16 March 1999 Internal T.I. 9831477 - LEGAL EXPENSES, DVORCE ACT, CHILD 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: Does the Divorce Act establish in law the right of a child to maintenance from his or her parents? If so, then does this mean that the portion of legal costs to obtain a divorce, which includes legal fees for enforcing a right that already exists under law to child support, is deductible?

Position: Yes, an argument can be made that the Divorce Act establishes a right under law of a child to maintenance from his or her parents.

Reasons:. Paragraph 18 of IT-99R5 indicates that legal costs incurred to enforce pre-existing rights to either interim or permanent support amounts are deductible. Paragraph 18 also states that a pre-existing right to a support amount can arise from a written agreement, a court order or legislation such as Part III of the Family Law Act of Ontario. An argument can be made that the wording in section 15.1 and paragraph 11(1)(b) of the Divorce Act is similar (i.e., in terms of the obligation it establishes by the parents of the child to support the child) to that in Part III of the Family Law Act of Ontario. We have accepted that Part III of the Family Law Act of Ontario establishes a right under law of a child to maintenance from his or her parents. With respect to spousal maintenance, there is no provision (similar to paragraph 11(1)(b) for child maintenance) in the Divorce Act which requires that the court stay the granting of a divorce until reasonable arrangements have been made for the support of a spouse. Accordingly, if we accept that there is a right established under the Divorce Act of a child to maintenance from his or her parents, then legal fees relating to establishing the quantum of child support under the Divorce Act would be deductible.
		March 16, 1999

Individual Returns and Payments HEADQUARTERS
Processing Directorate G. Moore
Sandra Short 952-1506
400 Cumberland, 9th Floor
7-983147

Deductibility of Legal Fees - Child Support

We are writing regarding your memo of November 25, 1998, concerning the deductibility of legal fees incurred to obtain or enforce a child maintenance order.

You have indicated that a number of enquiries have been received by the Winnipeg Tax Centre as a result of the informal decision of the Tax Court in the case of Kathy L. Wakeman v. The Queen, 1996 DTC 3220, [1996] 3 C.T.C. 2165. The gist of the submission is that the right of children to maintenance exists by operation of law in a number of provinces such as Ontario and Alberta. Consequently, you believe that legal expenses incurred in obtaining a court order for the maintenance of a child relates to the quantification and enforcement of that pre-existing right, as already provided for by law and should be deductible in all cases to the recipient of that child support. Because a child’s right to maintenance exists by operation of law at all times, you argue that there may be no need to establish such a right even when obtaining a support order under the Divorce Act when the support is for a child, as opposed to a spouse. If the Divorce Act does establish a right for maintenance for a child, then you have asked if the legal costs incurred in a divorce proceeding for maintenance of a child (assuming that this cost can be separately identified or reasonably allocated) would be deductible.

OUR COMMENTS

As you know, paragraph 17 of IT-99R5, Legal and Accounting Fees, indicates that legal costs incurred in establishing the right to support amounts, such as the costs of obtaining a divorce, a support order under the Divorce Act or a separation agreement, are not deductible as these costs are on account of capital or are personal or living expenses. Similarly, legal costs of seeking to obtain an increase in such amounts are also non-deductible. Legal costs incurred to enforce pre-existing rights to either interim or permanent support amounts are deductible. A pre-existing right to a support amount can arise from a written agreement, a court order or legislation such as Part III of the Family Law Act of Ontario, and enforcing such a right does not create or establish a new right. In addition, legal expenses incurred to defend against the reduction of support amounts are deductible since the expenses do not create any new rights to income. Legal expenses incurred in negotiating or contesting an application for support payments are not deductible since these costs are personal or living expenses. In addition, legal expenses relating to obtaining custody of children or visitation rights to children are not deductible.

You have referred to the court case of Kathy L. Wakeman v. The Queen, 96 DTC 3220, in which the court ruled that the taxpayer was entitled to deduct legal expenses incurred to obtain a permanent support order pursuant to the Divorce Act against her divorced husband for maintenance of their two children. Pursuant to the Informal Procedure, the Tax Court found that parents have a duty to support their children and such a duty is not extinguished by divorce. The principal submissions of the Minister were that the legal expenses claimed were not incurred for the purpose of enforcing payment of a maintenance allowance where the right has previously been established by court order but were expenses incurred in seeking to obtain an increase in such payments (i.e. the creation of a new right) and that the legal expenses related to obtaining custody of the children of the marriage. Therefore, the expenses were not incurred for the purposes of gaining or producing income from a business or property within the meaning of paragraph 18(1)(a) of the Income Tax Act (the “Act”) but were personal or living expenses of the taxpayer within the meaning of paragraph 18(1)(h) of the Act. The taxpayer argued that the legal expenses claimed did not relate to custody but solely to the establishment of the amount of maintenance of the two children of whom the taxpayer had custody. Accordingly, it was found that the legal fees pertained to a suit by the custodial mother against the divorced father for child support and did not relate to the right to establish child support but established the quantum of child support. The Court found that the deductibility of the legal costs was not precluded by paragraph 18(1)(b) (capital outlay or loss) or paragraph 18(1)(h) (personal and living expenses) of the Act. The legal expenses claimed did not relate to custody but solely to the establishment of the amount of maintenance for the two children in her custody. The court found that the maintenance right of children was created by law (i.e. The Divorce Act) and accordingly, the legal costs incurred in obtaining a court order of maintenance for a child related to the enforcement of a pre-existing right provided by law and not to the creation of a new right.

