Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Whether legal fees incurred to defend child support rights are deductible where outcome of procedures is that no child support is payable to the taxpayer.
Position: No.
Reasons: No provision of the Act allows for a deduction in this case.
January 28, 2002
Mr. André Aubin HEADQUARTERS
Shawinigan-Sud Taxation Centre Patrick Massicotte
T1 Client Services (613) 957-9232
2001-010423
Legal Fees for Child Support
XXXXXXXXXX
This is in reply to your round trip memo of September 28, 2001 in which you request our comments regarding the deductibility, pursuant to the provisions of the Income Tax Act (the "Act"), of legal fees incurred by the above mentioned taxpayer in relation to child support.
Facts
The following facts were gathered from the limited documentation made available to us, our telephone discussions with the taxpayer (Massicotte\XXXXXXXXXX), as well as the documents subsequently provided by the taxpayer.
1. The taxpayer was married to XXXXXXXXXX ("the Mother") on XXXXXXXXXX;
2. There are two children;
3. The parties separated on or about XXXXXXXXXX;
4. A written separation agreement was signed by both parties on XXXXXXXXXX providing inter alia for the joint legal custody of both children, with the Mother having primary responsibility for their physical custody and the taxpayer with substantial visitation rights;
5. It also provided that the taxpayer was required to pay to the Mother a monthly allowance of $XXXXXXXXXX commencing on XXXXXXXXXX, for the support of the children only. These payments were to cease where the Mother no longer had joint custody of the children and were also subject to changes where either or both children no longer lived with the Mother on a permanent and continuous basis;
6. The parties were divorced pursuant to a judgment of divorce rendered on XXXXXXXXXX (this document was not provided to us);
7. The said judgment incorporated a consent to judgment on accessory measures signed by the parties on XXXXXXXXXX, a copy of which was also not provided to us. We assume however that it incorporates the provisions described above in the written separation agreement signed by both parties on XXXXXXXXXX without any changes;
8. During the years XXXXXXXXXX, the children actually decided to change their residency arrangements and to start living with the taxpayer so that the taxpayer had primary responsibility for the physical custody of the children;
9. Following these de facto changes in the physical custody of the children, the parties signed a subsequent agreement dated XXXXXXXXXX, modifying inter alia the amount of child support the taxpayer was required to pay to the Mother to $XXXXXXXXXX per month. This agreement was ratified by the Family Division of the Superior Court of Quebec on XXXXXXXXXX. We have not been provided with a copy of these documents;
10. At some time after XXXXXXXXXX, the Mother presented a motion to vary the child support established in XXXXXXXXXX and the taxpayer responded by presenting his own motion to vary, allegedly based on the new child support guidelines applicable in the province of Quebec after May 1, 1997. We have not been provided with a copy of these documents either;
11. As a result of these procedures, a judgment was issued by the Superior Court of Quebec incorporating a consent to judgment upon accessory measures signed by the parties on XXXXXXXXXX;
12. It provided that the parties still have joint legal custody of both children, that the Mother would have substantial visitation rights, and that principal residence of the children would remain with the taxpayer. Considering the arrangements, it provided that neither party was required to pay child support to the other and that both parties irrevocably renounced to any claim each may have, or pretend to have, against the other for retroactive child support;
13. The taxpayer incurred $XXXXXXXXXX of legal fees during the year XXXXXXXXXX in the course of these legal procedures;
14. The taxpayer did not claim a deduction for these expenses in his tax return for XXXXXXXXXX, while a deduction of $XXXXXXXXXX was claimed for support payments actually made by him in XXXXXXXXXX. However, he submitted a T1-ADJ form on XXXXXXXXXX requesting the amount claimed on line 232 of his XXXXXXXXXX income tax return be adjusted from $XXXXXXXXXX to $XXXXXXXXXX.
Taxpayer's position
The taxpayer submits he should be allowed the deduction for all the expenses incurred in the course of the legal procedures carried out during XXXXXXXXXX as he claims they were made for the purpose of defending his right to child support amounts, as determined pursuant to the applicable child support guidelines, even though no amounts were actually receivable under an order or agreement.
The CCRA's position regarding the tax treatment of legal fees incurred in respect of support payments applicable to the taxpayer's situation in XXXXXXXXXX was explained in paragraphs 16 to 18 of former Interpretation Bulletin IT-99R4 of August 2, 1991. This position was carried forward and expanded upon release of Interpretation Bulletin IT-99R5 on December 11, 1998, although paragraphs 17 and 18 of IT-99R5 were subsequently revised on December 5, 2000, as explained below.
Former paragraph 17 of IT-99R5 provided that legal costs incurred in establishing the right to support amounts, such as the costs of obtaining a divorce, a support order under the Divorce Act or a separation agreement, were not deductible as these costs were considered on account of capital or are personal or living expenses. This position was supported in jurisprudence by the Federal Court-Trial Division decision in The Queen v. Burgess, 81 DTC 5192, [1981] CTC 258.
Former paragraph 18 of IT-99R5 also provided that legal costs incurred to enforce pre-existing rights to either interim or permanent support amounts were deductible. It added that a pre-existing right to a support amount could arise from a written agreement, a court order or legislation such as Part III of the Family Law Act of Ontario, and enforcing such a right was not considered to create or establish a new right.
Finally, paragraph 21 of IT-99R5 mentioned that, from the payer's standpoint, legal costs incurred in negotiating or contesting an application for support payments are not deductible since these costs are personal or living expenses. Similarly, legal costs incurred for the purpose of terminating or reducing the amount of support payments are not deductible since success in such an action does not produce income from a business or property. Legal expenses relating to obtaining custody of or visitation rights to children are also non-deductible.
In this case, as the parties were divorced, we note that the court order sought by the taxpayer and the Mother of the children was pursuant to the provisions of the Divorce Act. Therefore, pursuant to the position outlined in former paragraph 17 of Interpretation Bulletin IT-99R5, the legal fees incurred by the taxpayer would not have been deductible for the taxation year XXXXXXXXXX as they were considered to be on account of capital or personal and living expenses. The fact that the taxpayer in this case submitted the form T1-ADJ to request an amendment to his XXXXXXXXXX tax return in XXXXXXXXXX would not change this result. Moreover, we note that our position in former paragraph 17 of IT-99R5 had still not been revised in XXXXXXXXXX when the taxpayer submitted his request for adjustment.
Although the CCRA's position regarding the deductibility of legal fees incurred to obtain a child support order pursuant to sections 11 and 15.1 of the Divorce Act subsequently changed, in light of the more recent jurisprudence, the position described above applied until the date the revised bulletin was published in December 2000. As mentioned in paragraph 5 of the Index - Income Tax Interpretation Bulletins and Technical News, when there is a change in a previous interpretation or position, including a change resulting from a court decision, and the change is beneficial to taxpayers, 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 was still outstanding in December 2000, and those years for which a notice of objection could still be filed at that time. 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. In this case, it is our understanding that the taxpayer could not object to the assessment of his XXXXXXXXXX tax return as of XXXXXXXXXX when the request for an adjustment was submitted.
Notwithstanding the above comments, a support amount is defined in subsection 56.1(4) of the Act as inter alia an amount receivable under an order of a competent tribunal or under a written agreement. Generally, child support orders under the Divorce Act are to be made in accordance with the applicable guidelines. As both parties in this case were residents of the province of Quebec, the applicable guidelines are those provided under the Regulation respecting the determination of child support payments (Règlement sur la fixation des pensions alimentaires pour enfants), pursuant to Chapter VI.1 of Title IV of Book V of the Code of Civil Procedure (Code de procédure civile). These guidelines take into consideration a number of factors to determine the amount a parent may claim as child support. Notwithstanding these guidelines, a court may award a child support amount that is different on consent of both parents where reasonable arrangements are made for the support of the children, pursuant to section 825.14 of the Code of Civil Procedure and subsection 15.1(7) of the Divorce Act.
Although the taxpayer may claim an amount of child support could have been received under the applicable guidelines in this case (note that no conclusive documents were provided to support this claim), both parties actually consented to receive no child support amounts and such consent would generally override any amount otherwise determined pursuant to the applicable guidelines. The court was satisfied with such arrangement between the parties and the order issued as a result of the legal proceedings carried out by the taxpayer during XXXXXXXXXX specifically provides that neither party was required to pay child support to the other and that both parties irrevocably renounced to any claim each may have, or pretend to have, against the other for retroactive child support. Therefore, no amounts are receivable by the taxpayer under an order of a competent tribunal and no amounts are required to be included in the taxpayer's income either. As a result, no deduction can be allowed under the provisions of the Act.
We would also note in closing that even though the CCRA's position has changed regarding the tax treatment of legal fees incurred in respect of child support orders, those fees that relate to negotiating or contesting an application for support payments, from the payor's perspective, and those that relate to the resolution of child custody and visitation rights to children remain non-deductible since these are personal or living expenses. A breakdown of the legal fees, separately identifying the portion relating to quantifying the amount of child support and the cost of other issues raised in the legal proceedings, would normally be required. In a case such as the one under review, it would appear that the expenses would relate to personal and living expenses on the basis of the above comments.
We are returning the documents submitted with your request.
We trust that these comments will be of assistance to you.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the CCRA's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to
Mrs. Jackie Page at (819) 994-2898.
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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