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) Whether ITTN no.24 refers only to increase in spousal support. (2) Whether a breakdown of legal fees between spousal and child support necessary. (3) Whether announced change in position can be applied to the taxation year 2001 if objection period not expired.
Position: (1) No. (2) No. (3)Yes.
Reasons: (1) Applies to legal fees incurred to increase both spousal and child support. (2) The same tax treatment is given to fees that relate to both. (3) As mentioned in announcement, change in position applies to all future assessments and reassessments.
XXXXXXXXXX 2003-018401
P. Massicotte, CA, M.Fisc.
March 31, 2003
Dear XXXXXXXXXX:
Re: Income Tax Technical New No.24
We are writing in response to your letter of January 14, 2003, wherein you requested further clarification in respect of announcements made in Draft Income Tax Technical News (ITTN) release No.24, dated October 10, 2002.
More specifically, you refer to the section dealing with legal costs to obtain support amounts, where it was announced that as a result of recent court decisions, the Canada Customs and Revenue Agency has reconsidered the position found in paragraph 17 of Interpretation Bulletin IT-99R5 (Consolidated). You ask whether it is appropriate to consider the comments made in the last line of the second paragraph as referring only to an increase in spousal support, and not to an increase in child support.
In the last paragraph of that section, we indicated that the change in position announced was effective for future assessments and reassessments and would not apply retroactively (unless a notice of objection was filed and was still outstanding, or could still be filed). In that respect, you ask whether a breakdown of the legal fees is required between those that relate to obtaining spousal support and those that relate to child support. You also ask whether a taxpayer may claim a deduction in respect of such legal costs for the 2001 taxation year, provided a notice of objection can still be filed.
As you may know, recent court decisions have held that the right to receive support represents a pre-existing right, one created by the applicable legislation and not by a court order or an agreement, which merely enforces that right. This reasoning was initially upheld in the case of child support (Wakeman v. The Queen, [1996] 3 C.T.C. 2165, 96 D.T.C. 3220, T.C.C. - Informal Procedure) and was subsequently held to apply also to a claim for spousal support in the context of a divorce (Gallien v. The Queen, [2001] 2 C.T.C. 2676, 2000 D.T.C. 2514, T.C.C. - Informal Procedure). As a result, the legal costs for obtaining such support cannot be considered to be a non-deductible outlay on account of capital.
Similarly, where an order (or an agreement) is made to increase support payments, the courts have held that it cannot be considered to have resulted in the creation of a new right (Wakeman above, Sol v. The Queen, [2001] 1 CTC 2152, T.C.C. - Informal Procedure). The legal costs to obtain such an increase therefore cannot be considered an outlay on account of capital, and may be deducted on the same basis as the deduction of legal costs incurred to initially obtain support.
Moreover, paragraph 18(1)(c) of the Income Tax Act (the "Act"), which applies to restrict the deduction of an outlay or expense to the extent it may reasonably be regarded as having been made or incurred for the purpose of gaining or producing exempt income or in connection with property the income from which would be exempt, does not apply to expenses incurred in connection with child support amounts, even though not included in the recipient's income pursuant to parameter B of the formula in paragraph 56(1)(b) of the Act. The expression "exempt income" is defined in subsection 248(1) of the Act and was amended for taxation years after 1996 to specifically exclude a support amount, as defined in subsection 56.1(4) of the Act. Technical Notes issued by the Department of Finance in connection with this amendment provide that this was to ensure that expenses incurred in respect of support amounts would continue to be deductible even where the amount was a child support amount that was not included in income under Part I.
As a result, in response to your first inquiry, the comments made in Draft ITTN No.24 in connection with legal costs to obtain an increase in support are not restricted to spousal support. They apply to legal costs incurred in respect of both child and spousal support.
As indicated above, the changes described in Draft ITTN No.24 are applicable to all future assessments and reassessments. Where a taxpayer may still file a notice of objection pursuant to subsection 165(1) of the Act in respect a particular taxation year, a deduction may be claimed for the costs described above in respect of that year, even though no such deduction was claimed when the tax return was initially filed.
Finally, as the legal costs to obtain child and spousal support are given similar tax treatment following this announcement, a breakdown of the legal costs associated with each issue would not be necessary. Where such breakdown is nonetheless required, the appropriate Tax Services Office should be consulted regarding the documentation that would be acceptable in the circumstances. Should your situation involve a specific taxpayer and a completed transaction, we recommend you submit all relevant facts and documentation to them for their views.
We trust the above comments are of assistance to you.
Yours truly,
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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