Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Whether position in paragraphs 17 and 18 of IT-99R5 regarding legal fees to establish child support constitutes a change in position, supportable in law, or simply a clarification of the previous state of the law.
Position: Constitutes a change in position as a result of a change in case law.
Reasons: Changes in IT-99R5 were brought as a result of a series of court decisions, rendered under the informal procedure of the Tax Court of Canada, reversing prior jurisprudence on the issue of whether a divorce established a new right for maintenance. The new position in IT-99R5 is therefore a change in position and not merely a clarification. Furthermore, prior position was supported by binding case law.
August 30, 2001
Ms. Carole Grant HEADQUARTERS
Manager Patrick Massicotte
Ministerial Correspondence Division 957-9232
Attention: Jennifer Gilmour
2001-009791
Legal Fees - XXXXXXXXXX
This is response to your memo of August 22, 2001 wherein you requested our assistance in addressing XXXXXXXXXX comments in her letter of June 28, 2001 to XXXXXXXXXX regarding the deductibility of legal fees incurred to establish child support orders.
XXXXXXXXXX has taken issue with the fact that the change in position outlined in paragraphs 17 and 18 of Interpretation Bulletin IT-99R5, as announced on December 5, 2000, is only applied on a prospective basis to future assessments and reassessments. XXXXXXXXXX requests we reconsider our position based on XXXXXXXXXX further representations. She submits that her claim for a deduction in XXXXXXXXXX, in respect of legal fees incurred to obtain financial support for her children, was wrongfully denied at that time as, in her opinion, the decision of the Supreme Court of Canada in the case of Gladys (Geraldine) Evans v. Minister of National Revenue, 60 DTC 1047 is support for the proposition that such legal fees have always been deductible.
The role of the Canada Customs and Revenue Agency is to administer and enforce the Income Tax Act as passed by Parliament, and in accordance with relevant jurisprudence. As mentioned in our previous correspondence on the above issue (our file #2000-006157), the position formerly outlined in paragraph 17 of Interpretation Bulletin IT-99R5, indicating that legal costs incurred to establish the right to support amounts were not deductible (such as the costs of obtaining a support order under the Divorce Act), was supported in law by the decision of the Federal Court-Trial Division rendered on June 19, 1981 in the case of Her Majesty The Queen v. Dr. Beverley A. Burgess, 81 DTC 5192.
In that case, it was held that the legal fees were not paid by the taxpayer to earn income from an existing right, but were paid to acquire a new right to maintenance for the taxpayer and her children. The Federal Court concluded that the legal expenses were in the nature of capital and not deductible. In addition, Mr. Justice Cattanach did consider the decision of the Supreme Court of Canada in the Evans case to which XXXXXXXXXX refers to and distinguished it as follows:
"In the Evans case, the appellant had an existing right to the income and expended the legal fees to obtain payment of that income which was denied her. The suit was for income.
In the present case, the defendant's right to maintenance which arose on marriage ended with the divorce and her right to subsequent maintenance arose from the Court order.
The suit was for divorce and corollary thereto an award of maintenance. Therefore the legal expenses are in the nature of a capital expenditure, by bringing the right into being, rather than in the nature of a revenue expenditure to enforce payment of income from a right in being."
The Burgess decision in 1981 was therefore clear support in law for the position taken in respect of the deductibility of legal fees prior to the changes brought to paragraphs 17 and 18 of IT-99R5 in December 2000, and in particular when XXXXXXXXXX claimed a deduction in XXXXXXXXXX.
Arguably no longer supportable in law after the decision of the Tax Court of Canada in a number of cases heard under Informal Procedure (Kathy L. Wakeman v. Her Majesty The Queen, 95-2744(IT)I, Heather McColl v. Her Majesty The Queen, 2000-445(IT)I, Wendy Barbara Sol v. Her Majesty The Queen, 1999-4153(IT)I), as section 18.28 of the Tax Court of Canada Act provides that judgments rendered under the Informal Procedure have no precedential value, changes to the position in paragraphs 17 and 18 of Interpretation Bulletin IT-99R5 were nonetheless brought thereafter that were favourable to taxpayers in general.
Given the case law on the issue, the changes brought cannot be considered merely a clarification and cannot therefore be applied on a retroactive basis (unless, as explained in our previous memo, that a notice of objection has been filed or can still be filed in respect of the year). More specifically, in XXXXXXXXXX case, the rejection of the deduction claimed in XXXXXXXXXX for legal fees incurred to obtain maintenance cannot be considered an error in law as it was consistent with binding case law existing at that time (Burgess). As observed by XXXXXXXXXX, the fairness provisions cannot apply in such a situation to allow retroactive amendments to prior taxation years. While XXXXXXXXXX situation is unfortunate, we would note that changes in position that result from new developments in case law which are not favourable to taxpayers are also applied on a prospective basis and not on a retroactive basis.
Finally, XXXXXXXXXX refers to a letter we issued in November 1998, which stated that the changes brought to IT-99R5 were to reflect a clarification of our position, as opposed to a change in position, to support her request for a retroactive amendment to her XXXXXXXXXX taxation year. The opinion in that letter was subsequently reversed by letter #2001-006800 in which it is clearly stated that revised paragraphs 17 and 18 of IT-99R5 (Consolidated), as announced on December 5, 2000, constitute a change in position which can only be applied on a prospective basis, as indicated in the Notice at the end of IT-99R5 and in the Index to interpretation bulletins.
We trust these comments will be of assistance.
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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