Claiming Legal Fees (Case Law) For Tax Deduction in Child Support Matters

[golf.fanatic]

Claim only what is paid or what is billed?

A bit of a different take on this. I know I can claim my legal expenses for establishing child support. I paid a retainer in later 2011 but wasn't billed for most of the services related to that retainer until 2012. I also received a bill for services provided in 2012 that I didn't pay until early 2013. So, can I claim only what I PAID in 2012 or for the services that I was billed?

Similarly, I understand that if I am awarded costs (trial in April) that I'll need to include that as income in my next taxes. But do I actually have to receive the costs from my ex before I need to include it? For example, if I'm awarded costs as $10,000 but don't ever see a dime from my ex, do I still have to include it as income in subsequent years taxes or only include as receive (e.g. $1000 received in 2013, $1000 in 2014 etc)? Thanks for any help!

[OhMy]

Ask your legal counsel to provide you with a letter outlining what your expenses are related to establishing child support, they will outline it all for you so you can input the tax deduction on your income tax.

I've never heard of costs awarded as being included as income. Costs awarded and paid towards establishing cs needs to be applied to the legal fees you incurred to establish cs though.

[golf.fanatic]

I thought I read somewhere that if you claimed the legal fees and then were awarded costs in court -costs that would go against those fees except for the fact you already paid them - then you have to report that at some point. Basically you can't get the tax credit for them and be reimbursed for them via a costs award. Now I'm confused!

[Mess]

Expenses should be counted during the period the services were performed regardless of how they are paid.

If you paid a retainer the previous year, you just had an asset and the law firm had a liability.

If you paid the following year, then you had a liability for services performed, it was still an expense for that year. Whether you owe the law firm, or paid with your credit card, you still incurred the expense.

As far as receiving costs, I am not certain how CRA prefers this, but I can find out on Monday. For now, I would suggest that if you claimed the expense in 2012 and received the costs award in 2013, you balance the books by declaring that award as income in 2013. This would only be for the amount you claimed as an expense.

[OhMy]

Thank you for clarifying that Mess.


Out of curiosity;
If the costs awarded were not only awarded towards establishing CS, but towards other issues or matters in court, how does one go about figuring out which portion of the costs awarded were attributed to establishing CS?

[Rioe]

I don't know anything about this legal and tax stuff, but I cannot believe that a costs award would be taxed as income! You paid your legal fees out of post-tax income, and just because you are being reimbursed doesn't make it income again. That would be like buying something from a store, then returning it and getting your money back and being taxed on the refund!

The only thing I can see that would be complicated would be refiling a past income tax return if you had claimed for legal fees on it. If the other side later paid your costs, then you would have to remove the claim and correct your return. And surely it would be after actual payment was received, not just the order, because as we all know, that doesn't guarantee payment.

[Mess]

Just to clarify this, Rioe, it is an issue because we claim the initial costs as a deduction against income, so no, the taxes have not been paid.

Imagine a gross income of $100k, and legal costs of $30k in 2012. We deduct the costs and pay tax on a net income of $70k.

The trial ended the last week of December. The judge gives the decision in January, or later. The costs are awarded in 2013.

We now have received a tax deduction for $30k, but have actually spent little or none of it.

The costs award must be added back into income. The only point I am unclear on, I vaguely recall a form to adjust expense deductions for a previous year. I am not sure if this would be the route, or if the CRA would rather the costs (that specifically applied to the intitial deduction) be treated as income in the year they are received.

[golf.fanatic]

Thanks for your messages Mess. Just one clarification, are your required to report the income for the costs award in the year awarded or as they are received? So from your example, judge awards costs of $30k in 2013 but you don't actually receive any payment from the other party toward those costs. Surely you wouldn't have to claim it as income???

[Mess]

If you were a business you would count the money when it was earned, not when it was paid. A comparison would also be your last paycheque for the year usually is issued in January, but the money is counted for December. That being said, CRA is not going to complain if you are using "cash accounting" and reporting it when received, as long as it is reported.

[wannabehappy1978]

asked my tax lady if I could claim legal costs in obtaining child support and she said no. its just a personal expense

[HappyMomma]

asked my tax lady if I could claim legal costs in obtaining child support and she said no. its just a personal expense

Get a new tax lady - she's wrong.

[wannabehappy1978]

plz explain ? didn't claim 2000 bucks

[HappyMomma]

plz explain ? didn't claim 2000 bucks

Did you read over this thread? Was there something different about your case that makes you ineligible?

[Links17]

I think in Canada only recipients can claim legal expenses...

[Links17]

for fees relating to custody, child support and spousal support...