16 May 1996 External T.I. 9608565 - LEGAL FEES - SPOUSAL SUPPORT ENFORCEMENT

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 the enforcement of court ordered payments are deductible under the circumstances described.

Position:

1)legal fees to enforce payment of a lump sum payment of support which is not subject to tax are not deductible.

2)legal fess incurred to enforce payment of arrears of periodic support payments are deductible to the extent that they are incurred for the purpose of producing income from a property and are not outlays of a capital nature. They would only be deductible to the extent that they related to the enforcement of the pre-existing right to alimony or maintenance which would otherwise be taxable. This will be a question of fact.

Reasons:

1)18(1)(a) or 18(1)(c) apply

2) 18(1)(a) or 18(1)(c) apply

									960856
XXXXXXXXXX							D. Zion

Attention: XXXXXXXXXX

May 16, 1996

Dear Sirs:

Re: Legal Fees Incurred in respect of Spousal Support

This is in response to your letter of February 29, 1996, concerning the above-noted topic in which you bring forward further issues arising from your previous enquiries regarding the same subject.

You have provided two examples, which in your view, raise the same issue, that is, whether or not legal fees are deductible to enforce or protect an existing right to spousal support, irrespective of the tax treatment of the amount awarded.

In the first example, the spouse obliged to make a lump sum payment of support is in default, obliging the recipient spouse to take legal proceedings to enforce payment. The question is whether the legal fees in respect of the enforcement of the lump sum payment of support (which is not subject to tax), are deductible to the enforcing spouse.

In cases comparable to your first example, when legal expenses are incurred to enforce a right to a non-taxable capital receipt then, in our view, the provisions of either paragraph 18(1)(a) or 18(1)(c) of the Income Tax Act (the "Act") would be applicable to preclude the deduction of the legal expenses. Since the amount received by the enforcing spouse is not income for purposes of the Act, the legal expenses are not deductible within the limitations of paragraph 18(1)(a). Alternatively, paragraph 18(1)(c) of the Act applies because it not only precludes the deduction of any expense to the extent that it relates to exempt income (as defined in subsection 248(1) of the Act), but also the deduction of any expense to the extent that it relates to property the income from which is exempt from taxation.

The second example concerns the deductibility of legal expenses incurred by a spouse to enforce payment of arrears of periodic support payments, which if received pursuant to the original agreement, would have been taxable to the spouse. However, an agreement is reached whereby the spouse in arrears agrees to make a once-and-for-all lump sum payment of all support outstanding, both past and future. The resulting settlement payment is assumed to be a non-taxable receipt.

Paragraphs 16 to 18 of interpretation bulletin IT-99R4 "Legal and Accounting Fees," explain the department's position regarding the deductibility of legal fees incurred to enforce a pre-existing right to alimony and maintenance. In addition, the first paragraph of this bulletin comments that legal fees are only deductible to the extent that they are incurred for the purpose of gaining or producing income from a business or property and are not outlays of a capital nature. In a situation such as that outlined in your second example, it is our opinion that legal expenses incurred in order to enforce an existing right, are deductible only to the extent that they relate to the enforcement of a pre-existing right to alimony or maintenance that would otherwise be subject to taxation. Thus, because in your hypothetical example the final settlement payment was presumed to be a non-taxable capital receipt, a final determination of what portion of the legal expenses that may be deductible can only be made upon a complete review of all facts. As mentioned in our previous replies, the deductibility of legal fees involves a finding of fact and as such our comments are necessarily of a general nature. If you require clarification of the deductibility of legal fees in a particular situation, your request should be forwarded to the local tax services office and accompanied by all the relevant documentation including court orders and agreements, petitions and counter-petitions.

We caution you that these comments represent our opinion of the law as it applies generally and, as stated in Information Circular 70-6R2 dated September 28, 1990, are not binding on the Department. Nevertheless, we hope our comments will be of assistance to you.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch