The Attorney General of Canada v. Norma McCready Sembinelli, [1994] 2 CTC 378, 94 DTC 6636 (FCA.).
[9]I have great sympathy for his position which strikes me as consistent with fairness and common sense. Nonetheless, the cost of the recovering amounts paid in excess of his obligations under the separation agreement and which, when recovered by him are not income in his hands (he did not deduct the amounts paid after July 1, 2003) cannot be said to be the cost of gaining or producing income.
[10]While interpretation bulletins are not the law, nonetheless the statement in paragraph 21 of IT-99R5 is, in my view, a correct statement of the law and is consistent with the Nadeau decision. It reads:
21.From the payer’s standpoint, legal costs incurred in negotiating or contesting an application for support payments are not deductible since these costs are personal or living expenses. Similarly, legal costs incurred for the purpose of terminating or reducing the amount of support payments are not deductible since success in such an action does not produce income from a business or property. Legal expenses relating to obtaining custody of or visitation rights to children are also non-deductible.
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