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Shared Custody and Critical Issues – Tax Credits and Canada Child Benefits

If separated parents are sharing custody of their child(ren) with their ex-partner, it is important to know the Canada Revenue Agency’s (CRA) current interpretation of the law (April 2019) for each to get their fair share of government benefits.

  • What is shared custody (expected to be referred to as “shared parenting time” under the updated Divorce Act)?
  • How is child support calculated for shared custody?
  • Who can claim the Amount for an Eligible Dependant as a tax credit?
  • Who receives the Canada Child Benefit?
  • Unfortunately, the answer is, “It depends.”

Shared Custody and Child Support

(Relevant reference is Section 9 of the Federal Child Support Guidelines)

The Federal Child Support Guidelines defines shared custody as when parents have physical custody of “a child for not less than 40% of the time.” This means having custody from 40% to 60% of the time. With shared custody, there is flexibility in how support can be calculated. The Guidelines provide that support is still based on the tables, but also considers “increased costs of the shared custody arrangements; and the conditions, means, needs and other circumstances of each spouse and of any child for whom support is sought.” In most cases, each parent’s support obligation is the table amount based on their income. However, adjustments can be made as appropriate for the circumstances. If, for example, the parents are distant from each other, the support amount may be adjusted to compensate for travel costs.

The difference between 39% and 40% shared custody threshold makes a significant difference in the amount of child support being paid by one parent. Equal incomes often result in no basic child support payments required by either party. For sole custody, a $30,000 salary would normally trigger basic child support payments of $442.00 per month in PEI, similar in other provinces. In shared custody with parents having equal incomes of $30,000, the support payment would normally be calculated as each parent owing the other $442.00, with no net amount being paid.

When each parent has the children roughly equal in time, this provision makes sense because each should have similar child rearing expenses. A line between shared and sole custody needs to be drawn somewhere, and the Department of Justice established this 40% threshold in 1997 when the Guidelines were first introduced. When I was on the Advisory Committee for Child Support for the Federal Deputy Minister of Justice in the late 1990’s, this ratio was the subject of much discussion, but no better solution was found.

In summary, unless unusual situations exist, you will calculate support to be paid by each parent using the table amount for each individual’s income. The parties then have a choice: pay each other the gross amount by exchanging payments, or the higher income parent may pay the difference (a “set-off” amount). Continue reading before choosing a preference.

Amount for an Eligible Dependant

(Relevant references being the Income Tax Act subsections 118(1)(b), 118(5) and 118(5.1), the case of Verones v. R (2013 FCA 69) and subsequent case law, and CRA Technical Interpretation 2013-0502091E5)

Section 118(1)(b) of the Income Tax Act allows a separated person living as a single individual to claim a tax credit for a dependent child living with them. There are certain other eligibility requirements but I will not review them here in order to focus on child support issues. This credit is reported on the tax return as the “amount for an eligible dependant” (abbreviated below as “EDA”). It is worth approximately $2,500.

As noted above, when calculating child support obligations, you will be calculating two amounts – one for each parent. I suggest that the wording of the agreement should be similar to this (subject to legal advice):

Based on the shared parenting arrangement and the aforementioned income information of each party, and in accordance with the Federal Child Support Guidelines table, and for the benefit of the child(ren), Parent A shall pay Parent B basic child support in the amount of $Y per month, and Parent B shall pay Parent A basic child support in the amount of $X per month.”

Except in certain limited situations, DO NOT state that one of the parties is going to pay only a “set-off” amount. Why? Section 118(5) of the Income Tax Act states “where the individual is required to pay a support amount” they cannot claim the EDA. This could have created a problem for shared custody – no one would be able to claim the EDA if both parents paid support to the other person. However, Section 118(5.1) was enacted to fix this. This section has been interpreted by the courts to mean that if both parents make individual payments to each other based on a legal obligation to do so, then either parent can claim the EDA for a child. The wording of your agreement or court order must be clear evidence that both parents each have a legal obligation to pay child support without reference to any set-off amount.

