22 December 1995 External T.I. 9526205 - legal fees to enforce pre-existing right to support

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 Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

several q's re. legal fees incurred to enforce a pre-existing right to support (whether deductible under the general provisions of the Act rather than subdivision e; whether the fees are allocable to a source pursuant to 4(1)(a) of the Act; whether the right to maintenance is a source of income within the meaning of the Act; do maintenance payments represent income from pty within the meaning of the Act; if legal expenses exceed maintenance rec'd in the year, does the excess rep. a loss for the year from a pty for the purposes of the definition of "non-capital loss" in 111(1)(a) of the Act?

Position:

fees are deductible under the general provisions of the Act. Legal expenses are allocable to a source pursuant to 4(1)(a). Def'n of property in 248(1) is broad enough to include a right to maintenance and income which arises from this right is a source of income for the purposes of para 3(a) of the Act. While a right to maintenance is "property", maintenance payments themselves are not taxed as income from property. When rec'd, maintenace payments, if required to be included in income, are so included under subdivision d rather than b. Where legal expenses exceed maintenance rec'd in a year, the "loss for the year from...property" as referred to in "E" in the definition of "non-capital loss" is the actual amount of legal expense incurred.

Reasons:

		952620
XXXXXXXXXX	Sandra Short

Attention: XXXXXXXXXX

December 22, 1995

Dear Sirs:

Re: Legal Expenses Incurred to enforce a Pre-Existing Right to Support

This is in reply to your letter of September 27, 1995 which asks whether legal expenses incurred to enforce a pre-existing right to maintenance are:

1.deductible under the general provisions of the Income Tax Act (the Act) rather than subdivision e of division B of Part I thereof; and

2.allocable to a source pursuant to paragraph 4(1)(a) of the Act.

You have also asked the following related questions:

3.Is the right to maintenance a source of income within the meaning of the Act?

4.Do maintenance payments represent income from property within the meaning of the Act?

5.If, in a particular year, legal expenses happen to exceed the maintenance received, will the excess represent a loss for the year from a property for the purposes of the definition of "non-capital loss" in subsection 111(1)(a) of the Act?

You have provided us with your views on the above. With regard to 1. above you note that Interpretation Bulletin IT-99R4, paragraph 17 states that legal expenses incurred to enforce a pre-existing right to maintenance are deductible but as it does not cite any specific provisions, the implication may be that the expenses are deductible under the general provisions of the Act.

With regard to 2. above, you state that it appears from section 3 of the Act that deductions cannot be claimed in computing a taxpayer's income for the year, unless the deductions are permitted by subdivision e of division B of Part I of the Act or are allocable under section 4 to a specific source. You note with regard to 3. above that the cases of Evans v. M.N.R., 60 DTC 1047, and The Queen v. Burgess, 81 DTC 5192, are authority for the view that the right to maintenance is property within the meaning of the Act. With respect to 4. above, you believe that if the right to maintenance is a form of property, the payments which arise from that right are surely income from property. It is your understanding that this view has been previously expressed by the Department. With respect to 5. above, you believe that if the legal costs exceed the maintenance payments received, there will be no tax relief for the excess, unless the taxpayer has sufficient income from other sources in the same year or the excess gives rise to a non-capital loss.

Our Comments

1.Legal fees incurred to enforce a pre-existing right to maintenance are deductible to the recipient of such maintenance under the general provisions of the Act. Legal fees of this nature are not deductible under subdivision e of division B in Part I of the Act.

The Federal Court of Appeal reviewed, in September of 1994 (see 94 DTC 6636), the informal decision of the Tax Court of Canada in Norma McCready Sembinelli v. Her Majesty The Queen (unreported) and agreed with the Tax Court Judge that legal expenses incurred by Ms. Sembinelli in successfully defending a support order against an action by her former husband were deductible by virtue of paragraph 18(1)(a) of the Income Tax Act. It remained the Courts' opinion that the result Ms. Sembinelli obtained did not create any new rights and that no asset was created or preserved in that it was the previously quantified right which was being challenged.

2.Legal expenses are allocable to a source pursuant to paragraph 4(1)(a) of the Act. Section 4, which is applicable to the Act as a whole, provides, among other things, that only deductions which may reasonably be considered to be wholly applicable to a source or to a source in a particular place may be claimed against income from such source. Subsection 4(2) of the Act provides, for the purposes of Part I of the Act, that in determining the income or loss from a source no deductions are permitted under sections 60-64 (exceptions to this general rule are provided for in subsection 4(3)).

3.The definition of property in subsection 248(1) of the Act includes "a right of any kind whatever". This definition is broad enough to include a right to maintenance. Thus, a right to maintenance is "property". Income which arises from this right is a source of income for the purposes of paragraph 3(a) of the Act.

4.While a right to maintenance is "property" as that term is defined in subsection 248(1) of the Act, maintenance payments themselves are not taxed under the provisions of the Act as income from property. When received, maintenance payments, if required to be included in income, are so included under subdivision d of division B of Part I "other sources of income" rather than under subdivision b "income or loss from a business or property". The Act only requires the inclusion in income of certain forms of payments which may arise from one's right to maintenance. For example, to be taxable, the amount must, among other things, be paid as an "allowance" for the maintenance of the spouse, children of the spouse, or both and the amount must also be payable on a periodic basis.

5.Where it is determined that a legal expense is deductible in computing income pursuant to paragraph 18(1)(a) of the Act, the expense is deductible in the year incurred. Where this expense exceeds the amount of maintenance received in that same year, the excess itself is not a "loss for the year from ...property" as referred to in "E" in the definition of "non-capital loss" as found in subsection 111(8) of the Act. The "loss for the year from...property" is the actual amount of legal expense incurred. This is so because of the statutory requirement that income which results or originates from one's right to maintenance is, if included in income at all, to be included under subdivision d rather than subdivision b. A non-capital loss is defined as meaning the amount determined by the formula:

(A+B) - (C+D+D.1+D.2) where A is the amount determined by the formula E-F.

E is the total of all amounts each of which is the taxpayer's "loss for the year from an office, employment, business or property..."

F is the amount determined under paragraph 3(c) of the Act in respect of the taxpayer for the year.

Consider the example of an individual who receives $5,000 in maintenance in a year which is required to be included in income under paragraph 56(1)(c) of the Act. No other income is received. This same individual incurs, in the same year, $7,000 in legal fees which relates to the enforcement of a pre-existing right to maintenance. In this case, the individual, in computing his or her non-capital loss, would include $7,000 in the "E" calculation referred to above and his or her income under paragraph 3(c) of the Act would be $5,000.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch