5 February 2003 Internal T.I. 2002-0177827 - PENSION DIVISION LEGAL FEES & TAXABILITY

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: 1. Are legal fees to obtain a Pension Division Order deductible?

2. Are payments pursuant to a Pension Division Order taxable to the recipient and deductible by the RPP member?

Position: 1. No, legal fees to obtain a Pension Division Order are not deductible.

2. Yes, payments pursuant to the Pension Division Order are taxable as pension income to the recipient former spouse. No, the payments are not deductible by the former spouse who is the RPP member.

Reasons: 1. Legal expenses relating to a division or settlement of property arising out of, or on breakdown of marriage are not an eligible legal expense under subsection 60(o.1).

2. An order under the Pension Benefits Division Act results in a severance of the pension and each party is taxable on their portion, to be reported annually as income under paragraph 56(1)(a) of the Act. Payment in satisfaction of one's property rights arising from the marriage is a payment of a capital nature and thus not deductible.

				February 5, 2003

	XXXXXXXXXX  TSO		HEADQUARTERS
				Income Tax Rulings
	Attention:  XXXXXXXXXX 			  Directorate
				Renée Shields
(613) 948-5273

				2002-017782

Pension Division Order

This is in response to your facsimile received on December 6, 2002 regarding payments made pursuant to a Pension Division Order of the XXXXXXXXXX (the "Order").

Specifically you have posed two questions:

1. Whether legal fees paid by XXXXXXXXXX (the "Taxpayer") to obtain the Order are deductible?

2. Whether the payments made to the Taxpayer pursuant to the Order are taxable to the Taxpayer and deductible by the Taxpayer's former spouse?

Question #1 - Legal Fees

The Canada Customs and Revenue Agency's (CCRA's) general views regarding the deductibility of legal fees can be found in Interpretation Bulletin IT-99R5 entitled "Legal and Accounting Fees". You will note that paragraph 25 deals with your question. It states that paragraph 60(o.1) of the Income Tax Act (the "Act") applies to allow a taxpayer to deduct eligible legal expenses paid to collect or establish a right to a pension benefit. Eligible legal expenses under paragraph 60(o.1) of the Act do not include legal expenses relating to a division or settlement of property arising out of, or on a breakdown of, a marriage. Consequently, legal fees incurred to enforce a right to a former spouse's pension assets on the dissolution of their marriage are not deductible by the Taxpayer.

It should also be noted that where an agreement in respect of a division or settlement of property is negotiated between former spouses, including the division of pension assets, and the terms of the agreement are not satisfied by one of the parties to the agreement, legal fees relating to the enforcement of the pre-existing entitlements may be deductible by the former spouse. The enforcement of a pre-existing entitlement under an existing agreement in respect of a division or settlement of property would be considered to be separate and distinct from the original division or settlement of property arising out of the marriage breakdown. Paragraphs 17 through 21 of IT-99R5 reflect the CCRA's views on legal costs and support amounts with paragraph 18 dealing specifically with the enforcement of pre-existing rights to support amounts.

Question #2 - Tax Treatment of the Payments

The CCRA's position with respect to pension payments is noted in paragraph 11 of Interpretation Bulletin IT-499R, which states:

If there is a division of pension benefits on a marriage breakdown, generally the pension benefits legislation of a province provides the terms under which a portion of the pension benefits of a member of a pension plan may be paid to a spouse or former spouse under a domestic contract, a written separation agreement, or under a divorce decree or court order under a provincial family law act relating to a division of property on the breakdown of the marriage. Upon a division of pension benefits in these circumstances, the portion received by each spouse or former spouse at a time permitted under the pension benefits legislation of the province is included in the income of that spouse or former spouse as a pension benefit under subparagraph 56(1)(a)(i). The above treatment applies even if the administrator of the pension plan issues one cheque to the plan member who is required to apportion the payments.

In the case at hand, the Order is pursuant to the Pension Benefits Division Act 1992, c.46, Sch. II and constitutes a division of pension benefits. Accordingly, our opinion is that payments made to the Taxpayer pursuant to the Order, whether directly from the pension plan administrator, or as a re-allocation from her former spouse would be taxable to her as a pension benefit under subparagraph 56(1)(a)(i) of the Act.

Payments in satisfaction of property rights arising from marriage are of a capital nature and as such, no deduction is available to the Taxpayer's former spouse in respect of such payments.

We wish to raise a further matter for your consideration. We note that the Order indicates that the Taxpayer is entitled to "XXXXXXXXXX% of the value of the Respondent's pension from the date of marriage...to the date of separation." As such, the Taxpayer would appear to be entitled to XXXXXXXXXX% of the gross proceeds of the former spouse's pension. Paragraph XXXXXXXXXX of the Order provides that pending the foregoing division of the pension, the former spouse is to pay XXXXXXXXXX% of his net, monthly pension income to the Taxpayer. It is not clear what treatment is being given to the withholding taxes applied to the amount paid by the pension plan administrator to the Taxpayer's former spouse.

If, for example, the Taxpayer's former spouse receives a pension payment of $3,000 from which $1,000 in tax is withheld, his net pension amount is $2,000. He would then remit XXXXXXXXXX% or $XXXXXXXXXX to the Taxpayer, who is required to include this amount in her income. If the Taxpayer's former spouse takes the full benefit of the $1,000 in withholding taxes, the Taxpayer's $XXXXXXXXXX payment will be reduced by the income tax payable on this amount. This may not be appropriate given the apparent intention that the Taxpayer receive XXXXXXXXXX% of the gross proceeds of her former spouse's pension. It is our understanding that an allocation of withholding tax will be allowed administratively where a portion of the rights to the pension have been transferred to a former spouse upon the dissolution of marriage. In other words, in our opinion the Taxpayer should be entitled to reflect XXXXXXXXXX% of the withholding tax on her T1 return.

You have indicated that XXXXXXXXXX payments from the Taxpayer's former spouse to the Taxpayer were deposited to an incorrect bank account. The account to which the amounts were deposited was a joint account held by the Taxpayer and the Taxpayer's former spouse. Although the information provided to us is not explicit, it appears that the Taxpayer's former spouse enjoyed the benefit of these amounts and that the Taxpayer has not recovered these amounts since that time. It would be a question of fact whether the Taxpayer's spouse fulfilled the Order on these occasions. If the funds were not paid to the Taxpayer, it would seem anomalous to tax her on said amounts.

We trust that these comments will be of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CCRA's electronic library. 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 electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Mickey Sarazin, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch