The Power of Perspectives

The Canadian Bar Association

Kim Covert

Eligible dependents: Share the support, share the tax credit

April 9 2018 9 April 2018

 

It’s time for tax law to join the 21st century when it comes to family breakdowns.

Gone are the days when separation and divorce automatically meant children stayed with one parent and might see the other on the weekends. These days more and more families choose to share custody, yet the CRA doesn’t see that as an option when it comes to applying the tax laws.

When a child lives mostly with one parent, the Family Law Section says in a submission to the Finance Minister, Federal Child Support Guidelines require only one parent to pay child support, and only the recipient of the support may claim the eligible dependent tax credit for the child.

When the child lives with both parents, the guidelines require both parents to pay support. For convenience, most families adopt an informal approach, where the higher-earning parent subtracts the lower amount of support payable from the higher amount, and pays only the difference, instead of both parents having to exchange the exact amounts of support payable.

Parents in this situation may also agree to share the eligible dependent tax credit for their children, but the Tax Court of Canada has held that if only one parent pays, only that parent may claim the credit – even if they are paying only the difference of a mutual exchange – which frustrates the intentions of the parents and also contradicts information on the Revenue Canada website.

The Tax Court’s recent decision in Harder found a mandatory requirement in the Income Tax Act that parents pay each other the amount reflected in the court order, and said that a separation agreement to the effect that support payments will be set off is insufficient documentary evidence to allow both parents to claim the tax credit.

“This interpretation … means that many families cannot follow the terms of existing agreements or orders, and run significant risk of financial consequences if they are audited,” the submission says. “Parents would instead need to actually exchange the full amount of their respective support payments and keep a record of each payment for both to claim the eligible dependent tax credit.”

The decisions create unfairness between different kinds of separated families, the letter says. They can also be problematic in cases where support is an issue – say when the low-income parent dutifully pays the support and but does not receive reciprocal payments from the higher-income parent.

“Shared parenting is increasingly prevalent across Canada,” the Section says, and urges the government to demonstrate its support for families by amending the Income Tax Act to facilitate the set-off approach and allowing both parents to claim the eligible dependent tax credit.

“In our view, this is essential to ensure families avoid the need to renegotiate or relitigate these issues, as well as the cost, stress and uncertainty inherent in those processes.”

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