By Douglas J. Manning, Partner, Certified Specialist in Family Law
In an earlier blog post written by Lori Aylwin in January 2011 she discussed the tax treatment for legal fees and accounting fees incurred for the purposes of establishing or collecting child and/or spousal support. Lori’s article succinctly pointed out what needs to be established in order for a support recipient to claim his or her legal expenses as a tax deduction.
A recent judgment from the Tax Court of Canada in October 2011 clarified some of the additional circumstances and considerations that The Canada Revenue Agency should take into account in determining whether a taxpayer can claim certain legal expenses against their otherwise taxable income.
The case is cited as Mercier v the Queen 2011 T.C.C. 427 .
The Court seemed to focus on the word “establish” a child support amount in accordance with the child support guidelines. The court stated “that it is trite law that the legal costs incurred to obtain child support for the benefit of a child are deductible in computing taxable income” and cited The Canada Revenue Agency Interpretation Bulletin IT-99R5 at paragraph 17 as support for this position.
Previous cases have stood for the principle that it is only the support recipient who is entitled to deduct his or her legal expenses.
However, in this case, both spouses claimed that they had custody of the children for part of the time and thus both claimed that they were entitled to child support from the other parent for a part of the time during the relevant tax years. The Court recognized that this was somewhat of a unique case and that both parents had a claim to entitlement to custody and to child support and would have given both parties some deduction for their legal expenses in attempting to establish the child support amounts.
What was also interesting in this case, was that the Court carefully reviewed the actual court documentation in the custody and support legal proceeding and compared the documents prepared with the invoices for legal services submitted by the lawyer for the taxpayer to ensure that services provided actually dealt with establishing the support entitlement rather than other legal issues such as a divorce, non-removal of the children from the jurisdiction, etc.
Our Firm is often asked to provide a letter to be submitted by the taxpayer with their tax return to claim a deduction. Be sure to ask your lawyer to provide a similar letter if you are in a position to claim a portion of your legal fees as a deduction for tax purposes. Better still, ask your lawyer, when preparing their invoices to you, to use the words “establishing” or “collecting” child or spousal support in their notations on the accounts.
For more information please consult your accountant, tax return preparer or the Canada Revenue Agency website at www.cra-arc.gc.ca