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 their 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:
1. Fees spent in relation to a claim for custody of the children;
2. Fees spent to obtain a divorce or negotiate a separation agreement;
3. Fees spent to establish a right to spousal support after divorce; and
4. 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 to fall into one of the categories listed, you are able to claim them as a deduction in the year that they are paid.
For example, 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.
Alternatively, 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 if the legal expenses are 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 into 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.
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 tax 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.
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 where 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 have 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.
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.
Finally, 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.
Who Is Responsible For The Income Tax Returns?
You should always discuss these issues with your attorney and accountant before blindly claiming them on your tax return.
In most cases, when determining income for child support in accordance with the Federal Child Support Guidelines, an applicant simply needs to take the income from their spouse’s most recent income tax return, look at the Child Support Table for their province, and find the correlating amount of child support for that income based on the number of children.
However, where the applying parent believes that the paying parent’s income tax return does not accurately reflect their actual income, they may ask the court to make an order that the paying parent’s income is a different value based on their evidence. The question is, how is the proper income determined if you don’t use the paying parent’s income tax returns?
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Legal Fees Tax
First, the applying parent should be aware that it is their responsibility to prove that the paying parent’s income is different than what is reported on their income tax returns.
This can be shown through paystubs, deposits into bank accounts, corporate income statements etc.
Second, once it is shown that the income tax return is not a fair indicator of the paying parent’s income, the next step is to determine what income is appropriate.
The court may use a previous year’s income to estimate the current income of the paying parent if they had an unusually poor or successful year the year before.
The judge may average the last three years of income reported on the paying parent’s income tax returns if their income varies widely per year.
The court may include in the parent’s income all or part of the pre-tax income of a corporation in which the parent is a shareholder, director or officer and adjust pre-tax corporate income to add back salaries, wages, or management fees to non-arm’s length parties.
Family Lawyer Services
The Importance of Documenting Child Support Payments
You have promptly attended to paying your child support payment on time and in accordance with the Federal Child Support Guidelines.
You likely assume that your responsibility ends there. However, there is one extra step that all parents paying child support should take.
This occurs after making their child support payments and that is ensuring that they have documented the payment.
Documenting your child support payment can take many forms. It depends on how you provide child support to the other parent. When it comes to base child support, you can track your payments in a few different ways.
First, if you pay through the Family Responsibility Office. A record will be created through their program. Second, if you pay your spouse directly you can choose to make a payment with a paper trail.
Two common ways are through cheques and e-mail money transfer.
Have questions about determining income for child support?
If you write cheques each month, ensure that you put “[Month] Child Support” in the memo line. Include the month for which the payment will apply.
If you do e-mail money transfers, make sure that you put “[Month] Child Support Payment” in the Message Box. Print off a copy of the transaction and confirmation emails from the bank that the payment was received.
If you pay your spouse directly with cash make sure to have your spouse sign a receipt stating the date. You will also need to make sure the amount of child support that was received is documented.
Finally, the month that the child support payment will cover should be included. Then make sure that they sign the receipt to acknowledge they received payment.
Examination of the Child’s Circumstances
In Ontario, if the child is over the age of 18 and continues to be enrolled in school the obligation to continue to pay child support generally continues until the first post-secondary education degree is completed.
And sometimes, child support can even be payable through additional degrees.
To determine whether a child should be supported through a second degree the court will examine any relevant factors, such as the financial standing of the parents, the child’s academic performance, the child’s career goals, and the family’s expectations for education (usually the expectations prior to separation).
Whether child support will be payable requires an examination of the child’s circumstances and their ability to support themselves independently.
Have questions about whether child support is still payable for a child over the age of majority? Speak to a family law lawyer.
Author: Alistair Vigier