Silver Linings – Deducting Legal Fees on Your Tax Return
It’s tax season again, but there could be a silver lining for some Canadians involved in family law disputes: they may able to claim a tax deduction for their legal fees.
Not all legal fees incurred in a family law matter are created equal, however, and it is important to know which fees are eligible for a deduction before filing your taxes.
Support recipients
Under “carrying charges and interest expenses” on line 221 of the T1 General Form, a support recipient can deduct legal fees related to support payments from their current or former spouse or common-law partner, or from the natural parent of their child. More specifically, support recipients can deduct legal fees incurred to:
- Collect late support payments;
- Establish the amount of support payments owing from their current or former spouse or common-law partner;
- Establish the amount of support owing from the natural parent of their child (who is not otherwise their current or former spouse or common-law partner), where support is payable under the terms of a court order;
- Obtain an increase in support payments; and
- Defend against a reduction in support payments.
Under “other deductions” on line 232 of the T1 General Form, support recipients may also claim a tax deduction for legal fees incurred in trying to make child support payments non-taxable.
A support recipient may deduct the above legal fees even where their claim for support and/or defence against a reduction of support is unsuccessful, provided the claim was not frivolous and there was a reasonable chance of success.
Where a support recipient receives a costs award or other reimbursement for some or all of their deductible legal fees, they must reduce the claimed deduction by this amount. If they receive the award or reimbursement in a future year, this amount must be included in the support recipient’s income for that year.
Support payors
Unfortunately, the above tax benefits do not equally apply to support payors – that is, if you pay support, you cannot claim a deduction for legal expenses incurred to establish, negotiate or contest the amount of your support payments.
Further, legal fees incurred to obtain a separation or divorce, to establish custody or access arrangements for a child, or to determine the division of family property are not tax deductible.
What do you need to provide?
The CRA typically requests evidence of the legal fees that have been claimed as a deduction, such as a letter from the taxpayer’s family law lawyer or copies of their invoices with proof of payment. It is therefore a good idea to speak with your family law well in advance of the filing deadline, to ensure that you have the necessary supporting documents.
For more information about whether your legal fees can be deducted, contact the Family Law Group.