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:
Whether or not legal expenses incurred to defend against a decrease in the quantum of support or alimony would be deductible. If deductible, would they be deductible as incurred or when paid.
Position TAKEN:
Legal expenses incurred to defend against a decrease in support would be deductible as incurred.
Reasons FOR POSITION TAKEN:
December 15, 1994
Kitchener District Office HEAD OFFICE
Office Audit Rulings Directorate
D. Zion
(613) 957-8953
Attention: Sandy Wilson
942906
Deductibility of Legal Fees
The purpose of this memorandum is to respond to your enquiry of March 2, 1994, regarding the deductibility of legal fees incurred by
XXXXXXXXXX
As we understand the situation, XXXXXXXXXX has incurred legal fees in connection with defending a right to receive spousal support which had previously been established through a support order under the Family Law Act, as well as legal fees incurred in a subsequent action to obtain an increase in the amount of child support. It is your view that the client should be allowed to claim that portion of the legal expenses relating to her defense of the right to receive the spousal support and not be allowed to deduct that portion of the legal expenses that relate to the action taken to increase the child support payments. Furthermore, you are of the opinion that the allowable legal expenses may only be claimed in the taxation year that they are actually paid as opposed to the taxation year in which they were incurred.
XXXXXXXXXX is in disagreement with your position regarding the deductibility of the legal expenses and has put forth the argument that the legal expenses pertaining to both defending the right to receive the spousal support and to increasing the amount of child support are deductible. He maintains that a new right was not created in either case. In addition, he has taken issue with the fact that the child support payments are taxable income in the hands of XXXXXXXXXX as opposed to her daughter. He argues that XXXXXXXXXX is simply acting as trustee for the child.
XXXXXXXXXX
The above decision is in keeping with the Department's position outlined in paragraph 17 of IT-99R4, Legal and Accounting Fees, where we adopt the position that legal fees incurred to increase the quantum of support are capital in nature and thus not deductible. We feel that this can be distinguished from the situation where legal fees are incurred to defend the quantum from reduction in that once a right to alimony or maintenance has been established and quantified, a subsequent court challenge to increase the amount can be seen as an attempt to establish a new right whereas in the latter case it is the previously quantified right which is being challenged. Thus, we are in agreement with your position that the legal expenses incurred to defend against the action to reduce spousal support are deductible while those legal expenses incurred in an action to increase the amount of child support are not deductible.
With respect, we are not in agreement with your position regarding when the deductible legal expenses may be claimed. Where it is determined that a legal expense is deductible in computing income of the taxpayer pursuant to paragraph 18(1)(a) of the Act, the expense would be deductible in the year incurred. Furthermore, the deduction of the eligible legal fees would not be limited to income received from that source i.e., maintenance payments.
We would like to mention that paragraphs 56(1)(b) and (c) have recently been repealed with respect to a marriage breakdown occurring after 1992 and that revised provisions have been enacted as a consequence thereof. As the information in XXXXXXXXXX letter states that the marriage breakdown occurred prior to 1993, our comments are so based. Similarly, our comments below on subsection 56.1(1) have been made in respect of circumstances that relate to this provision as it read prior to the recent revisions. However, we are also adding that the tax consequences set out below would not be any different in the situation under consideration if the recently enacted provisions were to be applicable.
To be included in income under paragraph 56(1)(b) of the Act, that paragraph specifically requires that the related payments be received from the recipient's spouse or former spouse. Similarly, paragraph 56(1)(c) of the Act requires that the payments be received from the recipient's spouse. However, where alimony or maintenance payments are made to a third party rather than to a spouse or former spouse and the payments are described in subsection 56.1(1), they will also be included in income under paragraph 56(1)(b) or (c) as the case may be. This result is achieved by virtue of subsection 56.1(1) as this provision deems the payments for the purposes of paragraphs 56(1)(b) or (c) to have been paid to and received by the payer's spouse or former spouse. Accordingly, payments, which meet all the criteria in paragraphs 56(1)(b) or (c) may be made by her former spouse to XXXXXXXXXX which we understand to be currently the case, or at XXXXXXXXXX discretion to her daughter directly, would be required to be included in XXXXXXXXXX income in the year of receipt. We would like to mention that these comments are provided on the basis of our understanding of the situation outlined in
XXXXXXXXXX letter only, as we have not been provided with a copy of the support order.
We trust that our comments will be of assistance in resolving this matter.
P.D. Fuoco
Section Chief
Personal and General Section
Business and General Division
Rulings Directorate
Policy and Legislation Branch
c.c. Assessment of Returns Directorate
Technical Publications Division
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