DEDUCTIBILITY OF LEGAL FEES RELATED TO SUPPORT ISSUES
It may be obvious to most that legal fees can add up quickly when one is required to hire a lawyer to pursue child or spousal support. However, what may be a surprise is that the Income Tax Act actually provides relief by allowing for the deduction of legal fees incurred in obtaining support. “Great!” you say? Not so fast.
What is even more surprising is that the permissible deductions are entirely one-sided. The individuals receiving support payments (“support recipients”) are permitted to take these deductions, while the support payors are left with no tax relief whatsoever. This remains true even if the support payor had to defend against an unwarranted claim by the support recipient. Fair? Not really, but unfortunately that is the reality under the Income Tax Act. It is important for support recipients who are able to take advantage of this benefit to understand the law and how it applies to them.
Fortunately, the law is surprisingly straightforward. The person receiving any type of support payment can deduct their legal fees from their income on their tax return for the year the fees were paid. The fees claimed must have been for any of the following purposes:
- Collecting late support payments and/or enforcing an existing court order or separation agreement to collect child or spousal support;
- Establishing the amount of support payments to be made by the current or former spouse or common law partner;
- Establishing the amount of support payments to be made by the legal parent of the child where the support is to be paid as a term of a court order;
- Varying the amount of support being received; or
- Opposing a claim to reduce support.
If the legal fees paid relate to any of the above, the amount of those fees can be deducted from income. For example, if the support recipient’s income was $50,000 in 2013 and he also paid $10,000 in legal fees related to any of the purposes above, then $10,000 (less any cost awards) maybe deducted from income directly leaving a taxable income of $40,000.
On the other hand, it is important to note that legal fees paid for the following purposes are not deductible:
- Obtaining a separation or divorce;
- Establishing custody of or visitation arrangements for a child; or
- Preventing a higher support order and/or challenging a claim for support, where the defending party is the payor.
To take advantage of this deduction, you should request a letter from your lawyer indicating the amounts paid for legal fees within the taxable year and the specific percentage and/or amounts directly related to any of the purposes above.
If this information is news to and you have previously paid legal fees that could have deducted in a previous year, we suggest speaking with an accountant to determine the cost-effectiveness of re-filing your tax return in order to claim the deduction.
While the benefit of deducting legal fees from income for tax purposes can provide some much needed relief for support recipients, support payors are regrettably on their own. Unfortunately, this unequal treatment under the Income Tax Act may be something to consider when deciding whether to zealously litigate such matters or find an alternative method of resolution.
The above is only general information about this point of law. If you require more information or advice, consult a lawyer about your options as your case may be different depending your circumstances.