Principal Issues: Fairness of the legislation as it allows the deduction of legal costs by the party seeking support while the defendant is not allowed to deduct legal costs.
Position: CRA's position is that legal costs to obtain support are deductible. Legal costs incurred to defend a claim for support are non-deductible.
Reasons: Legal costs incurred to obtain spousal or child support are incurred to enforce a pre-existing legal right and are therefore deductible. However, legal costs incurred to defend a claim for support are non-deductible as they are considered personal or living expenses.
XXXXXXXXXX 2010-039045
Ann Townsend
May 11, 2011Dear XXXXXXXXXX :
Re: Legal Costs for Support Payments
I am writing in response to your email of November 8, 2010, in which you requested our comments on the tax treatment of legal costs incurred for support payments. In particular you are questioning why an individual is entitled to deduct legal costs when pursuing child and/or spousal support however a defendant against such a claim cannot deduct their legal costs. You feel that this is a double standard which causes an unfair advantage to one party.
Written confirmation of the tax implications inherent in a particular transaction is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments that may be of assistance.
Canada Revenue Agency's ("CRA") view on the application of the Income Tax Act ("Act") concerning the treatment for tax purposes of legal costs related to support amounts are discussed in paragraphs 17 to 21 of Interpretation Bulletin IT-99R5 - Legal and Accounting Fees ("IT-99R5") and Income Tax Technical News, Issue No. 24, which are both available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tp/it99r5-consolid/README.html and http://www.cra-arc.gc.ca/E/pub/tp/itnews-24/itnews-24-e.html.
It is CRA's view that legal costs incurred to establish spousal or child support amounts are deductible as these costs are incurred to enforce a pre-existing legislative right to support or maintenance. The underlying tax policy with respect to child support is that child support amounts are still income from property even though the requirement to include child support in the recipient parent's income was eliminated in the new child support provisions introduced in 1997 ("New Rules"). A confirmation of that tax policy was the amendment made to the definition of "exempt income" so that it does not include child support amounts in order to ensure that expenses incurred (such as legal costs) in respect of such amounts continue to be deductible after 1996. Here is an extract of the Department of Finance technical notes related to this specific modification:
[S.C. 1997, c. 25 (Bill C-92)] - The definition "exempt income" applies to money or property that is, because of any provision in Part I of the Act, not included in computing a person's income. The definition is used, for example, in paragraph 18(1)(c) of the Act, which provides that no deduction may be taken for expenses or outlays that relate to exempt income.
As a consequence of the new tax treatment of child support amounts, the definition "exempt income" is amended so that it does not include support amounts. This will ensure that expenses incurred in respect of such amounts continue to be deductible even where the amount is a child support amount that is not included in income under Part I of the Act. As well, the reference to "money" in the definition is being deleted, as it is redundant.
These amendments apply after 1996. [Emphasis added]
In the case where a taxpayer is successful in a legal proceeding and is awarded a reimbursement in legal costs, the gross amount of the legal costs which are otherwise deductible must be reduced by the reimbursement of any legal costs awarded by the courts and received by the taxpayer.
As indicated in paragraph 21 of IT99R5, the payer's 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.
Please note that the role of the CRA is to administer and enforce the Income Tax Act as passed by Parliament. In our view, legislative amendments would be required in order to enable the deduction of legal fees by the defendant in a spousal support or child support case. Amendments are the responsibility of the Department of Finance. Should you wish to pursue your concerns further, you may write to the officials in the Tax Policy Branch at the Department of Finance, L'Esplanade Laurier, 140 O'Connor Street, Ottawa, Ontario, K1A 0G5.
We trust these comments are helpful.
Yours truly,
Guy Goulet CA, M.Fisc.
Manager
For Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch