2014: Tax deductible legal fees linda.hammerschmid March 28, 2015 6456 Ask The Hammer Every year I come across a certain number of people who have been through Family Law proceedings and are not aware that they may be entitled to a tax deduction for the legal fees, or a portion thereof, spent during the process they were undergoing. Over the years, the tax departments, both Federal and Provincial, have taken different stances with regards to such deductions, but what is important to understand for the current 2014 tax filing season, is as follows: It has been determined since approximately October 2002 that the Federal government accepts legal fees, incurred by the recipient in respect of child support orders, consented to or ordered under the Divorce Act, are generally deductible. This is distinct from fees that are incurred solely for obtaining a Divorce from one’s spouse, which fees still remain non-deductible. The same can also be said regarding child custody and/or visitation issues and property division. The issue of legal fees incurred to defend against a Motion or to subsequently request a reduction in the quantum of child support was less than clear Federally. However, in the case of A.G. of Canada vs. Sembinelli (F.C.A.)94DTC6636 such expenses were permitted although the decision appears to qualify the issue of the deductibility of these fees. Moreover, since child support rules were established as of May 1, 1997, there has been a debate as to whether legal fees incurred to enforce or defend such payments would be considered deductible. The tax department now considers and accepts that these legal fees, incurred to execute or defend child support payments, are deductible because child support payments, although not included in income, are not “exempt” income pursuant to the Income Tax Act as defined in the Act and therefore the legal fees do not come within the general ban on deductibility. The premise upon which all of these deductions is based is that child support is a pre-existing right of the child and not a question of creating a right. As regards the issue of spousal support, the following applies: A payer CANNOT claim legal fees incurred to: Get a separation or divorce; Establish, negotiate, contest, reduce or terminate the amount of support payments; Establish child custody or visitation rights or; The situation is different for the payer of support under the Federal Tax Act because these costs are considered personal or living expenses and, similarly, fees incurred to terminate or reduce the amount of support payments are not deductible since this action does not produce income from either a business or property. The writer disagrees with this issue, since if the payer presumably is no longer paying support that same money could be invested, which would therefore produce income and therefore should be allowed to be deductible. But again this is not the position of the government. Nonetheless, if the receipt provided by your attorney specifies that all or part was incurred due to an issue of child support, the deduction may be allowed. A recipient CAN claim deductions for legal fees incurred in relation to support payments that their current or former spouse [or common-law partner in other jurisdictions], or the natural parents of their child paid to them or will have to pay to them and more specifically can deduct legal fees incurred to: Collect late support payments; Defend against a reduction in support payments; Establish the amount of support payment from their current or former spouse or common-law partner; Establish the amount of support payments from the legal parent of their child [who is not their current or former spouse or “common-law” partner] where the support is payable under the terms of a court order; or Try to obtain an increase in support payments; A recipient can also deduct legal fees incurred to try to make child support payments non-taxable. Legal fees are deductible by the recipient even where the claim for support was unsuccessful as long as the claim was bona fide and not frivolous, with a reasonable chance of success. Individuals must reduce their claim by any award or reimbursements they received for legal expenses [such as a provision for costs or through an insurance plan]. A recipient CANNOT claim legal fees incurred to: Get a separation or divorce; Establish child custody or visitation rights; Collect an amount which does not qualify as a support amount; Collect an amount from the estate or succession of a deceased person; or Equalize assets. Furthermore, legal fees paid to collect a lump-sum payment, which sum does not qualify as support, are not deductible by the recipient: An amount paid as a lump-sum will generally not be considered a support payment because it is not paid on a periodic basis. However, if periodic payments required by a court order or written agreement have fallen into arrears and one payment is made to bring these requirements up to date, that payment would be considered a support payment. The following are generally not support payments: A lump-sum payment made in place of several periodic payments that were imposed under a court order or written agreement, but were not yet due to be paid [a prepayment]. However, if a prepayment was made for the sole purpose of securing funds to the recipient, it may be considered a support payment; A lump-sum payment made under a written agreement for a period before the date of the order or agreement; Installment payments of a lump-sum [however there are cases in which 3 or more lump sum installments have been considered as support]; and Payments that release the payer from any obligation to pay arrears, future maintenance or both. In Quebec however, and uncharacteristically, the government allows the deduction of legal fees paid to either revise an amount of alimentary support or to revise the obligations to pay such support so long as the support referenced is paid periodically and not in a lump sum form. Moreover, the payer of support in Quebec can also deduct legal fees with regards to the initial fixation of alimentary pension and this pursuant to the case of Sauvage c. Le Ministère de Revenu du Québec (DFQE 2002F-94). As is the case with the Federal Law, the costs to obtain a divorce or custody or access of children are not deductible. Therefore, again, one should request from one’s lawyer a receipt for payment of all fees paid in any given year and, where necessary, a breakdown percentage of those fees which are considered deductible for the purposes of submitting your tax deductions. Finally, when preparing your tax returns for either government you should inquire with your accountant as to the current status of the Tax Act and any new case-law, which is always changing. Should your accountant be reticent to claim the deduction, it may be possible to pay the tax, as if the deduction were not taken, but file a Notice of Objection at the same time explaining that you believe you are eligible for the particular deduction that you would otherwise claim. After review of your return by the tax departments your assessment notice(s) may take into consideration the said deduction to which you were eligible, and if applicable, reimburse you any resulting overpaid taxes [and the pitiful interest they pay us]! Therefore, the old adage of “nothing ventured nothing gained” could be relied on but be prepared. If your deduction is rejected, you may owe further tax to the government, which may include also interest and penalties [which are always superior to what we receive]. It is therefore advisable to ask your attorney for a breakdown receipt of the legal fees paid in the previous year so as to establish what part was incurred for the fixing, collecting, enforcing or defending against reduction of child support payments which clearly are deductible on your tax returns. Me Hammerschmid is a practicing Family Law Attorney since 1982 and Senior Partner at Hammerschmid & Associates, 1 Westmount Square, Suite 1290, and a founding and current member [past Secretary for 28 years] of The Family Law Association of Quebec. She can be reached at 514-846-1013 or [email protected]. Inquiries treated confidentially. A frequent guest on CBC TV/Radio, CTV and CJAD on Family Law, Me Hammerschmid will be a monthly guest with Dr. Laurie Betito on CJAD’s Passion, on the last Thursday of each month.
