Tax Deductible Legal Fees

Every year, I come across a certain number of people who have been through family 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 2013 tax filing season, is the following:

It has been determined since approximately October 2002 that the Federal government accepts that legal fees incurred by the recipient in respect of child support orders, consented to or issued 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 Federal 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 this area still remains in flux since some assessors do not permit the deduction whereas others do. Therefore, the old adage of “nothing ventured nothing gained” could be relied on but be prepared that, if your deduction is rejected, you may owe further tax to the government, which may include also interest and penalties. 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.

The situation is completely different for the payer of support under the Federal Tax Act, the reason being that 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. Nonetheless, if the receipt provided by your attorney specifies that all or part was incurred due to child support, the deduction may be allowed.

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

All legal fees paid with regards to custody, visitation or the divorce itself, as in the case of the recipient of child support, are also not deductible for the payer of the said support. However, the spousal support itself is deductible for the payer, so long as it is paid on a periodic basis and not as a lump sum.

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 obligation 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 Ministere de Revenue de Quebec (DFQE 2002F-94).

As is the case with the Federal Law, neither the cost to obtain a divorce or custody or access of children is 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 caselaw, 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 this 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.