This time of year we should all be turning our minds to getting our paperwork together to file our income tax return. One of the questions we get this time of year is whether our clients can claim their legal expenses as a deduction on their income tax return.
You can claim legal fees incurred to collect late support (child or spousal) payments, establish the amount of support, seek an increase in support payments or to defend against the reduction of support payments. But you cannot claim those fees you incur where you are establishing a right where none existed.
It is important to distinguish between ‘collect’, ‘establish” and ‘create.’ The friendly words are “collect” and “establish”. ‘Create’ isn’t, because legal fees incurred to create a right to support are not deductible. To put it as simply as possible you can deduct those fees incurred to “collect” ; that is when you incur fees when there is an amount owed to you. i.e. you can deduct legal fees incurred to collect late support (child or spousal) payments. You can also deduct those fees incurred to “establish” the amount of support based on your legal right to child or spousal support as the case may be. But if your argument lies on whether you actually have a right to support at all (there is a questions as to whether you are a spouse or child) those legal fees incurred in asserting that claim may not be deductible.
Those deductible legal fees may also include the fees paid to experts such as accountants who are retained by your lawyer to determine a support payor’s income for the purpose of your support claim.
For the support payor or the one defending a claim for support, however, there is no such tax relief. Legal fees incurred by the payor-spouse in respect to child or spousal support are not deductible under any circumstances, regardless of whether the expenses are incurred to establish, negotiate, or contest the amount of support payment.
In order for an expense to be deductible, it must relate to an income source. Since the payor-spouse is the payer, his or her legal fees are not expenses incurred to earn an income.
Before you claim a deduction, ask your lawyer for a receipt for tax purposes and consult with your accountant. At our firm we provide a letter to attach to your tax return detailing what percentage of your account was incurred in seeking support; along with a billing history. You might want to get that ball rolling now, because if you’re anything like me tax time always seems to sneak up on you.
For more information go to the Revenue Canada web site at www.cra-arc.gc.ca