Tax Rules Made Simple – Deductibility of Legal Fees
Most people aren’t turned on by tax law; even lawyers find the topic unduly complex and labyrinthine. But there are a few relatively-straightforward tax rules and specific principles about which separating and divorcing couples should be aware.
I will start with one of the easier ones:
Legal fees that are paid to pursue child or spousal support are deductible from the recipient spouse’s income.
The concept – at least as tax principles go – it relatively straightforward. The Income Tax Act specifically allows that for the purposes of determining taxable income, a person can deduct any legal and accounting fees (which the legislation collectively calls “professional fees”) that are incurred in the pursuit of a claim for child or spousal support. The professional fees are deducted in the year in which they are paid. In this way, by deducting those professional fees from total income, the person receiving child/spousal support enjoys a reduced level of income tax liability. (Note that legal fees incurred by the paying spouse or partner are not deductible).
However, this tax rule comes with some rather finicky exceptions and clarifications. For example:
• Legal costs to quantify a spousal support entitlement, established under the Ontario Family Law Act, can be deducted from income.
• Legal costs in connection with determining child support are always deductible, whether the proceeding takes place under the Ontario Family Law Act or the Divorce Act.
• Legal costs to establish the entitlement to child or spousal support amounts under the Divorce Act are not deductible.
• In contrast, legal costs incurred to enforce a pre-existing right to either interim or permanent support are deductible.
Complicated? It can be. Always seek competent Family Law and tax advice in connection with the deduction of legal fees from income.
At Russell Alexander, Family Lawyers our focus is exclusively family law, offering pre-separation legal advice and assisting clients with family related issues including: custody and access, separation agreements, child and spousal support, division of family property, paternity disputes, and enforcement of court orders. For more information, visit us at www.RussellAlexander.com.