Tax Deductions And Family Law: Two things you might know, two things you may not

Family Law

It’s tax time again, and if you’re a family law litigant, or were last tax year, you probably have a lot on your mind.  Family law litigation can be stressful and expensive, which in turn can add further stress.  There are a few ways to reduce that expense, or at least make it easier.

If you’re involved in a family law case, you probably know that monthly spousal support is tax deductible to the payor and taxable in the hands of the recipient, just like your RRSP contributions (for a payor)—don’t forget to declare it, but remember that you need a court order or written agreement for the Canada Revenue Agency (CRA) to accept it.

If you’re paying spousal support, you may also be aware that you can fill out a T1213 Source Deduction Form  to decrease the amount that gets deducted from your paycheque at source, like an RRSP deduction, periodically, rather than having to wait.  For example, if you earn $120,000 gross, but are paying $20,000 in spousal support, you can file this form to make sure you only get taxes taken off as if you’re earning $100,000, which means more cash in your hands on a monthly basis.  This means no big refund in April, but it also means less of an interim cash crunch.  Otherwise, you’re essentially lending the government money for a year—and it’s money that you can probably use.

Likewise, if you’re a recipient of spousal support, you can indicate additional amounts that you’d like taken off on your TD1. While less advantageous than filling out a form for a reduction in taxes for a payor of spousal support (doesn’t help your cash flow, and it’s the reverse of the payor’s situation where it’s kind of like an interest-free loan for a year, from the government), it may provide some assistance if you think you may have difficulty budgeting and would rather just have the extra money deducted at source on a monthly basis rather than risking a bill in April that you may not have budgeted for.

What you may be less aware of is that legal fees for establishing, seeking an increase, or defending against a reduction of support are tax deductible.  This didn’t use to be the case for spousal support, but has been for a while now.  A letter from your lawyer indicating how much you paid last year in legal fees, and how much of that was for one of those purposes, can allow you to deduct that amount on your T1—so you do get an additional something back for your legal fees.

Note that, if you own a company, and there are expenses related to the division of that company, it’s possible that those fees may also be deductible for your company (though not on your personal return) as they may be funds paid in order to help keep the business intact.

Finally, while most of those legal fees are for recipients of support, if you have care of a child between 40-60% of the time, even though you may not be the one receiving a monthly cheque, you may actually qualify as a recipient if there is an off-set under s. 9 of the Federal Child Support Guidelines, and thus, you may still be eligible to claim a deduction for your legal fees even if you’re the one writing a child support cheque on a monthly basis, because technically, as the recipient of an off-set, you are also in receipt of child support.  For example, if you should be paying $900 per month in child support based on your income, but s. 9 applies and so the other person owes you $300 per month, resulting in a payment to them of $600 per month, you can still claim legal fees related to establishing, increasing, or defending that offset.

Please contact a Family Law lawyer for more information.