As we are in the heart of tax season, I thought it timely to offer some information about how Canadian tax laws treat legal fees relating to a family proceeding.
Keep in mind that I am not, and do not profess to be, a tax expert. If you have any specific tax-related questions about the points discussed in this post, you should consult your tax advisor or accountant.
Tax Treatment of Legal and Accounting Fees: Interpretation Bulletin IT-99R5
Income Tax Interpretation Bulletin IT-99R5 outlines the treatment for tax purposes of legal and accounting fees. Family law clients will be particularly interested in paragraphs 17 to 21, which discuss the tax treatment for legal fees paid in relation to spousal and child support. To read sections 17 to 21 in full, click on the link above.
In summary:
¶ 17. Legal costs incurred to obtain a divorce, a spousal support order under the Divorce Act or a separation agreement are not tax deductible. Legal costs incurred to obtain an order for child support are deductible. Legal costs incurred to obtain an increase in spousal or child support are non-deductible.
¶ 18. Legal costs incurred to enforce an interim or permanent support amount that arises from a written agreement, a court order or legislation such as sections 11 and 15.1 of the Divorce Act are deductible (for example, if your former spouse is not paying monthly child support as set out in a court order, the legal fees you incur to have the order enforced may be tax deductible). Legal expenses incurred to defend against a reduction in the amount of support are also deductible (for example, if your former spouse brings an application to reduce the amount of child support, the legal fees you incur to defend the application may be tax deductible).
¶ 20. Legal fees incurred in connection with the receipt of a lump sum payment are not deductible. If the payor owes the recipient a large amount of money for non-payment of periodic (i.e. monthly) support, the payment of the amount owing will not necessarily be considered a lump sum payment and may be tax deductible.
¶ 21. Legal costs incurred by the payor in negotiating or contesting an application for support payments are not deductible. Similarly, legal costs incurred for the purpose of terminating or reducing the amount of support payments are not deductible. Legal expenses relating to obtaining custody of or visitation rights to children are also non-deductible.
CRA may ask your lawyer to provide a letter setting out what percentage of your total legal fees relate to a tax deductible category. As a proactive measure, you may want to ask your lawyer for such a letter before submitting your taxes.
