Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Whether the position expressed in our documents E9828805 and E9831477, and in revised paragraphs 17 and 18 of Interpretation Bulletin IT-99R5, regarding legal fees incurred in respect of child support orders under the Divorce Act, can be applied retroactively back to the 1985 to 1989 taxation years.
Position TAKEN:
No.
Reasons FOR POSITION TAKEN:
While we recognize that the above documents and the explanation of the bulletin revisions to paragraphs 17 and 18 in IT-99R5 may refer to the changes as being a clarification, they are in effect a revision of our previous position that legal fees for support orders under the Divorce Act were not deductible. As indicated in the Notice at the end of IT-99R5, and in the Index to interpretation bulletins, when there is such a change in a previous interpretation or position, it is usually effective for all future assessments and reassessments. Accordingly, the only prior years that could be reassessed are those years for which a notice of objection had been filed and is still outstanding, and those years for which a notice of objection can still be filed.
January 19, 2001
Mr. Richard Gendron HEADQUARTERS Manager M. Azzi Ministerial Correspondence Division 957-8972
Attention: Betty-Ann Ward 2000-006157
Legal Fees - XXXXXXXXXX
This is in reply to your memo of December 14, 2000, wherein you requested clarification as to the time of application of the position expressed in our documents E9828805 and E9831477, and in revised paragraphs 17 and 18 of Interpretation Bulletin IT-99R5, regarding legal fees incurred in respect of child support orders under the Divorce Act.
Our Comments
As you know, paragraph 17 of IT-99R5 formerly indicated that legal costs incurred in establishing the right to support amounts, such as the costs of obtaining a divorce or a support order under the Divorce Act were not deductible as these costs were viewed as being on account of capital, or as personal or living expenses. This position was supported by Federal Court-Trial Division case of The Queen v. Burgess, 81 DTC 5192.
In late 1998, the Tax Court of Canada-Informal Procedure decision of Wakeman v. The Queen, [1996] 3 C.T.C. 2165 was brought to our attention and, as a result, we undertook a review of the above position. In Wakeman, the Court found that, in Ontario, the maintenance right of children was created by law and this right was not extinguished by a divorce. As a result, the Court found that the legal costs incurred in obtaining a court order of maintenance for a child were deductible as they related to the enforcement of a pre-existing right provided by law and not to the creation of a new right. The position adopted by the Court in Wakeman was subsequently upheld by the Courts in McColl v. The Queen, 2000 DTC 2148, and in Sol v. The Queen, 1999-4153(IT)I.
In light of Wakeman, and upon reviewing the provisions of the Divorce Act and provincial family law statutes, we found that, while the issue is not free from doubt, an argument can be made to the effect that children have a pre-existing right to maintenance under the Divorce Act. Accordingly, we decided to accept that legal costs incurred in respect of a child support order issued under the Divorce Act would generally be considered deductible, in keeping with our longstanding position (in paragraph 18 of IT-99R5) that legal costs incurred to enforce pre-existing rights to support amounts are deductible. Upon completion of our review, in March 1999 we issued two letters (the two documents noted above and in your memo) explaining our revised position on legal costs relating to child support orders under the Divorce Act, and we subsequently revised paragraphs 17 and 18 of IT-99R5 to reflect this position.
While we recognize that the above documents and the explanation of the bulletin revisions to paragraphs 17 and 18 in IT-99R5 may refer to the changes as being a clarification, they are in effect a revision of our previous position that legal fees for support orders under the Divorce Act were not deductible. That is, these changes are essentially a clarification to reflect our acceptance of the recent court cases and our revised position regarding legal fees. As indicated in the Notice at the end of IT-99R5, and in the Index to interpretation bulletins, when there is such a change in a previous interpretation or position as a result of a court case, it is usually effective for all future assessments and reassessments. Accordingly, the only prior years that could be reassessed are those years for which a notice of objection had been filed and is still outstanding, and those years for which a notice of objection can still be filed. Generally, a taxpayer can file a notice of objection for a particular year up to one year after the date on which the return for that year was due. As a result, in the above situation, XXXXXXXXXX returns cannot be reassessed, as she is requesting adjustments in respect of the 1985 to 1989 taxation years.
We trust that these comments will be of assistance.
Roy Shultis
Director General
Income Tax Rulings Directorate
Policy and Legislation Branch
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