Child Support Payer can Deduct Legal Fees spent on Child Support Bid

Cristin Schmitz for The Lawyers Weekly

May 7, 2010

The Tax Court has ruled that a father with joint custody of his son is entitled to deduct the legal fees he spent to pursue child support, even though the father has always paid, rather than received, child support.

Legal expenses incurred to obtain a child support order are generally deductible from income by recipients, but the Canada Revenue Agency (CRA) says payers cannot deduct their legal fees for negotiating or contesting an application for support payments.

The appellant taxpayer challenged the CRA's refusal to let him deduct $5,375 in legal fees spent in 2006 trying to get child support as part of his five-year bid to obtain permanent sole custody of his child.

He has paid his ex-wife support for their son ever since the pair's 2000 separation. However under their 2006 divorce settlement, which was incorporated into a court order in December 2006, his ex-wife notionally pays him child support of $334 per month, corresponding to her income under the child support guidelines. That amount is set off against the $777 per month he owes her in child support, based on his income. That leaves him paying net child support of $443 per month.

On April 19 Tax Court Justice Judith Woods overturned the CRA's assessment which totally disallowed the $5,375 legal fees deduction.

According to his counsel, Michael Jaeger of Boddy Ryerson in Brantford, Ont., her decision could affect tens of thousands of joint custodial parents paying support across Canada "and possibly [all] those who are support payers - who also incur legal fees in a bona fide attempt to establish child support in fulfillment of their objective to obtain a custody order."

Jaeger told The Lawyers Weekly he did not find a single previous reported decision allowing a payer parent with joint custody of one child to deduct legal fees spent to claim support for that child.

"Basically Revenue Canada's policy had been to deny a deduction to a net payer of child support," he said. If the decision's reasoning is ultimately applied to all payers (not just those who are joint parents) "that would have huge nationwide significance," he suggested.

"Even if it doesn't go that far, and it just applies to facts of this case, it would certainly have significance and importance for[...]many joint parents in Canada[...][where] one parent is paying the other support."

Counsel for the Crown, Darren Prevost of the Department of Justice in Toronto, told The Lawyers Weekly he had no comment given that "we have not yet decided whether we will be pursing an appeal."

Toronto family law practitioner Stephen Codas of Epstein Cole told The Lawyers Weekly the message of the decision could be that legal fees for child support claims are deductible in some cases "notwithstanding that the individual was paying child support before, during, and after the court process, and even where an order obliged the individual to pay child support on a temporary basis."

Codas said this seems to depart from the normal rule that legal fees paid by payer spouses in respect of child or spousal support are not deductible.

However he stressed that he had physical custody of the child for most of the time after the temporary child support order was made, which allowed the judge to conclude that his sole custody and child support claims stood a chance of success, even though the claims eventually settled out. "Therefore, a claim for custody in and of itself may not be enough to establish a basis to deduct the fees on account of child support," Codas suggested. "This case confirms that a finding needs to be made that the claim for custody (and resulting child support) was viable. This can only be established based on a review of the specific facts of each case."

Chartered accountants and business valuators Andrew Freedman and Paula White of Toronto's Cole and Partners told The Lawyers Weekly the ruling is consistent with an Oct. 10, 2002 CRA technical news release stating that a support recipient can deduct legal fees for efforts to obtain a child support order, even if an action is not commenced or an actual order is not obtained.

"This case would have seemed less conspicuous if the appellant was the wife in the same circumstances," Freedman and White suggested.

According to the tax authorities, he did not have a right to receive child support from his ex-spouse because he agreed to pay her $350 per month under an interim consent order in 2001 which gave him sole custody.

Yet at that time both parents also filed for divorce and he did ask for sole custody and child support.

The CRA also insisted that he abandoned his claim for child support because the parties' settlement in late 2006 culminated in an order that he pay child support.

According to the Crown, he did not have a pre-existing right to child support when he incurred the 2006 legal fees because any right to child support had been extinguished by the May 2001 interim order giving his ex-spouse child support.

"I do not agree with this submission," Justice Woods held. "The May 2001 order did not extinguish the appellant's right to child support. The legislative obligation to support children does not cease with a court order, and especially a court order providing for interim support only."

The judge also rejected the CRA's argument that the 2006 divorce settlement indicated that Trignani had abandoned his child support claim at the relevant time. "It is quite possible that the claim was abandoned only when the minutes of settlement were entered into, which likely was after most of the legal services were rendered," she observed.

Ruled Justice Woods, "the evidence as a whole makes a strong case that the claim for child custody (and consequently child support) in 2001 was bona fide, not frivolous, and had a reasonable prospect of success. In the absence of evidence to the contrary, I am not willing to presume that this claim was not being vigorously pursued in 2006."

She noted that the CRA appears to have assumed that he never made a formal claim for child support, but the evidence clearly revealed that he had done so when he filed for divorce in 2001.
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