Tax Court Rules on Deductibility of Legal Fees to Claim or Enforce Support

Ron Hooge, a respected Vancouver chartered accountant and business valuator with SmytheRatcliffe, has distributed a commentary on a recent Tax Court case, Sarophim v. Her Majesty the Queen, concerning the tax deductibility of legal fees incurred in relation to support payments to be made following separation.

The basic rule, as I had understood it, is that legal fees incurred to obtain or enforce a spousal or child support entitlement are tax deductible whereas legal fees incurred to defend a support claim are not. The taxpayer in Sarophim argued that this distinction was unconstitutional.

As Ron says in his commentary, the taxpayer lost:

"The Court found that it is now settled law that legal fees incurred by the payer of support (for example, to establish or increase, or decrease or terminate it) cannot be considered to have incurred for the purpose of earning income, and therefore not deductible. The Court referenced Interpretation Bulletin, IT-99R5, paragraph 21. 

"Except where there is a specific provision in the [Income Tax Act] dealing with legal or accounting fees, legal and accounting fees are deductible only to the extent that they 

a) are incurred for the purpose of gaining or producing income from business or property, and 

b) are not outlays of a capital nature."

Ron then quotes paragraphs 17 to 21 of the Interpretation Bulletin, which are indeed worth the effort to read if you can make it through the heavy legal prose. What the Interpretation Bulletin says is this:

1. Legal fees incurred to establish a right to spousal support are not deductible.
2. Legal fees incurred to establish a right to child support are deductible.
3. Legal fees incurred to obtain an increase in the amount of child support or spousal support paid are not deductible.
4. Legal fees incurred to enforce a right to child support or spousal support established in an order or agreement are deductible.

My thanks to Ron for his commentary and to Megan Ellis, QC for bringing it to my attention. My extra thanks to Kathleen Packard for helping me find and correct an error in this post.

More Family News from KTLA

In my 5 May 2012 post "If Only I Could Do It All Over Again: Hindsight is 20/20," I wrote about an article from Los Angeles-based KTLA Television on the revenge of a jilted girlfriend which, sadly, turned out to be a hoax. I also mentioned the "disturbing family-related news" offered by KTLA.

I happened by KTLA's website again today, and they have managed to maintain an even keel on their family news reportage. Here are the stories you'll find under the Popular Stories banner today:

• Man Chops Off Daughter's Head for 'Indecent Behavior'
• Baby Dies After Being Fed Vodka And Baby Formula
• Mothers Brawl at South L.A. Preschool Graduation
• Children Left Bound, Blindfolded in Walmart Parking Lot
• Parents Track Down Daughter's Pimp, Kill Him

Holy cow. But don't let these depressing stories get you down. For something lighter, scroll down a bit and check out their photo gallery, "Adorable Cats Wearing Fruit Hats."

Effective Date Announced for Family Law Act

The Ministry of Justice has announced that the new Family Law Act will come fully into force on 18 March 2013. Mark your calendars!

Among other things, the coming-into-force date means that a persons who fall within the act's definition of "spouse" in s. 3 will be entitled to bring an application under the new act for spousal support or the division of property as long as:

1. married spouses were divorced or had their marriage annulled on or after 18 March 2011, or
2. unmarried spouses separated on or after 18 March 2011.

The provisions for these time limits can be found at s. 198.

Update: 20 June 2012

In an email distributed today, the Attorney General writes:

"The implementation date has been set for early 2013 with a number of considerations in mind. 
It will allow the Ministry of Justice sufficient time to make the necessary systems changes.  Over the next several months, the regulations required under the Act will be finalized.  And, perhaps most importantly, we want to allow legal practitioners and other professionals who provide support to families dealing with separation and divorce to familiarize themselves with the broad scope of changes before the Act comes into force. 

"In addition to the implementation date, the necessary changes have also now been made to the Supreme Court and Provincial Court family rules.  These changes, which will also come into force March 18, 2013, will ensure court processes are consistent with the new family law changes."

The Attorney General also announced that the Provincial Court (Family) Rules will be revised after the coming-into-force of the Family Law Act, which, given her announcement that the amendments necessary to accommodate the new act are ready to go, seems to suggest that a broader reform of that court's rules is also in the works:

"In addition to the amended family rules announced today, I can confirm that the Provincial Court of British Columbia intends to proceed, in conjunction with the Ministry of Justice, with a further phase of Provincial Court family rules amendments following the coming into force of the new Act."

Supreme Court Releases Decision on Child Vaccination

The Supreme Court has just released its decision in the case of M.J.T. v. D.M.D. What makes this decision especially interesting is that, in addition to the usual family law issues, the court was asked to wade into the vaccination debate in the context of the parties' five year old child.

The mother was opposed to the child being vaccinated and had successfully preserved the child from being vaccinated to the date of trial. The father subscribed to a different view. The judge tactfully described the parties' views thusly:

"[84] ... [The father] arranged a meeting for himself and [the mother] with Dr. Simon Dobson, a pediatrician at B.C. Children's Hospital with extensive experience in pediatric immunization. [The mother] asked Dr. Dobson whether he could guarantee that [the child] would not suffer any adverse reaction to the pediatric vaccinations given as part of the immunization program at the hospital. Dr. Dobson advised that no physician could give such a guarantee. Accordingly, [the mother] refused to consider having [the child] vaccinated against any of the common childhood infectious diseases."

At trial, witnesses were called to give evidence about the benefits and risks of vaccinations, and the mother's concerns were more fully developed. She was concerned about the health risks of aluminum adjuvants commonly used in vaccines, the possibility of a connection between vaccination and autism, and vaccinations as a cause of certain fevers and convulsions she and her siblings has suffered as children.

The court accepted the evidence of the father's expert witness, Dr. David Scheifele of UBC and BC Children's Hospital, who addressed the mother's concerns as follows:

"[95] In response to [the mother's] questioning, Dr. Scheifele explained that aluminum adjuvants are important components of some vaccines because they enhance the immune response to the vaccine. He noted that researchers at the United States Food and Drug Administration recently modelled carefully the amounts of aluminum in infants after infant vaccinations using the best available human data. They found that the amount of aluminum in infants’ bodies from vaccines and diet was significantly less than the levels determined to be safe. The researchers concluded that episodic exposures to vaccines containing aluminum adjuvants continue to present an extremely low risk to infants, and that the benefits of using those vaccines outweighed any theoretical risks. 

"[96] [The mother] asked Dr. Scheifele whether he could guarantee that [the child] would not suffer any adverse reaction to any of the vaccinations recommended for children. Dr. Scheifele was clear in his response: medical science can never offer such a guarantee. He reiterated his opinion that the risk of [the child] suffering an adverse reaction is extremely low, and the benefits to [the child] of receiving the vaccinations significantly outweighed the theoretical risks.

"[97] Addressing [the mother's] concern that vaccinations may cause autism, Dr. Scheifele said that studies have convincingly shown that autism does not result from immunization. In any event, autism becomes evident during early childhood; this is no longer a concern for [the child], who is developmentally normal. ... 

"[99] Dr. Scheifele pointed out that at the age of 5, [the child] has passed beyond the peak risk period for benign febrile convulsions without showing any indication of proneness to seizures. The colds, ear infections and cough illnesses he had already experienced did not trigger seizures, thus it was unlikely that vaccination-related fevers would do so. Dr. Scheifele went on to say that in the largest study to date (Huang WT et al., Pediatrics 2010), no increased risk of febrile seizures was detected after immunization with modern pertussis vaccines administered to young children."

The expert concluded:

"[100] After reviewing all of the information provided to him by [the mother] and [the father], Dr. Scheifele stated that he would not hesitate to immunize [the child], who is a normal, healthy child. According to Dr. Scheifele, nothing in [the child's] personal or family history poses a contraindication to routine childhood immunizations or presents any greater risk than that faced by other healthy children. In fact, the risk of giving vaccines at [the child's] age — 5 years — is lower than with vaccinations in the first two years of life."

The court concluded that both parents were "devoted, loving and considered parents," although "neither understood the eccentricities of the other when they decided to marry," and ordered that the parties would have joint custody and joint guardianship of the child, with equal decision-making authority. On the contentious vaccination issue, however, the court held that:

"[176] .... I accept Dr. Scheifele’s opinion that the benefits of immunization to [the child] significantly outweigh any risk of side effects. For that reason, I conclude that [the father] is entitled to make the decision concerning [the child's] immunization."

Guest Column: "Protect the Children of 'Baby Mommas'"

by Brenda Shapiro, Esq.

When a young girlfriend of a professional athlete, musician or other celebrity gives birth, she joins the growing number of “baby mommas” in South Florida and the nation. While these women in their teens or early 20s come from very different social and economic backgrounds, they would all like their children to have a secure financial future.

The fathers have different goals. Even if he has a good relationship with the baby momma and contributes to his child's care. Fathers live in the fast lane focused on career and endorsement contracts. They buy every boy toy imaginable including cars, jewelry, multiple residences, boats, planes, et al. spending their new wealth freely.

For most of these fathers, marriage to the woman who gave birth to their child is unnecessary. They hope to avoid a host of legal and financial complications. And there are other fathers who try to distance themselves from the situation, forcing the baby momma to file a paternity suit to establish her child’s rights.

Today, a professional athlete might have a three-year contract for $5 million, $10 million or more per year. That's a big chunk of change for a young man in his early twenties whose life has suddenly changed. He is in the media spotlight and constantly being told he's a star. He is pursued by money managers, who promise to manage the financial and investment side of his life, who may or may not have his interests at heart.

Few professional athletes think ahead about what will happen to their money after their peak earning years come to an end. Only a handful of pros like Magic Johnson and Shaquille O’Neal or celluloid stars like Brad Pitt have been able to harness their skills and celebrity status to find success in the business world. Yes. Angelina Jolie is a baby momma.

So, what does short-term earning curve mean financially for baby mommas and their children?

First, the new mother is entitled to child support, based on guidelines established by state statute. Those guidelines are designed to meet the immediate needs of the child – not the mother. And unless the child requires special medical or developmental care, the monthly cost of providing food, shelter, clothing and day care is going to be relatively small compared to the father's high income.

Paying child support usually poses no immediate problem for the high-earning father – at least until the contract comes to an end. Then the financial picture will probably change dramatically. There may be no money left for the child, since the flow of funds has been drastically reduced and the many assets are now liabilities without cash flow to pay the debt.

In light of this all-too-familiar situation, statutes should be revised to address "Good Fortune" child support. Good fortune child support recognizes the long accepted principle that children who are dependent on their parents should share in their parents' wealth. It does not require a lifestyle analysis. Instead of little league baseball or soccer, it allows the court to consider the special benefits available to the wealthy; little league baseball and soccer, swimming lessons, horse-back riding, ballet, music lessons, tennis lessons, private schooling, tutoring et al. It would create the opportunity to order irrevocable trust funds established for each child. The trust funds would be funded from the difference between reasonable child support and the statutory guidelines based upon the parents' net monthly income. An athlete earning millions a year will not notice the contributions needed to fund a college education or career training in the future. Placing the fund under the management of a disinterested third party, preferably a bank trust department selected by the parties or appointed by the court, can help assure that those dollars will be available as the child grows into adulthood.

Putting a court-ordered trust fund in place today provides the child of a baby momma with long-term financial security. Long after the father’s income disappears, those funds will be available to give his son or daughter a better opportunity in life. It's the right thing to do – for all parties.

About Brenda B. Shapiro, Esq.

Attorney Brenda B. Shapiro provides legal counsel to clients on family law matters, including prenuptial and postnuptial agreements, divorce, child custody, access and time-sharing, post-dissolution, domestic violence, and grandparents’ rights. She established the Law Offices of Brenda B. Shapiro, LLC in 1994, where she is managing partner. She is also a founding director of the Collaborative Family Law Institute. For more information, visit www.bbshapirolaw.com.

Removing Counsel and the "Possibility of Mischief"

In general, a lawyer can act for anyone willing to hire him or her, subject to one major exception: the existence of a conflict of interest. Under Chapter 6 of the Law Society's Professional Conduct Handbook, lawyers have a duty of undivided loyalty to each client and may not act against a former client. This means that if I have acted for Mr. Smith and Mr. Smith remarries, I cannot act for the new Mrs. Smith in the event she and Mr. Smith split up, and the court has the ability to remove a lawyer who is not just in but perceived to be in a conflict of interest.

In the unusual Supreme Court case of Svorinic v. Svorinic, the wife applied for an order that the husband's lawyer be restrained from acting for the husband, not because of a conflict of interest but because:

"a) [the lawyer] obtained confidential information about the respondent as a result of him representing her former husband ... in [her former husband's] family law action against [her] in the Provincial Court; 

"b) ... several of the issues in the said Provincial Court action are closely connected to the issues in this Supreme Court action; and 

"c) ... there is a risk that the confidential information will be used in this action, to the prejudice of the respondent."

In other words, there was no conflict of interest because the lawyer had previously acted for the wife, but because the lawyer had represented the wife's former husband he was alleged to have information about her that he wouldn't otherwise have had and was likely to use this information to the wife's disadvantage.

It probably didn't help that the lawyer had put the former husband on his list of witnesses for trial.

Quoting from an older case from the Supreme Court of Canada, MacDonald Estate v. Martin, the judge held that:

"[22] The court has inherent jurisdiction to make an order restraining a lawyer from continuing to act for a party to litigation. The purpose of this power is to prevent the 'possibility of mischief' occurring to the applicant, if the lawyer continues to represent the opposing party in the litigation. The applicant need only persuade the court that the 'possibility of mischief' exists, to justify the order. 

"[23] To establish the 'possibility of mischief', the applicant must persuade the court that two questions must be answered in the affirmative, namely:

1) Did the lawyer receive confidential information attributable to a solicitor and client relationship relevant to the matter at hand? 

2) [If so] Is there a risk that it will be used to the prejudice of the client?"

This is what the court said in MacDonald Estate, with the important bits in bold:

"In my opinion, once it is shown by the client that there existed a previous relationship which is sufficiently related to the retainer from which it is sought to remove the solicitor, the court should infer that confidential information was imparted unless the solicitor satisfies the court that no information was imparted which could be relevant. This will be a difficult burden to discharge. Not only must the court's degree of satisfaction be such that it would withstand the scrutiny of the reasonably informed member of the public that no such information passed, but the burden must be discharged without revealing the specifics of the privileged communication. ... 

"The second question is whether the confidential information will be misused. A lawyer who has relevant confidential information cannot act against his client or former client. In such a case the disqualification is automatic. No assurances or undertakings not to use the information will avail. The lawyer cannot compartmentalize his or her mind so as to screen out what has been gleaned from the client and what was acquired elsewhere. Furthermore, there would be a danger that the lawyer would avoid use of information acquired legitimately because it might be perceived to have come from the client. This would prevent the lawyer from adequately representing the new client. Moreover, the former client would feel at a disadvantage. Questions put in cross-examination about personal matters, for example, would create the uneasy feeling that they had their genesis in the previous relationship. 

"[After the fact] undertakings ... in affidavits without more are not acceptable. These can be expected in every case of this kind that comes before the court. It is no more than the lawyer saying 'trust me'. This puts the court in the invidious position of deciding which lawyers are to be trusted and which are not. Furthermore, even if the courts found this acceptable, the public is not likely to be satisfied without some additional guarantees that confidential information will under no circumstances be used. ..."

In other words, the mere fact that a lawyer has acted for a party allows the court to assume that the lawyer has confidential information, and the lawyer can't duck the problem simply by promising not to use the confidential information.

Naturally, the argument in Svorinic then turned to whether the information the lawyer had really was "confidential." I was not able to completely understand the lawyer's argument, but it appears that he claimed that there is no presumed confidentiality that attaches to protect information gathered in a Provincial Court proceeding. The court disposed of that argument rather quickly:

"[58] In British Columbia, there exists an implied undertaking to the court in civil actions that the parties and their lawyers will not use any documents or answers obtained from each other under the Rules of Court governing documentary and oral discovery, for any purpose outside the civil proceedings in which the discovery was obtained. ... The undertaking applies to all documents and information obtained by compulsion pursuant to the rules governing pre-trial discovery (which would include court-ordered discovery under a Rule of Court). Moreover, the documents and information so obtained are protected by the undertaking, whether or not they were confidential or incriminatory in nature. 

"[59] ... the implied undertaking applies to both the parties and their lawyers. Moreover, I can see no reason why the implied undertaking would not apply to parties and their lawyers in both civil and family proceedings in the Provincial Court. If that is a correct observation, then both Mr. Svorinic and [the former husband] are bound by the implied undertaking of confidentiality. They would be prohibited from exchanging with each other any documents or information obtained by them pursuant to the rules for pre-trial discovery or pursuant to a court order requiring disclosure. It is only documents and information obtained from the opposing party to the litigation which were acquired through the process of discovery under the Rules of Court, or by court order, that are subject to the undertaking."

In other words, the parties to a lawsuit and their lawyers are all under an obligation to keep information received in the litigation private and to not use the information except for the purposes of the litigation. This is a rather important point, and although most lawyers are familiar with the concept of litigation privilege, most clients are not and assume that the information gleaned in the course of litigation is free for public distribution by way of Tweets and Facebook posts. It isn't.

At the end of the day, the court in Svorinic held that the lawyer should be restrained from acting for the husband to prevent the possibility of mischief:

"[54] I infer from the facts which I have found that there is a risk that [the lawyer] would misuse some of the confidential information about the respondent that he acquired as a consequence of his retainer by [the former husband]. That means that there is a possibility that mischief will occur if [the lawyer] continues to represent the claimant. That is all that the applicant need establish on an application of this kind. 

"[55] In the result, the claimant’s right to counsel of his choice must give way to the need to maintain the high standards in the legal profession and the integrity of the justice system."

I would like to thank my friends and colleagues Stephanie Fabbro and Agnes Huang, both of whom are skilled family law counsel, for pointing this case out to me.

Lawyers' Magazine Publishes Rates Survey

Canadian Lawyer has published its 2012 survey of lawyers' fees (PDF), which includes reports on the rates charged for common family law activities, broken down by region and size of firm.

Court Services Suspends Hearing Day Fees in Supreme Court

The Law Society advises that the Court Services Branch of the Ministry of Justice — the benighted office responsible for running courts throughout the province — has suspended the processing of payments or issuance of invoices for hearing fees under the Supreme Court Civil Rules and Family Rules.

Hearing days fees are fees charged by the Supreme Court for trials. Under Appendix C, Schedule 1 of the Family Rules, hearing day fees are payable on a tariff which increases with the length of trial:

• nothing for each of the first 3 days;
• $500 per day for the 4th to the 10th days; and,
• $800 per day for 11th day and onwards.

The catch, however, is that the person responsible to pay these fees isn't the party who wins or loses or the person who is awarded their costs, it's the party who sets the action for trial! This can lead to some dickering and brinksmanship about who will wind up setting an action for trial.

The Branch's decision to stop collecting these fees arises out of the court's recent decision in Vilardell v. Dunham, In this case, the claimant had asked the court for an order that she be exempted from paying the hearing fees and, once the trial was done, the court heard her argument on the issue, with submissions by the Canadian Bar Association British Columbia and Trial Lawyers Association of British Columbia as intervenors. At the application, the issue was not whether the claimant could afford the fees (she could, she was a veterinary surgeon), but whether the rules' provisions for the fees were constitutional. This is the relief the claimant sought:

"(b)a declaration that the imposition of fees for the hearing of a trial infringes a right of access to justice and thereby offends the rule of law and is therefore inconsistent with the Canadian Constitution;
"(c) a declaration that the imposition of fees for the hearing of a trial infringes s. 96 of the Constitution Act, 1867 and is therefore unconstitutional;
"(d) a declaration that the imposition of fees for the hearing of a trial infringes s. 7 of the Charter and is not justified under s. 1 of the Charter;
"(e) a declaration that the imposition of fees for the hearing of a trial infringes s. 28 of the Charter by denying women the equal protection of s. 7 which denial is not justified under s. 1 of the Charter;"

I won't recite the court's analysis; it is masterful and deserves a thorough review rather than the hackneyed summary I could provide. At the end of the day, the court held that:

• access to justice is a fundamental constitutional right which may not be abrogated by Parliament or the provincial Legislature;
• the constitutional obligation of the provinces to administer justice does not not include the power to hinder the court's functioning;
• the hearing day fees imposed by the province are a barrier to access to justice; and,
• hearing day fees are unconstitutional.

According to the Law Society, "the Branch has been advised that the ruling is being appealed by government and a decision is pending regarding whether or not to file a motion to apply to the court for an order staying further proceedings." Stay tuned.

As I've said, the judgment is masterful. Here is my favourite passage, from paragraph 425:

"The court cannot fulfill its democratic function as an independent and impartial arbiter between government and the individual, or between individuals, if the government limits those who may come before the court by means of financial or procedural deterrents."