Are you wondering if you can use legal fees tax deduction? The cost of going to court can get expensive. When legal fees begin to increase, spouses start to look for ways to recapture the money spent.

One question that clients have is whether they can claim their fees on their tax returns. The answer is yes, some legal fees can be deducted from your total taxable income on your tax return.

But it depends on the type of legal proceeding.

In general, legal fees cannot be claimed on income tax returns in relation to the following procedures:

-Fees spent in relation to a claim for custody of the children;

-Fees spent to obtain a divorce or negotiate a separation agreement;

-Spent to establish a right to spousal support after divorce; and

-Fees spent to obtain a lump-sum spousal support amount.

Legal Fees Tax Deduction

Legal fees spent by a party who successfully receives support by court order are tax-deductible. This is true if the fees are spent on any of the following procedures:

1. Fees spent to enforce an existing order for child support or spousal support
2. Fees spent to vary an existing order for child or spousal support;
3. Fees spent to defend a reduction of child support or spousal support

If your fees paid fall into one of the categories listed, you are able to claim them as a deduction in the year that they are paid.

Understanding the Basics of Tax Deductible Legal Fees

If you brought a motion forward for child support in October 2017 and successfully obtained an order for child support you would be able to claim your legal fees for that motion on your 2017 taxes.

If you receive a costs award from the court for being successful in your claim for support and the other party pays them.

The amount of the cost award must be deducted from the amount paid in legal fees before they are reported on your income tax return.

If you pay the fees in one year, but receive payment for a costs award in the next year, the costs would no longer be deducted from the fees but included as income on your tax return.

Legal Fees CRA Deductibility

Legal fees spent by a party who becomes responsible for paying support are not deductible under any circumstances. This includes the legal expenses incurred to reduce support payments.

Also if they were incurred to contest applications for support to be increased.

The above is general information regarding the tax treatment of legal fees. Lawyers are unable to provide you with tax advice when filing your income tax return.

If you have questions about adding your legal fees to your return, make sure to speak to a financial advisor.

They will be able to give you advice in relation to your specific circumstances and whether your costs would be deductible. For all other issues related to your family law matter, speak to us.

We can connect you with a law firm that would be happy to answer any questions you may have about family law.

Tax and Family Law

You’ve come to terms with what items you are keeping and what your ex is taking; the family home is sold and the money is with the real estate lawyer waiting to be paid out.

You’ve gone through your assets and have a proposal ready to go to finish your property division once and for all. But have you taken the time to check on your penalties and tax implications?

Most people are in a rush to get their divorce or separation dealt with as soon as possible. They often don’t want to think about the specific details surrounding what their property division will look like.

Types of Legal Fees Eligible for Tax Deductions

They just want to get it done as soon as possible. This can have a huge impact on their personal finances at year-end, or even after they sign the agreement to pay out what they think they should.

Their bank informs them that they cannot process the payment to their ex.

Investments, long-term savings accounts, pensions, property holdings and even personal business holdings can all have taxes or penalties attached to them.

They can become active when you try to transfer them to your ex-spouse. RRSPs are the ones most people are aware of.

Money is taken out of an RRSP

Whenever money is taken out of an RRSP, there is automatically a certain amount of tax that is owed on the withdrawal amount.

Other investments that are supposed to be locked in for extended periods of time can also have tax-related complications attached to them.

Even worse can be penalties that the specific investment institution will claim against you for removing the funds prior to the maturity date of the investment.

In order to protect your property and make sure that you are not signing up for a division of property that you can’t afford, you need to take the time to discuss your property holdings with both your accountant and your lawyer.

These professionals can help guide you through what your actual cash value is at the time of your separation.

Signing off on documents

This is important so you are not signing off on documents that leave you with less than half of your personal holdings.

Are you curious about legal fees and taxes? It’s that time of year again when everyone is trying to maximize their tax breaks.

If you’ve been involved in family law litigation you should discuss whether or not you have any sort of tax breaks or benefits that may have resulted or changed from your case should be claimed.

You should talk to both your accountant and your attorney about these potential tax breaks as each individual case may vary as to what tax breaks are available.

Navigating the IRS Rules on Legal Fee Deductions

The most common tax issue in family law is for those paying spousal support. You and your ex are required to claim spousal support in your annual taxes.

This is because the government views it as a sort of wage payment. The party paying will receive a tax break. The party receiving is likely to have to pay a portion of the tax.

This would depend on the amount depending on their annual income.

Keep in mind that this only comes into effect when your spousal support is being paid in monthly installments. It will be applicable if there is a one-time payout of spousal support.

Legal Fees and Taxes

Have you seen a change in the custody of your children? Are you paying a portion of the daycare expenses for your children?

This may result in tax breaks for both yourself and your ex. You will need to determine who is claiming which child on their tax returns.

There are additional tax credits available to those parents who are claiming a dependent child.

There are also government incentive programs that sometimes provide additional tax breaks for active families and certain activities.

You need to make sure that only one of either yourself or your ex is claiming these on your taxes as a double claimed amount is likely to end in an audit of both your taxes and those of your ex-spouse.

In some cases, you can attempt to claim your total annual legal fees in your tax return if you have been forced to deal with issues of support variation or enforcement.

