Introduction: The problem of deducting legal costs in a family law context

As Canadian tax attorneys, clients are sometimes surprised to learn that we have at least a general understanding of other areas of law, even though we have a very strong and specific tax law knowledge that has been developed over years in the specialized income tax practice. This is because the Income Tax Act is written so that almost all transactions, transfers, income, capital and coincidences are affected in some way by the Income Tax Act. This means that as Canadian tax attorneys we are tax specialists, but we often have to act as “all-rounders” in other areas of the law as well.

One of the areas where specialized tax knowledge can make a big difference to client results is in family law. While most family lawyers are aware that income taxes can be caused by their work, their primary focus is on the division of value, property, and cash, which in most cases is already part of the spouse’s after-tax revenue. On the other hand, future amounts earned and child support raises the problem of income taxes, although the rules are often misunderstood by both family lawyers and accountants as being less complex than they actually are. A simple example shows why proper tax advice can ultimately result in large savings in a family law context – something that can help entire families by reducing the Canada Revenue Agency’s share of marital assets and future income.

The deduction of legal costs to enforce a duty of support

One of the most recent inquiries we received from a colleague in family law was a question about the deduction of legal fees in a family law context. His understanding of the applicable income tax law was fairly solid but incomplete. This resulted in ongoing arguments with clients ‘accountants who refused to request a deduction from those clients’ tax returns for legal costs related to enforcing a spouse’s support obligation. Legal fees related to enforcing child maintenance or lump sum payments are commonly referred to as deductible, but the real uncertainty is about the size of spouse maintenance payments.

Under the Income Tax Act, spousal support amounts are normally deductible by the payee’s spouse and are included in the payee’s spouse’s income. From a child benefit perspective, it would normally not make sense to view a non-taxable source of income as “income” for the payee and therefore legal costs to secure it may be deductible. Section 248 (1) of the Tax Act saves this, however, by classifying child support payments as a type of “exempt income”, whereby the income itself is removed from the calculation of the net income of a taxpayer, but a deduction is still permissible in accordance with the other provisions of the Tax Act.

On the other hand, there is some confusion related to spousal support payments. Typically, lump sum payments to spouses are not deductible by the payer as they will be treated as an after-tax breakdown of revenue if the union collapses. Monthly spouse support payments come from current and current income and are therefore included in the tax return of the payer’s spouse. There is no argument for the deductibility of the legal costs incurred to enforce the payment of these amounts, as it is a simple abstract connection.

How tax advice solves and improves the problem of flat-rate spouse support amounts

The cause of the confusion, as we explained to our fellow lawyer, is that there is no specific reference to the Statutory Income Tax Act that addresses spouse support payments, their enforcement, and legal fee deductibility.

The rating agency’s earlier position was that legal costs incurred for securing flat-rate spouse support payments are not deductible under tax law. For the past fifteen years, the Canadian Finance Court, Federal Appeals Court, and Supreme Court of Canada have clarified the law regarding these deductions.

In essence, the courts have turned to a typical income tax technique to solve the problem: characterization. In many cases, spouses are defaulted in their payments and the payee’s spouse is forced to take the matter to court for a payment order and possibly other sanctions. Once that’s done, the result is usually an order that requires a lump sum payment instead of monthly support fees, either retrospectively or prospectively. In these cases, the courts have examined the underlying nature of the lump sum payment in a typical income tax manner, and where this is due to the enforcement of a past or future periodic support obligation, the courts have allowed the deduction of the appropriate enforcement based on the characterization as income for costs the payee according to the general scheme described above.

Pro Tax Tips – Why Tax Advice Can Help – Analysis from Canadian Tax Attorney

As seasoned Canadian tax attorneys, we often spend time and analysis on the question of characterization. But what does that mean for those involved in a family law dispute?

A Canadian tax attorney, such as the experienced tax advisor at our tax firm, can examine the facts of your situation or that of your family law clients and justify the classification of legal costs as deductible. In tax law, formal matters, that is, with specific legal advice from an experienced Canadian tax attorney, a family attorney can negotiate flat-rate settlements with obvious and specific intent to characterize spousal support payments as nominally attributable to a regular support obligation, or at least show why they differ from a conventional one Differentiate the flat-rate breakdown of the payment of property types The difference could mean savings of thousands of dollars in income tax deductions on both spouses’ tax returns.

If you’re a taxpayer divorcing or a family lawyer looking to maximize value for your client in your ongoing dispute, give our top Canadian tax attorneys a call. We can work in a support role to make sure you maximize the savings during these costliest times. Those who seek tax advice in advance will be surprised at the tax savings our office can provide in the short or long term.

The content of this article is intended to provide general guidance on the subject. A professional should be obtained about your particular circumstances.