Recently, there have been a series of family law cases in which judges have taken into account the impact of tax deductions when awarding costs. These cases have resulted in a reduced amount of costs being ordered because of the ability of the individual to deduct legal fees for obtaining spousal or child support. However, Canada Revenue Agency (CRA) has recently been contacted regarding this issue. CRA takes the position that if an individual deducts legal fees and then gets reimbursed in costs, those costs are treated as income for income tax purposes and must be included in the income of the individual receiving the costs in the year in which they are received.
None of the judges deciding these earlier cases considered the fact that costs indemnification will be treated as income.There is not a formal ruling from CRA but counsel and courts should be cautious about relying on these cases.