30 November 1995 External T.I. 9525235 - LEGAL FEES INCURRED IN RESPECT OF SPOUSAL 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:

-whether legal fees incurred in connection with applications for either interim or permanent support under a provincial statute such as Ontario's Family Law Act are generally deductible and whether similar applications under the Divorce Act are not deductible

-given that repayments of support will be taxable to the recipient if they were deducted by the payor when originally paid, whether legal fees incurred by the recipient (the original payor) to recover previously paid support would be deductible

-whether opinion expressed in 942906 is contrary to views expressed above

Position:

-legal fees incurred with respect to either interim or permanent support under a provincial statute such as Ontario's Family Law Act would be deductible to the recipient of such support

-legal costs incurred with respect to a support action (interim or permanent) commenced under the Divorce Act would not be deductible

-legal fees incurred by the recipient of a reimbursement of support payments in order to recover previously paid support would not be deductible.

-no contradiction. Position that legal expenses incurred to defend against an action to reduce spousal support is deductible is not contrary to the comments found in paragraphs 16 and 17 of IT-99R4 (which comments are reflected in above opinions)

Reasons:

-statutes such as Ontario's Family Law Act provide that every spouse has an obligation to provide support for the other spouse hence fees are deductible as the relate to the enforcement of a pre-existing right provided by law

-actions commenced under the Divorce Act are considered to be costs incurred to establish a right to such payments (no pre-existing right to support) and therefore fees are considered on account of capital

-such amounts would not be a source of income but simply a return of payments previously made

-whether an amount of support is initially quantified through an action commenced under a provincial family statute such as Ontario's Family Law Act or established by the Court through an action commenced under the Divorce Act is irrelevant when determining the deductibility of future legal fees incurred in a subsequent court challenge to the quantum of support

		952523
XXXXXXXXXX	Sandra Short

Attention: XXXXXXXXXX

November 30, 1995

Dear Sirs:

Re: Legal fees incurred in respect of spousal support

This is in reply to your letters of July 27 and September 22, 1995. In your earlier letter you have asked that we comment on your interpretation that legal fees incurred in connection with applications for support under a provincial statute such as Ontario's Family Law Act should be deductible as the application for support represents a quantification of the amount of support which arises as a result of marriage. You refer to the Burgess (81 DTC 5192) case for support.

Your letter of September 22 is primarily in response to our letter of September 8, 1995 to you. You have asked that we clarify the deductibility of legal fees incurred to obtain interim support vs. permanent support under both Ontario's Family Law Act and under the federal Divorce Act. You advise that interim support, whether awarded under a provincial matrimonial statute or under the federal Divorce Act, is awarded prior to final judicial determination on the merits of the case - typically after examinations for discovery have taken place but before trial. You have asked whether we agree that it does not matter whether support has been awarded before the divorce has been granted if the interim support order is made pursuant to the federal Divorce Act.

You have also asked, given that repayments of support will be taxable to the recipient if they were deducted by the payor when originally paid, whether legal fees incurred by the recipient (the original payor) to recover previously paid support would be deductible.

Our Comments

As cited by you, Ontario's Family Law Act provides that every spouse has an obligation to provide support for the other spouse, in accordance with need and to the extent that the spouse is capable of doing so. Hence, in our view, legal fees incurred with respect to either interim or permanent support under a provincial statute such as Ontario's Family Law Act would be deductible to the recipient of such support as both forms of support relate to the enforcement of a pre-existing right provided by law, and not to the creation of a new right. We agree that Burgess supports this position.

It is our opinion that legal costs incurred with respect to a support action - whether interim or permanent - commenced under the Divorce Act, would be considered to be costs incurred to establish the right to such payments and not the enforcement of a pre-existing right such as exists under relevant family law. Such legal costs incurred to establish a right to support under the Divorce Act are considered on account of capital.

In response to your final written query, it is our view that legal fees incurred by the recipient of a reimbursement of support payments in order to recover previously paid support would not be deductible. In our view, the recipient has no pre-existing right to the income which is ordered by a court to be reimbursed to the original payor. Such amount is not a source of income but simply a return of payments previously made.

In our telephone conversation of November 27 (XXXXXXXXXX/Short), you asked whether our opinion as expressed above is in any way contradicted by the comments found in our December 15, 1994 opinion to a Tax Services Office (our file number 942906) which, in addressing the situation of a particular client, makes reference to the decision rendered by the Federal Court of Appeal in reviewing the Tax Court of Canada decision in Norma McCready Sembinelli v. Her Majesty The Queen (unreported). The Department did not lodge an appeal to the Supreme Court of Canada.

We do not believe that there is any contradiction. Our position expressed in file number 942906 is that legal expenses incurred to defend against an action to reduce spousal support are deductible to the recipient but that legal expenses incurred in an action to increase the amount of child support are not deductible to the recipient. This position can be defended with reference to both Interpretation Bulletin IT-99R4, Legal and Accounting Fees, and the findings of the Federal Court of Appeal in Sembinelli.

Norma McCready Sembinelli incurred legal expenses in successfully defending a support order. In late 1984, an irrevocable judgment of divorce was rendered making absolute the conditional judgment of divorce pronounced earlier that year. The conditional judgment ratified an agreement signed at some earlier date between the spouses. Ms. Sembinelli's former spouse made a motion in 1990 to rescind the support order. The Department disallowed the taxpayer's attempt to deduct such expenses. Her appeal to the Tax Court of Canada was allowed and the Crown applied to the Federal Court of Appeal for a judicial review of the Tax Court's findings. The Crown's application was dismissed. Hugessen, J.A. agreed with the Tax Court Judge that the legal expenses incurred by Ms. Sembinelli were deductible by virtue of paragraph 18(1)(a) of the Act. The Court's opinion was that the result Ms. Sembinelli obtained did not create any new rights and that no asset was created or preserved. Her rights continued under the previously existing suport order.

It is our opinion that the decision of the Federal Court of Appeal in Sembinelli is not contrary to the Department's position as outlined in paragraph 16 and 17 of Interpretation Bulletin IT-99R4, Legal and Accounting Fees - which position is also reflected in our comments to you above. As stated in the Interpretation Bulletion, a deduction is denied to a recipient for legal fees incurred to establish or increase an amount of alimony: it does not discuss the issue of the deductibility of fees incurred to defend against a decrease in the quantum of support.

While legal fees incurred to establish a right to an amount of support are not deductible to the recipient, it is our opinion that legal fees which are subsequently incurred to prevent a reduction to an amount of support or alimony previously established are deductible. Whether an amount of support is initially quantified through an action commenced under a provincial family statute such as Ontario's Family Law Act or established by the Court through an action commenced under the Divorce Act, is, in our opinion, irrelevant when determining the deductibility of future legal fees incurred in a subsequent court challenge to the quantum of support. We have previously expressed the opinion that paragraph 18(1)(b) of the Act would not preclude a deduction of legal fees where the challenge to the quantum of alimony was not a challenge to the right to support but rather on the inability of a payer to make such payment. Our view was based on the premise that the right to income remains unchanged in such circumstances; it was not the right to support which was being challenged or preserved but the quantum of alimony required to provide that support.

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