Parents paying child support can get dependant tax credit denied

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Among the many many private non-refundable credit some taxpayers can declare on their private tax return is the “eligible dependant credit,” generally known as the “equivalent-to-spouse” quantity. The credit score is offered to a taxpayer who doesn’t have a partner or companion, however who lives with a dependent mother or father or grandparent, little one, grandchild, brother or sister who’s both beneath the age of 18 or is wholly depending on the taxpayer attributable to a bodily or psychological incapacity.

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For 2024, the dependant quantity is $15,705, which on the federal 15 per cent non-refundable tax credit score price is price $2,356. A parallel provincial credit score can be accessible and its worth will depend on which province you reside in. The credit score quantity is diminished dollar-for-dollar by the web revenue of the dependant, and should solely be claimed as soon as per family annually, by one particular person. About a million taxpayers claimed this credit score in 2021.

For folks who’re separated or divorced and nonetheless have minor youngsters dwelling at house, the entitlement to the credit score could be advanced, as it is going to rely on whether or not little one assist is being paid and to whom. Underneath the Revenue Tax Act, the credit score can’t be claimed by a taxpayer who pays little one assist to their former partner or companion. A latest case determined by the Tax Court docket in October handled the entitlement to the credit score.

The taxpayer and his now ex-spouse had separated in March 2016. The couple entered right into a written separation settlement in July 2016, which offered for equal shared custody of their two minor youngsters, with every mother or father having the youngsters for an equal variety of days over a repeating four-week cycle.

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When {couples} separate, the Federal Child Support Guidelines are used to legally decide the quantity of kid assist one mother or father should pay to the opposite mother or father to assist assist their youngsters. The rules work on the precept that each dad and mom ought to share the identical portion of their revenue with their youngsters as in the event that they lived collectively. The rules set out monthly child support amounts in a desk that makes use of the paying mother or father’s degree of revenue, and the variety of youngsters eligible for assist.

Within the case of fifty/50 custody, the kid assist is usually calculated for every mother or father, the decrease quantity is deducted from the upper, and the upper incomes mother or father pays the opposite mother or father the distinction. This is named “set-off” assist.

Underneath the phrases of this couple’s settlement, based mostly on the husband’s annual revenue of $55,000 and the spouse’s revenue of $36,500, the husband was to pay to his ex-wife, starting in September 2016, the kid guideline quantity of $289 monthly, “being an quantity calculated on the set-off of assist based mostly upon the respective revenue of the events.” Annually, monetary info was to be exchanged between spouses as to their respective incomes, and the assist for the next 12 months can be adjusted accordingly.

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The taxpayer argued that one cheque representing the set-off quantity was paid by him to his ex-spouse for “web comfort, i.e. to keep away from the inconvenience of sending cheques to one another.”

The Canada Revenue Agency denied the taxpayer’s declare for the dependant credit score for 2018 and future tax years. The taxpayer submitted a jointly-signed letter dated January 7, 2023 to the CRA saying that the couple has all the time had a mutually agreed shared 50/50 custody settlement for each youngsters, they agreed to every declare the dependant credit score with respect to a specific little one, and doing so “retains issues as equal as attainable between them financially.”

A previous resolution of the Federal Court of Appeal discovered that within the context of assist funds and the dependant credit score, the “idea of set-off distracts from the true difficulty which is whether or not or not (the taxpayer) is the one mother or father making a baby assist fee.”

In that case, the taxpayer paid month-to-month little one assist in an quantity that represented a set-off between what he and his former partner have been every required to contribute beneath the rules. Whereas their respective guideline incomes have been referenced within the court docket order, solely the taxpayer was directed to pay a assist quantity.

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That court docket thought-about the Supreme Court of Canada’s assertion that the underlying precept behind the rules is that spouses have a joint monetary obligation to assist their youngsters in accordance with their relative skills to take action. After figuring out their respective obligations to contribute beneath the rules, one mother or father could also be required to make little one assist funds to the opposite; nonetheless, “the set-off idea doesn’t rework the respective obligations into assist funds for income tax functions.”

Within the present case, the couple’s separation settlement solely required the taxpayer to pay little one assist. With respect to his ex-spouse, whereas her revenue was considered within the guideline calculation and the revenue quantity seems within the settlement, there isn’t a requirement within the settlement that she pay little one assist to the taxpayer based mostly on her guideline revenue.

Whereas the decide appreciated the taxpayer’s arguments, she famous that the case legislation and tax laws are clear in that they don’t allow the taxpayer to assert the dependant credit score since he was the only payor of kid assist.

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She did, nonetheless, encourage the taxpayer and his ex-spouse to think about updating the wording of their separation settlement to “replicate their said intentions for revenue tax functions,” which can permit him to reopen the previous ten years of tax returns and request reassessments to permit the credit score beneath a particular rule within the Tax Act designed for conditions when neither mother or father can in any other case declare the dependant credit score.

In 2008, the same case was delivered to Tax Court docket, wherein a taxpayer tried to argue that Canada’s tax legislation discriminates towards divorced dads like him, who share custody of their youngsters and pay little one assist to their former spouses. As a part of his divorce settlement, he and his ex-wife had agreed that every would declare the dependant credit score for considered one of their two daughters for whom they shared joint custody. However the CRA denied his declare as he was the only mother or father paying little one assist.

The decide in that case went on to elucidate that the quantity that the taxpayer was required to pay as little one assist beneath the rules already takes under consideration the truth that, as somebody who pays assist, he wouldn’t be entitled to assert the dependant credit score, and in consequence, his little one assist fee is lower than it will have been if he have been entitled to assert the credit score.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. Jamie.Golombek@cibc.com.

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