Mother and father paying youngster help can get dependant tax credit score denied

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Among the many many private non-refundable credit some taxpayers can declare on their private tax return is the “eligible dependant credit score,” typically known as the “equivalent-to-spouse” quantity. The credit score is out there to a taxpayer who doesn’t have a partner or accomplice, however who lives with a dependent guardian or grandparent, youngster, grandchild, brother or sister who’s both beneath the age of 18 or is wholly depending on the taxpayer resulting from a bodily or psychological incapacity.

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For 2024, the dependant quantity is $15,705, which on the federal 15 per cent non-refundable tax credit score price is value $2,356. A parallel provincial credit score can be accessible and its worth depends upon which province you reside in. The credit score quantity is lowered dollar-for-dollar by the online revenue of the dependant, and will solely be claimed as soon as per family annually, by one particular person. About a million taxpayers claimed this credit score in 2021.

For folks who’re separated or divorced and nonetheless have minor youngsters residing at house, the entitlement to the credit score will be advanced, as it’ll rely on whether or not youngster help is being paid and to whom. Underneath the Earnings Tax Act, the credit score can’t be claimed by a taxpayer who pays youngster help to their former partner or accomplice. A latest case determined by the Tax Courtroom in October handled the entitlement to the credit score.

The taxpayer and his now ex-spouse had separated in March 2016. The couple entered right into a written separation settlement in July 2016, which offered for equal shared custody of their two minor youngsters, with every guardian having the youngsters for an equal variety of days over a repeating four-week cycle.

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When {couples} separate, the Federal Baby Help Tips are used to legally decide the quantity of kid help one guardian should pay to the opposite guardian to assist help their youngsters. The rules work on the precept that each mother and father ought to share the identical portion of their revenue with their youngsters as in the event that they lived collectively. The rules set out month-to-month youngster help quantities in a desk that makes use of the paying guardian’s stage of revenue, and the variety of youngsters eligible for help.

Within the case of fifty/50 custody, the kid help is usually calculated for every guardian, the decrease quantity is deducted from the upper, and the upper incomes guardian pays the opposite guardian the distinction. This is called “set-off” help.

Underneath the phrases of this couple’s settlement, based mostly on the husband’s annual revenue of $55,000 and the spouse’s revenue of $36,500, the husband was to pay to his ex-wife, starting in September 2016, the kid guideline quantity of $289 per 30 days, “being an quantity calculated on the set-off of help based mostly upon the respective revenue of the events.” Annually, monetary info was to be exchanged between spouses as to their respective incomes, and the help for the next 12 months can be adjusted accordingly.

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The taxpayer argued that one cheque representing the set-off quantity was paid by him to his ex-spouse for “internet comfort, i.e. to keep away from the inconvenience of sending cheques to one another.”

The Canada Income Company denied the taxpayer’s declare for the dependant credit score for 2018 and future tax years. The taxpayer submitted a jointly-signed letter dated January 7, 2023 to the CRA saying that the couple has all the time had a mutually agreed shared 50/50 custody settlement for each youngsters, they agreed to every declare the dependant credit score with respect to a specific youngster, and doing so “retains issues as equal as attainable between them financially.”

A previous determination of the Federal Courtroom of Attraction discovered that within the context of help funds and the dependant credit score, the “idea of set-off distracts from the true challenge which is whether or not or not (the taxpayer) is the one guardian making a baby help fee.”

In that case, the taxpayer paid month-to-month youngster help in an quantity that represented a set-off between what he and his former partner had been every required to contribute beneath the rules. Whereas their respective guideline incomes had been referenced within the court docket order, solely the taxpayer was directed to pay a help quantity.

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That court docket thought-about the Supreme Courtroom of Canada’s assertion that the underlying precept behind the rules is that spouses have a joint monetary obligation to help their youngsters in accordance with their relative talents to take action. After figuring out their respective obligations to contribute beneath the rules, one guardian could also be required to make youngster help funds to the opposite; nonetheless, “the set-off idea doesn’t remodel the respective obligations into help funds for revenue tax functions.”

Within the present case, the couple’s separation settlement solely required the taxpayer to pay youngster help. With respect to his ex-spouse, whereas her revenue was considered within the guideline calculation and the revenue quantity seems within the settlement, there isn’t any requirement within the settlement that she pay youngster help to the taxpayer based mostly on her guideline revenue.

Whereas the decide appreciated the taxpayer’s arguments, she famous that the case regulation and tax laws are clear in that they don’t allow the taxpayer to assert the dependant credit score since he was the only real payor of kid help.

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She did, nonetheless, encourage the taxpayer and his ex-spouse to think about updating the wording of their separation settlement to “replicate their acknowledged intentions for revenue tax functions,” which can permit him to reopen the previous ten years of tax returns and request reassessments to permit the credit score beneath a particular rule within the Tax Act designed for conditions when neither guardian can in any other case declare the dependant credit score.

In 2008, an identical case was dropped at Tax Courtroom, by which a taxpayer tried to argue that Canada’s tax regulation discriminates towards divorced dads like him, who share custody of their youngsters and pay youngster help to their former spouses. As a part of his divorce settlement, he and his ex-wife had agreed that every would declare the dependant credit score for one among their two daughters for whom they shared joint custody. However the CRA denied his declare as he was the only real guardian paying youngster help.

The decide in that case went on to clarify that the quantity that the taxpayer was required to pay as youngster help beneath the rules already takes into consideration the truth that, as somebody who pays help, he wouldn’t be entitled to assert the dependant credit score, and because of this, his youngster help fee is lower than it could have been if he had been entitled to assert the credit score.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Non-public Wealth in Toronto. Jamie.Golombek@cibc.com.

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