8 September 1995 External T.I. 9520805 - LEGAL FEES RELATING TO SPOUSAL SUPPORT ORDERS

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:

deductibility of legal expenses incurred in respect of alimony or maintenance orders

Position TAKEN:

no deduction to payer in any case or the recipient of a non-taxable amount or where the amount is incurred to establish a right or unsucessfully defend the creation of a new right but where the amount is incurred to enforce a pre-existing right to a taxable amount, it will likely be deductible

Reasons FOR POSITION TAKEN:

general comments only based on the principles of 18(1)(a),(b) and (c)

A. Humenuk
XXXXXXXXXX 952080

Attention: XXXXXXXXXX

September 8, 1995

Dear Sirs:

Re: Legal Fees Incurred in respect of Spousal Support

We are replying to your letters of October 18, 1994 and April 10, 1995 addressed to the Taxation Centre which have been referred to us for reply. We apologize for the delay in our response.

You have asked for our views as to whether legal fees incurred in respect of various court actions relating to an award of alimony or maintenance would be deductible by either, or both of, the payer and the recipient of the support payments. The four situations you have asked us to address involve a petition to:

(a)establish or quantify a recipient's right to support from the recipient's spouse or former spouse,

(b)increase the amount of support previously established,

(c)decrease the amount of support previously established and

(d)cancel the requirement to pay support payments in arrears.

The deductibility of legal fees involves a finding of fact and as such the comments which follow are intended as general comments only and may not be applicable in a particular fact situation. For 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.

As stated in paragraph 17 of Interpretation Bulletin IT-99R4 "Legal and Accounting Fees", legal fees incurred by the recipient to establish or increase the amount of support are not deductible following the line of reasoning taken by the court in The Queen v Burgess (81 DTC 5192). However, as stated in paragraph 16 of the bulletin, legal fees incurred by the recipient in enforcing the right to support already established under either family law or a previous court order are deductible. Thus, the legal fees incurred in respect of an action to obtain support payments from a spouse following the breakdown of a marriage are deductible but legal fees incurred to establish an award for alimony subsequent to a divorce are not. It should be noted that the references to the Act found in paragraph 16 of the bulletin refer to the Act as it read prior to the 1993 amendment to paragraphs 56(1)(b) and (c) and the repeal of 56(1)(c.1) as enacted by chapter 24 of the 1993 statutes.

Challenges by a payer to reduce or eliminate the requirement to pay support can take many forms, including a petition for divorce which, when granted, dissolves the marriage and nullifies any further obligation of the payer arising from that marriage. Where the result of the court action is that a new right to support is established, as in the case of Filteau v M.N.R. (91 DTC 509), no deduction is available in respect of the recipient's legal fees paid in respect of that court action irrespective of which party initiated the court action. However, where the challenge by the payer does not create a new right, the legal fees incurred by the recipient in opposing the payer's challenge would be deductible for the reasons stated in the Attorney General of Canada v. Sembinelli (94 DTC 6636).

With respect to the fourth situation, it is our view that the legal fees incurred by the recipient to collect support payments in arrears, including legal fees incurred in respect of an action by the payer to have such an obligation cancelled, would normally be deductible in computing the recipient's income.

In all of the above noted situations, it is presumed that the support payments in question are required to be included in the recipient's income under either paragraph 56(1)(b) or (c) of the Act. Where the payments are not required to be included in the recipient's income, the related legal fees would not be deductible in any of the situations described because of paragraph 18(1)(c) of the Act which precludes the deduction of any expense to the extent that it relates to exempt income or property the income from which is exempt from taxation.

With respect to the legal fees incurred by the payer of support payments, our position is set out in paragraph 18 of the bulletin. As stated by the Tax Court of Canada in the case of Bayer v. MNR (91 DTC 1035), one of the conditions necessary for a non-business expense to be deductible is that it be incurred in respect of a property which is an income-producing property. In the case of an individual obligated to make support payments, the property or right which is being pursued or enforced is the right to sue for a diminished obligation to pay support. Such a right is not an income-producing right and thus legal fees incurred in respect of such a right are not deductible by reason of paragraph 18(1)(a) of the Act.

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