Principal Issues: Whether, where the amount of otherwise deductible legal fees incurred in a particular year to obtain or establish a support amount exceed the payer's income for the same year, it is possible to create a non-capital loss using those legal fees.
Position: Yes.
Reasons: Case law. Previous positions taken.
XXXXXXXXXX 2010-038627 Andrea Boyle, CGA March 15, 2011
Dear XXXXXXXXXX :
Re: Legal Fees to Collect Support Payments
I am writing in reply to your letter dated November 3, 2010, in which you have suggested that the inclusion of "legal expenses incurred to collect support" on line 232 "Other deductions" of the T1 Personal Tax Return is inappropriate because it can restrict the extent to which legal expenses to collect support payments are deductible.
You have identified that, because of the way that the income tax forms are currently set up, amounts on line 232 of the T1 cannot be deducted to create a non-capital loss on form T1A. You have asked us to comment on the appropriate section of the Income Tax Act and the corresponding line of the personal tax return under which support-related legal fees should be deducted.
The particular situation outlined in your letter may relate to a factual one, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions 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. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.
All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended ("the Act").
We agree with the view that, where legal fees are incurred in a particular year by the recipient of support payments in order to collect or establish the amount of support payments, these fees are deductible under subdivision b of Division B of Part I of the Act.
Additionally, where the amount of these legal fees exceeds the recipient-of-the-support-payment's income for that same year, it is possible to create a non-capital loss using those legal fees and this non-capital loss can then be carried back or forward to offset income in other years in accordance with paragraph 111(1)(a) of the Act.
We acknowledge that this situation is not presently provided for in form T1A Request for Loss Carryback and that an amendment to the form is required. We have informed the individuals within the Canada Revenue Agency who are responsible for reviewing and updating forms of the issue with this form.
For the time being, most taxpayers should continue to deduct these legal expenses on line 232 of their tax return as indicated in the Canada Revenue Agency Pamphlet Support Payments P102. A taxpayer who is in the unusual position of creating a non-capital loss using these deductible legal fees should specifically communicate his or her particular circumstances when filing a personal tax return so that an adjustment can be made to the non-capital loss calculation for the year.
We trust that these comments will be of assistance.
Yours truly,
Guy Goulet C.A., M.Fisc.
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch