Spousal Support - No Court Order/No Agreement & Legal Fees

My client received $65K in support payments from separated spouse during the year. This client also spent $30K in legal fees relating to spousal support (lawyer provided tax letter).

  1. Without a court order/agreement the receiver is not obligated to report this as income (as the payer is not allowed to deduct).

  2. Legal fees pertaining to spousal support are deductible in the year incurred.

Are both those statements true?

You appear to be assuming that the facts are different to what they likely are.

If the individual is refusing to report taxable income, you should decline the tax preparation engagement, so as to protect yourself against legal liability.

Support payments - Canada.ca Check this out. It will help.

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I’m not assuming anything about facts as they. I’m not sure I understand you - was just asking the community, if both those statements are true…

They’re both true statements, generally, but depending on when an agreement gets signed, the support could end up being taxable. I should mention that the legal fees of the recipient related to spousal support are deductible.

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Handing over $65,000 without an agreement?

I don’t think that the lawyer would opine that in writing…

No good trying to solve a different problem without facts in writing.

Check out the link I gave you. I think you will find your answer there.

Yes, thank you. I’m interested, I guess, knowing from the community, their experience with CRA if the payer claimed the deduction before a court order/agreement…

Your client is the recipient, and therefore what the payor does is largely irrelevant to your client.

Your client’s reporting of income is as S56(1)(b) and S56.1

Unless your client’s lawyer puts it IN WRITING on his letterhead (so you can keep a copy in your files) that the $65,000 was received
in the the COMPLETE ABSENCE OF “an order or agreement, or any variation thereof”,
you could be associating yourself with a non-reporting of income problem.

Joe, you made your point - thank you

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“My client received $65K in support payments…”
.

For reference:

"56 (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year…
… (b) the total of all amounts each of which is an amount determined by the formula A - (B + C) where A is the total of all amounts each of which is a support amount received … "

“56.1 (1) For the purposes of paragraph 56(1)(b) and subsection 118(5), where an order or agreement, or any variation thereof,
… (b) when paid, is deemed to have been paid to and received by the taxpayer…”

On the surface, legal fees can be deducted from taxable income. No income, no fees.

If you go to objhorsts link above it does state that legal fees related to establishing or collecting support payments are not deductible.

I haven’t seen the link but I’m pretty sure that CRA does allow the support recipient to claim legal (and accounting) expenses related to collecting spousal support. The Income Tax Act doesn’t allow this deduction. It’s an administrative policy by CRA. The payor is not allowed this deduction (for reasons unknown). The legal fees to establish the right to support are not deductible.

.

Not allowed in the case of this recipient, who apparently thinks that for tax purposes it is a spontaneous free gift/donation without any sort of agreement or variation thereof, and is not support, even though they appear to have told the tax preparer that it is in fact support…

Yes, I agree that an agreement, even interim, is a must.

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-23200-other-deductions/line-23200-legal-fees.html

You cannot claim legal fees you incurred to get a separation or divorce or to establish custody of or visitation arrangements for a child. For more information, see Guide P102, Support Payments.