We are in agreement that an argument can be made that the wording in section 15.1 and paragraph 11(1)(b) of the Divorce Act is similar (i.e., in terms of the obligation it establishes by the parents of the child to support the child) to that in Part III of the Family Law Act of Ontario. We have accepted that Part III of the Family Law Act of Ontario establishes a right under law of a child to maintenance from his or her parents. The Divorce Act, R.S.C. 1985, (2nd Supp.), C. 3, section 15.1, states that “A court of competent jurisdiction may, on application by either or both spouses, make an order requiring a spouse to pay for the support of any or all children of the marriage”. Paragraph 11(1)(b) of the Divorce Act states that in a divorce proceeding, it is the duty of the court to satisfy itself that reasonable arrangements have been made for the support of any children of the marriage, having regard to the applicable guidelines, and if such arrangements have not been made, to stay the granting of the divorce until such arrangements are made. With respect to spousal maintenance, there is no provision (similar to paragraph 11(1)(b) for child maintenance) in the Divorce Act which requires that the court stay the granting of a divorce until reasonable arrangements have been made for the support of a spouse.

With respect to the Maintenance Order Act of Alberta and the Parentage and Maintenance Act of Alberta, we have briefly reviewed the wording of the legislation dealing with the provision of maintenance for a child by his or her parents. It appears that the wording of the above-mentioned provincial legislation provides for a similar financial obligation or responsibility on the parents for maintenance for their child as that found in Part III of the Family Law Act of Ontario. Notwithstanding the different wording in these statutes, including the Divorce Act, we would suggest that their intent is similar with respect to the establishment of an obligation of parents to support their children.

As indicated in paragraph 18 of IT-99R5, if there exists a pre-existing right to a support amount that has arisen from legislation and enforcing such a right does not create or establish a new right, then the legal costs incurred to enforce such rights are deductible.

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In our opinion, it would be difficult to distinguish, with respect to the determination of a pre-existing right, between provisions found in Part III of the Family Law Act and similar provisions found in other statutes. However, we do not believe that allowing the deduction of legal fees pertaining to child maintenance would affect our position on spousal maintenance (i.e., that legal fees incurred with respect to spousal maintenance are not deductible) because the courts generally do not have the same discretion with child maintenance as the courts have with spousal maintenance under the Divorce Act.

In Dr. Beverley A. Burgess v. The Queen, 81 DTC 5192, the Federal Court - Trial Division, found that legal fees to obtain maintenance for the taxpayer and her children as part of a divorce were not deductible since the right to maintenance following divorce was a right separate from the right to maintenance arising from the existence of a marriage bond. The right to maintenance arising on marriage terminated with the dissolution of the marriage. The legal fees were therefore paid by the taxpayer to establish a new right to maintenance, not to enforce an existing right. The Court indicated that the authority to grant an order for corollary relief upon granting a decree nisi for divorce is discretionary and that section 11 of the Divorce Act (R.S.C. 1970, Chapter D-1) makes this abundantly clear. The Court also commented that “The Court, if it thinks it fit and just to do so having regard to the circumstances of the parties, may make the order named in paragraph 11(1)(a) requiring the husband to provide for the maintenance for the wife and conversely in paragraph 11(1)(b) require the wife to likewise provide for the husband”. It appears from this statement that the Court only addressed the issue of whether there exists a right to spousal maintenance under the Divorce Act, not maintenance for the children of the marriage. Since the Court did not distinguish between maintenance for the wife and maintenance for the children, the issue of whether there exists a right under law (the Divorce Act) for maintenance of a child was arguably, not addressed in this court case.

We note that the first sentence of paragraph 17 of IT-99R5 states that legal costs incurred in establishing the right to support amounts, such as the costs of obtaining a divorce, a support order under the Divorce Act or a separation agreement, are not deductible as these costs are on account of capital or are personal or living expenses. We do not believe that this comment is incorrect; however, our position in the bulletin could be clarified to indicate that legal fees incurred to obtain a support order for spousal support under the Divorce Act are not deductible.

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However, in the majority of cases, the legal expenses would normally include the legal cost of obtaining a divorce, child custody and visitation rights issues, and the cost of obtaining child support. The cost of obtaining the divorce and the resolution of child custody and visitation rights issues would generally constitute most of the cost of legal fees incurred, which would not be deductible. Since there are now federal child support guidelines that have been established, we would expect that the issue of setting the amount of child support would, in the majority of cases, be fairly straightforward and accordingly, the legal fees relating to establishing the quantum of child support for a support order under the Divorce Act should, therefore, be a small amount. A breakdown of the legal costs incurred to obtain a divorce would be required which separately identifies the legal cost pertaining to obtaining maintenance for a child.

We trust our reply will be of assistance to you.

J. Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch