Divorce: legal fees incurred to split assets may be capitalized

In a recent decision, Kondor v. The Queen (2014 TCC 303) the taxpayer/husband spent approximately $12,000 in legal fees to a divorce lawyer in dividing property (mainly private company shares) with his former spouse. Notably, most of the fees related to delay tactics in stretching out for 3.5 years the negotiations with his former spouse.  The delay was apparently necessary because the company - DPX Capital Inc. - invested in risky securities and was highly leveraged.  Withdrawing funds (or presumably, selling shares) too quickly might negatively impact the value of the shares and the company's margin position, or so it was argued.  Under these circumstances, the taxpayer claimed the fees were incurred to earn income from the business.  The Court agreed that the legal fees protected the value of the taxpayer's shares and therefore were incurred to gain or produce income from property.  This was the case, despite that the taxpayer was a mere shareholder and not actually carrying on the company's business.  Ultimately though, the Court held that the expenditures were on capital account.

This conclusion is consistent with an earlier decision (Muggli v. The Queen) - referred to in the decision, but arguably takes the Court's reasoning in that decision one step further.  That case also dealt with legal fees incurred in relation to division of assets on divorce - specifically, farm property.  Both decisions suggest that legal fees incurred to preserve ownership and income-producing potential of shares are capital outlays. Pursuant to the Kondor case, fees paid by a shareholder (not the principal or owner/operator) to a divorce lawyer can be capitalized. Kondor was heard under the Informal procedure at the Tax Court of Canada and therefore does not form legal precedent.   Nevertheless, it provides insight into current judicial analysis, and a possible indication of how the Court might rule on a similar matter in the future.