What's deductable and what's not
The question of the deductibility of legal fees in marital dissolution proceedings is, for obvious reasons, of significant interest to most clients and typically one of the first questions asked of a family law attorney.
Up to 2002, the answer that we family law practitioners almost invariably gave to clients was that virtually none of the legal costs (legal fees and disbursements) incurred in connection with spousal or child support proceedings were deductible, whether federally or provincially.
The position of Canada Customs and Revenue Agency (“CCRA”, then known as “Revenue Canada”), had long been that legal fees incurred to establish spousal and/or child support and/or a variation thereof were non-deductible for federal income tax purposes. CCRA’s position had been based on the decision of the Federal Court - Trial Division in the case of The Queen vs. Burgess, 8DTC 5192 (1981) CTC, 258. In the Burgess case, the Court reasoned that the legal fees were incurred for the purpose of bringing into existence the right to support and that the right was considered capital property. Since the expenditure was incurred on account of capital, it was therefore not deductible for tax purposes.
However, as a result of the decision of the Tax Court of Canada in Gallien vs. The Queen, (2001) 2CTC 2676 (TCC - Information Procedure), the CCRA reconsidered its position. Since October, 2002, the CCRA considers legal costs incurred by the spouse seeking a spousal or child support Order under the Divorce Act or under applicable provincial legislation in a separation agreement, to have been incurred for the purpose of enforcing a pre-existing right to support and therefore deductible for federal income tax purposes. The CCRA also now accepts that the legal costs of seeking an increase in support (whether spousal or child support) or making the child support non-taxable under the Child Support Guidelines are similarly deductible for federal income tax purposes.
For its part, the position of the Quebec Minister of Revenue as to the non-deductibility of legal costs to obtain an initial spousal or child support Order remained unchanged until December 12, 2003. On that date, the MRQ announced that commencing with taxation year 2003 and for taxation years prior thereto not otherwise prescribed (i.e. generally 2000 - 2002), a taxpayer who incurs legal costs to obtain an initial spousal support and/or child support Order or to increase such a support Order will be able to deduct his/her legal costs for Quebec income tax purposes.
Insofar as legal fees paid to enforce or collect support payments are concerned where the right to support has already been established (by written agreement or Court Order), these fees are likewise deductible both federally and provincially.
Unfortunately, it would seem that only the recipient of the spousal and/or child support (i.e. the alimentary creditor) is the beneficiary of the federal and provincial taxing authorities’ newly-found “souplesse”. The payor of spousal and/or child support (i.e. the alimentary debtor) is still not allowed to deduct the legal fees he or she incurs to contest an initial spousal or child support application or an application to increase said support. Similarly, the alimentary debtor will not be permitted to deduct legal fees incurred in the event that he/she seeks an Order to decrease the existing support.
Other situations where legal fees are not deductible either federally or provincially are fees relating to:
- the custody and/or access to children
- obtaining a divorce judgment
- the establishment or enforcement of a lump sum payment in lieu of spousal support
- the partition of other financial or property interests between the spouses.
For ease of reference, a summary of the federal and Quebec positions with respect to the tax treatment of legal costs incurred in marital dissolution proceedings is attached hereto.
Finally, it must be underscored that the onus will always be on the taxpayer to establish the portion of legal fees that pertains directly to deductible issues. For that reason, the client should instruct his/her family law attorney to record and bill time and disbursements related to spousal and child support issues separately or in such a fashion that this onus can be satisfied.
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