Income Tax Issues in Matrimonial Settlements
Income Tax Issues in Matrimonial Settlements – Part III
By Steve Z. Ranot
Which Parent Claims the Deductions and Credits and Qualifies for Benefits?
There are a number of credits and expenses available to parents such as the eligible dependant, disability and tuition credits as well as child care expenses that can be claimed by either parent each April. Similarly, there are a number of benefits like 2016’s new Canada Child Benefit that are paid to one parent. Who may or should claim these is a decision made on personal income tax returns but should also be governed by the separation agreement to avoid future disagreements on relatively minor amounts. These are discussed below.
Claiming the Eligible Dependant or Old Equivalent to Spousal Credit
Where one spouse (or common-law partner) supports another and the supported spouse (or common-law partner – do I really have to keep adding these parenthetical additions?) earns less than about $11,000, a spousal credit may be claimed by the higher income spouse. This credit is worth up to about $2,400 in refundable tax-savings. Where the couple separates, if one or both do not re-marry or “respouse”, one or both may be able to claim a dependent child for the eligible dependant amount.
Generally, the dependant will be a child under age 18 living with a parent. A payer of child support cannot claim that child for the eligible dependant amount. This generally makes it clear who may claim a particular child in the case of shared custody. Although if each pays child support to the other in such a case, the Canada Revenue Agency (“CRA”) generally permits the credit to the parent who is a net child support recipient but permits the parents to alternate the years claiming the same child as a spousal equivalent. That is, one may claim the credit in even years and the other in odd years. If the two parents cannot agree how to share the credit, no one gets it. So, it is best to calculate to whom it generates the most tax-savings and then share it fairly. By the way, this credit is available for other low-income dependants – parents, grandparents and disabled children over 18 years of age.
If there are two children and the parents have roughly equivalent incomes and shared custody, you might wish to word the agreement so that each parent pays child support to the other on just one child so that each may claim the eligible dependant credit on a different child.
Canada Child Tax Benefit (“CCTB”) and the Canada Child Benefit (“CCB”)
The CCTB was a tax-free monthly payment for children under the age of 18 and was intended to help families with the cost of raising their children. As a result of the March 22, 2016 federal budget, it has been replaced by the CCB. The CCB is calculated for 12-month period beginning in July of one year and ending in June of the following year. The amount of the CCB payments from July 2017 to June 2018 is based on the 2016 “adjusted income” of the parents of the child[ren]. The CCB pays parents up to $6,400 per child under age 6 and $5,400 per child aged 6 through 17. A Child Disability Benefit will pay an additional $2,730 per eligible child. All of these amounts will start to erode when family (or single parent) income exceeds $30,000. These very significant payments will likely continue to be paid to the parent who resides with the child and primarily fulfills the responsibility for the caring and upbringing of the child.
When parents separate, the CCB may be an important consideration during custody and child support negotiations. Provided certain other criteria are satisfied, CRA pays the parent who resides with the child and who primarily fulfils the responsibility for the caring and upbringing of the child. Generally, when the female parent resides with the child, she is presumed to be the person who fulfills this responsibility. As a result, when the father and mother reside together, it is the mother who is normally paid the CCTB.
Where the parents have separated and each spends considerable periods of time with the child[ren] and each of the parents had applied for the CCTB, the CRA will conduct a review to determine which parent qualifies for the CCTB. We assume the same rules will apply to the new CCB. The review will attempt to determine whether the child[ren] actually resides with one parent and simply visits the other or whether the child indeed resides with both parents. If it is determined that the child resides with both parents, then a determination is made to establish who is primarily responsible for the care and upbringing of the child. The existence of a court order is only one of several factors considered by CRA. Usually the review confirms that the parent who has custody of the child the majority of the time is the primary caregiver and therefore was eligible to receive the CCTB. Where custody is shared equally and both parents satisfy the “resides with” and “primary care” requirements, the CRA will pay one parent for six months and then rotate the payment to the other parent for the next six months. These rotational payments will begin with the parent who previously had not been the regular CCTB recipient, meaning the payments will usually commence with the father.
Should either of the parents be dissatisfied with the results, the normal appeal rights which exist for other income tax matters apply.
In lieu of the rotational payments, the parents may mutually agree to and request one of the following alternate arrangements:
(1) Where there are more than one child, payment of the CCTB to one parent for one or more of the children and payment of the CCTB to the other parent for the remaining child[ren]; or
(2) Payment of the CCTB to one parent only and the agreement that the other parent will then be able to claim the equivalent to spouse amount as a non-refundable credit.
This latter alternate arrangement only applies where theparent claiming the equivalent to spouse amount is not paying child support with respect to the same child.
However, the old CCTB and the new CCB are means-tested benefits meaning that it is worth more to the lower-income parent. Accordingly, it makes sense to agree that the lower income parent claims it solely and then determine how most fairly to share it.
It is the provisions of the Income Tax Act1 that dictate to whom the CCB is paid. Payment is not based on the rules of family law or/and other legal arrangements. Knowledge of the legislative requirements, by both parents and their representatives, will avoid frustrations arising out of agreements to allocate or share the CCB contrary to the rules in force by the CRA.
Child Care Expenses
Generally, for a couple, the deduction of child care expenses allows the lower income spouse to deduct these expenses up to a prescribed maximum, within certain limitations. In order to qualify, the expenses must relate to an “eligible child” which is defined as a child of the taxpayer or taxpayer’s spouse who was dependent on the taxpayer or taxpayer’s spouse at some time during the year.
When the parents are separated, the rules change. CRA takes the position that, in cases of separation throughout the year, only the custodial parent may claim the child care expenses. Accordingly, in joint or shared custody situations, each parent may claim such expenses so the limits are effectively doubled if each parent pays at least the maximum deductible amount.
Where separation occurs during the year, the lower income parent has the full amount available for the year and the higher income parent is limited to a prescribed per-week limit for the portion of the year after separation.
In the past, post-secondary school tuition was eligible for both federal and Ontario tax credits as well as education credits based on the number of months of full- and parttime attendance at such a school. If the student has sufficient taxable income, the credits must be used by the student. If not fully needed to reduce the student’s tax to zero, the student had the option to transfer the unused credits to a supporting parent or grandparent. The student may select the recipient.
In its 2016 Ontario budget, Kathleen Wynne’s government announced that tuition would be free for students from low-income families but, to pay for this benefit, the Ontario tuition and education credits would disappear.
Not to be outdone, the federal Liberals eliminated the education and textbook tax credits in the March 22, 2016 federal budget. These did not require receipts but gave the student or a supporting parent or grandparent a valuable credit based on the number of months the student was in full- or part-time post-secondary school attendance. The after-tax cost of these section 7 expenses 2 just got much pricier in 2016.
Ranot, S. Z. (2018, October). Income Tax Issues in Matrimonial Settlements. Money & Family Law, 33-10, 74.
2 Federal Child Support Guidelines, SOR/97-175.
* CPA, CA.IFA, CBV, Marmer Penner Inc. Business Valuators & Litigation Accountants.This article was originally published by The Advocates’ Society as part of its “Financial Literacy for Family Lawyers” program (May 1, 2018), and is being re-printed here with permission.
This article has been reproduced with permission from the following: author Steve Z. Ranot, The Advocates’ Society Financial Literacy for Family Lawyers Program, and Thomson Reuters Canada Limited.