Strategies for Maximizing Deductions on Your Legal Expenses

That being said the Canadian Revenue Agency has very strict guidelines regarding claiming legal fees or debts owing for legal fees.

Are you curious about legal fees and taxes? It’s that time of year again when everyone is trying to maximize their tax breaks. If you’ve been involved in family law litigation you should discuss whether or not you have any sort of tax breaks or benefits that may have resulted or changed from your case should be claimed.

You should talk to both your accountant and a lawyer about these potential tax breaks as each individual case may vary as to what tax breaks are available.

Common Mistakes to Avoid When Claiming Legal Fee Deductions

The most common tax issue in family law is for those paying spousal support. You and your ex are required to claim spousal support in your annual taxes. This is because the government views it as a sort of wage payment. The party paying will receive a tax break. The party receiving is likely to have to pay a portion of the tax.

This would depend on the amount depending on their annual income. Keep in mind that this only comes into effect when your spousal support is being paid in monthly installments. It will be applicable if there is a one-time payout of spousal support.

Legal Fees and Taxes

Have you seen a change in the custody of your children? Are you paying a portion of the daycare expenses for your children? This may result in tax breaks for both yourself and your ex. You will need to determine who is claiming which child on their tax returns as there are additional tax credits available to those parents who are claiming a dependent child.

There are also government incentive programs that sometimes provide additional tax breaks for active families and certain activities however you need to make sure that only one of either yourself or your ex is claiming these on your taxes as a double claimed amount is likely to end in an audit of both your taxes and those of your ex-spouse.

Documentation and Record-Keeping: Proof for Every Penny Deducted

In some cases, you can attempt to claim your total annual legal fees in your tax return if you have been forced to deal with issues of support variation or enforcement.

That being said the Canadian Revenue Agency has very strict guidelines regarding claiming legal fees or debts owing for legal fees so you should always discuss these issues with your lawyer and accountant before blindly claiming them on your tax return.

With tax season approaching, I thought I might share some of the tax issues that can arise during separations and divorce. Most tax issues arise in family law as a result of the division of family property.

Your family lawyer should advise you that there may be a tax issue that will arise from your separation, at which point you should consult a tax expert.

Taxes during divorce

Registered vs. Non-Registered Assets: When dividing the assets that have accumulated over the course of a relationship, couples are confronted with decisions about who will keep which assets.

If a couple owns a house and some RRSPs, it will often make sense for one party to remain in the house and buy out the other party’s interest as well as let the other party keep the RRSPs (this assumes the value of one-half of the house is greater than the value of the RRSPs).

When making decisions like this, care should be taken to consider whether the RRSPs will be used in retirement, or used prior to that by the party who keeps them.

If it is likely they will be used beforehand (to purchase a new house, for instance) consider the tax consequences of withdrawing the funds from the plan and advise the lawyer to prepare the separation agreement accordingly – a different division of assets could make more sense.

Note that funds from RRSPs can be transferred from one spouse to another by way of a tax-free rollover, so if one party has an RRSP worth more than the other party, the RRSPs can be equalized as part of the terms of the divorce.

Corporations: Shares in corporations owned by a spouse will usually be considered family property and will thus be subject to division upon separation. Valuing the shares or portion of the shares that will be considered family property is best done by a business valuation professional.

Income Tax Act

The simplest way to deal with shares in a corporation that one party owns or operates is to transfer all the shares to the party who will continue to own or operate the corporation and have that party compensate the other party out of the remaining family assets.

A tax expert should again be consulted here, as the parties should consider the impact of a capital gain (or loss) realization as part of this transfer.

If there are not enough remaining family assets to accomplish this, then matters can become more complicated.

Spouses are related parties as defined by the Income Tax Act, so in cases like these, they are permitted to divide the corporation into two corporations by way of what is called a “butterfly” reorganization.

After this procedure is performed, each spouse should own one corporation and the assets of the original corporation will have been divided between them.

Legal Fees and Taxes

Sometimes spouses will opt to hold onto the shares in a corporation owned or operated by their former spouse. I do not recommend this approach, as continuing to be involved in the business of one’s former spouse can involve unpleasant and expensive supervision of the activities of the business.

Support Payments: While child support payments are not deductible for the payor or taxable for the recipient, periodic spousal support payments are.

While spouses are separating, certain expenses usually need to continue being paid and interim support arrangements are often put into place. There is often a temptation to agree that the payor spouse pays some expenses in lieu of making actual spousal support payments to the recipient.

The Impact of Legal Fee Deductions on Your Overall Tax Liability

Such arrangements can have negative tax consequences, as the CRA will likely not interpret these arrangements as meeting their definition of tax-deductible spousal support payments, even if the separating parties agree to treat them as such.

In short: the greater the amount and variety of assets that two spouses have when separating, the greater the need for tax advice when considering the terms of separation.

While most family lawyers are familiar enough with tax law to know when there is an issue, family lawyers are not tax experts. It is important to have a tax professional available to provide advice to both you and your lawyer when separating.

If you need to speak to a lawyer about legal fees and taxes, contact us. We can connect you with one.

How to Save on Taxes by Deducting Your Legal Fees

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