Easing the tax burden on divorcing families

Negotiating all of the emotional and practical implications of the dissolution of a marriage while trying to protect children as much as possible from the fallout is difficult enough without the Income Tax Act adding to the burden.

The CBA’s Family Law Section has written to Finance Canada to follow up on concerns it has raised previously, including the Income Tax Act’s failure to keep pace with changes in the way separating and divorcing couples are handling issues such as custody and child support.

An increasing number of children are part of families that have separated or divorced, and an increasing number of their parents share parenting on a more-or-less equal basis, the Section says in its letter. The question of who can claim the eligible dependent tax credit for a child for whom support is being paid in these shared parenting arrangements “remains the most difficult and intractable tax issues facing families going through a separation,” the Section says. “Differing communications from CRA and logistically impractical decisions from the Tax Court make this an issue consistently raised as problematic by lawyers and clients across Canada.”

In shared parenting arrangements, parents often work out an informal set-off approach to child support, rather than exchanging payments, and agree to share the tax credit. In its recent decision in Harder, the Tax Court requires parents to physically exchange funds for each to make an eligible dependent claim. “As the net amount of support paid remains the same, all that is accomplished is unduly complicating payments, whether direct or through Maintenance Enforcement Programs. It can also result in inequities when a Maintenance Enforcement Program may enforce against one parent but not the other.”

Also at issue is the amount of proof required by CRA from primary caregiving parents who want to collect the Canada Child Benefit. The Section says a court order or written separation agreement should be proof enough of the parenting situation. The issue is even more complex in shared parenting situations where neither parent is designated the primary caregiver.

The final issue raised in the letter is that only the recipient of child support can claim a tax deduction from legal fees paid to seek or obtain support. The person who pays the support can also incur legal fees but is unable to claim them on their taxes. “In both cases, payors and recipients are seeking a support order that will affect their incomes,” the Section says. “We see a fundamental unfairness in not allowing the payor of support to similarly deduct legal fees, regardless of the situation.”