Eligible Dependent Tax Credit: Is it worth the trouble?
A lot has been written on this topic and it continues to create confusion with post-divorce tax returns. Vanessa and John each earn $80,000 per year. They have two children, ages 8 and 4, and share parenting. Their separation agreement specifically addresses how child support cheques are to be exchanged so that the Canada Revenue Agency (“CRA”) approves both of them to claim the Eligible Dependent Tax Credit.
How much is this credit really worth?
The answer depends on the tax-payer’s income, deductions, other credits available, and surtax. For simplicity, with an annual income range between $40,000 and $80,000, and without any additional tax deductions or credits, the net cash value of this credit is $188 per month. With higher incomes, the value of this credit gradually increases from $188 per month to $205 per month. To determine the total value of the credit, multiply the monthly amount by the number of months till the child reaches age 18.
It is crucial to remind our clients the importance of the payment exchange in a shared parenting arrangement where a set-off amount of child support applies. Often times, one parent pays the other the difference between the amounts of child support owing; however, this may cause problems with CRA come tax season. To avoid tax issues, consider advising your clients to set up recurring e-mail transfers, exchange post-dated cheques to each other for the full amount of table support owing, or arrange payment with the Family Responsibility Office.
New Living Arrangements
The other important thing to remember is that new living arrangements can disqualify a parent from receiving this credit. The CRA specifically stipulates that only one person is eligible to receive this credit per household.
Many of my clients (especially young parents) don’t connect tax planning with lifestyle choices, yet a simple oversight can cost thousands of dollars or amount to thousands of dollars in savings. Tax planning post-divorce is important to maximize the value of potential tax credits.
– Reproduced by permission of Thomson Reuters Canada Limited.