In prior years, an individual had deducted legal fees incurred to obtain spousal support. However, such proceedings resulted in a lump sum award that did not qualify as a “support amount.” Did this outcome require adjustments to the prior years’ tax returns to reverse the deductions?
After making the assumption that the individual had a pre-existing right to spousal support, and after also noting that support amounts generally were periodic in nature, CRA stated:
[A]n individual who starts a support claim to establish or collect support amounts (whether prospectively, retroactively, or both) would generally be able to deduct legal fees they incurred for that purpose. This would be the case as long as the support claim is bona fide and … with a reasonable chance of success, and even if the claim for support is unsuccessful … . Conversely, where an individual starts a support claim for the purpose of collecting a lump-sum payment that does not qualify as a support amount …, the individual is not entitled to deduct legal and accounting fees incurred for that purpose.
Assuming that the support claim … was started to establish or collect support amounts … no adjustments to the individual’s prior years’ tax returns would be warranted to exclude the legal expenses previously deducted in computing the individual’s income.