FAMILY LAW AND TAXES
When you settle a family law case you cannot ignore the tax aspects. Here are some highlights of some changes to income tax issues that will affect single parents, and a tax-related issue about which all single parents need to take careful notice.
Shared Custody – Benefits Entitlement
Prior to July 2011, only one person could receive the Canada Child Tax Benefit and the Universal Child Care Benefit each month, and the child component of the GST/HST credit each quarter, with respect to a qualified dependent. This created a problem for parents who share custody of a child. As of July 2011, legislation was amended to recognize both shared custody parents as "eligible individuals" in the same month. Now, two people are eligible to receive the Canada Child Tax Benefit, the Universal Child Care Benefit, and the GST/HST credit amounts, as long as they would each be eligible to receive amounts under the Canada Revenue Agency existing shared eligibility policy. This policy applies when a child is living more or less equally with two people who live separately. The benefits will be split equally between the two people, with each receiving one-half of each monthly installment. The child component of the GST/HST credit would also be shared equally - each individual will receive one-half of each quarterly installment. [For Government of Canada information re the Canada Child Tax Benefit see: http://www.cra-arc.gc.ca/bnfts/cctb/menu-eng.html. For government information re the Universal Child Care Benefit see: http://www.cra-arc.gc.ca/bnfts/uccb-puge/menu-eng.html. For government information re shared custody see: http://www.cra-arc.gc.ca/bnfts/cctb/fq_lgblty-eng.html]. It is important to note that shared custody arrangements must be spelled out in advance in the governing document be it a Separation Agreement or court order.
Single Parents - Universal Child Care Benefit
Another change was made to the Universal Child Care Benefit (UCCB) for single parents. The UCCB provides families with $100 per month for each child below six years of age. Prior to July 2011, in a two-parent family, the UCCB was included in the income of the lower-income spouse. In a single-parent family, however, the UCCB was included in the income of the single parent. The result was that single parents pay more tax on the UCCB, because the UCCB is taxed at his or her marginal tax rate. A single-parent family, earning the same income as a two-parent family, therefore paid more tax on the UCCB than the two-parent family.
As of July 2011, a single parent can choose to claim the benefit amount received in his/her own income; or, the UCCB can be included in the tax return of the dependant for whom an Eligible Dependant Credit is claimed. The single parent is also able to include the UCCB amount in the income of one of the children for whom the UCCB is paid, if the parent is not able to claim the Eligible Dependant Credit. [For Government of Canada information re Single Parents and the Universal Child Care Benefit see: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/rprtng-ncm/lns101-170/117-eng.html].
“Eligible Dependent” or “Equivalent-to-spouse” tax credit – a contentious issue
A married person may claim his/her lower income earning spouse as an “eligible dependant” and thus obtain a tax credit worth as much as $10,320. A separated or divorced person may claim a child as an “equivalent-to-spouse” and obtain a similar credit. However, if the divorced or separated couple do not agree in advance as to who will obtain the credit, then the Canada Revenue Agency will disallow both claimants. In effect, one divorced spouse can block the other from receiving the credit.
A Toronto lawyer brought a constitutional challenge to the equivalent-to-spouse tax credit. Justice Campbell J. Miller did not agree that the constitution had been violated. His Honour did agree with labour lawyer Stephen Krashinsky that the Income Tax Act should be redrafted so that divorced people are not deprived of a popular tax credit available to married couples. But the judge’s views on the topic were just that – advisory views. CRA had denied to Mr. Krashinsky the credit in the face of his ex spouse’s opposition and Justice Miller did not have the power to order CRA to do otherwise.
Let us reiterate and make this crystal clear: The Income Tax Act grants a tax credit to individuals who supports a low-income spouse. It also grants a comparable credit to a divorced individual who can show that he or she supports a relative, including a child. There’s a catch, though: only one ex-spouse can claim the credit. And if one spouse objects then neither can claim the credit.
Anyone who has been through a contentious divorce knows that getting your ex-spouse to agree on anything can be a challenge. Getting your ex to agree that you should get a tax credit worth up to $10,320.00? Good luck. The law, as it currently stands, effectively gives ex-spouses a veto as to whether or not their former partner should receive the tax credit.
As Mr. Krashinsky told the court, “It cannot be the law that one hostile party, acting unreasonably, can exercise a veto on the lawful entitlement of another party. Instead of resolving the dispute, the Canada Revenue Agency simply throws up its hands and denies the deduction to everyone, thereby enriching itself."
Justice Miller stated in his reasons:
Mr. Krashinsky, your bringing this case to the Court will hopefully serve two purposes. First, to convey a message to the Family Law bar that this is an issue that should routinely be addressed at the time of the separation agreement, where joint custody is an issue. Second, to convey a message to the legislators that notwithstanding good intentions to provide taxpayer relief, because that is what this credit is to do, the zero sum approach of denying any credit without agreement can, in certain circumstances, create a harsh and unfair result contrary to their intention of providing relief. It may, indeed, be time to create a better mouse trap.
Until such time as the government changes the legislation, we must be careful to address the issue of this tax credit in separation agreements and in orders. If either you or your ex-spouse plans to claim this tax credit, make sure that the issue is resolved in the Separation Agreement or in court. It is not enough to rely on your ex-spouse’s promise to allow you to claim the credit.
February 8, 2012