If there is one shared child, with the correct wording and if the parents meet the normal qualifying requirements to claim the EDA, they can choose which parent claims the EDA on their tax return. To be fair to each parent, they could take turns from year to year claiming this tax credit (for example, Parent A in even-numbered years, Parent B in odd-numbered years). If one parent is not taxable, then it would obviously be better for the taxable person to claim the credit.

If there are two or more children being shared, both parents can claim the EDA for a child. They must agree on who claims which child.

To warn you again, if the agreement or court order prescribes use of a set-off payment, the parents lose the flexibility of choice if they have only one shared child, and with two children, the parent paying the set-off amount will lose out on the tax credit.

If there is a risk that one parent will not honour their payment requirements, then a set-off arrangement may be necessary. Consider this example. If one parent pays $442 per month, and the other pays $342, then a set-off would be $100. For both parents to get the EDA, a two payment system is the best choice. In that case, the lower income parent must save $342 to have it available on the payment date. Unfortunately, if the $442 cheque received from the former partner on the same day bounces, the recipient is going to be short by $442 for that month. If only a set-off payment of $100 was being paid, he or she would have been short by only $100.

In addition to the legal agreement requiring separate payments as discussed above, consider doing a “side agreement” if there is a risk of non-payment. The CRA has said a side agreement may be acceptable, but the use of the term “may” means there is no guarantee. Preference is for separate payments.

The disallowance of the EDA when a set-off payment is paid makes less sense when you realize that the impact of the EDA is built into the legislated tables of the Federal Child Support Guidelines[1]. By design of the Guideline tables, if the EDA is not shared, the custody amounts are biased against the payer of a set-off payment. Both parties are paying a support amount reduced by the EDA. However, only the recipient of a set-off amount gets the EDA; the payer is left short by this $2,500 credit.

The Minister of Finance, The Honourable Bill Morneau, P.C., M.P., in correspondence to me dated March 21, 2019, stated “Our Government continues to examine the tax system to ensure that it is fair and effective. That said, changes to rules in this area would need to be carefully considered in terms of the impacts on different groups and implications for the tax system as a whole.” His concluding paragraph stated, “Although our Government continues to monitor the issues you have raised, we are not prepared to recommend any changes at this time.”

 

Canada Child Benefit

(Relevant references are the Income Tax Act, Section 122.6, and Tax Court cases of Lavallee v. The Queen (2018 DTC 1152) Morrissey v. The Queen (2019 FCA 56) and Lavrinenko v.  The Queen (2019 FCA 51))

The definition of shared custody differs for the Canada Child Benefit (CCB). In the Income Tax Act, Section 122.6, shared custody exists when the parents “resided with the qualified dependant on an equal or near equal basis.” There is no specific ratio stated. In a 2018 development, in the Tax Court case of Lavallee v. The Queen (2018 DTC 1152), the judge concluded that the CCB should not be shared by the parents in that particular case because the custody ratio was 42%/58%. He went on to say that “equal or near equal” should be defined as no more than a 25% differential, being between 45% and 55%.   In two subsequent Federal Court of Appeal cases as referenced above, the judges confirmed that custody of 45% is required before the CCB can be shared by the parents. This difference could create a hardship condition for parents sharing custody in accordance with the Guidelines support calculations when their share is 40% or more but less than 45%. Calculate their time carefully.

In the above noted letter to me on March 21, 2019, the Minister of Finance stated that the CCB will be shared “provided the recipients meet the requirements under the CRA shared-eligibility policy. This policy applies when a child lives more or less equally with two individuals who live separately (generally interpreted by the CRA to be where a child lives 40 percent to 60 percent of the time with each parent).” However, I have a copy of a later letter dated April 16, 2019 from CRA denying an application for shared CCB that states, “The definition of equal or near to equal for the purpose of shared custody is a minimum of 45% of the time in which the parent resides with the child(ren).” For two parents each making $30,000, one parent would receive about $13,000 of tax-free CCB and the other parent nothing.  Finally,  I have also been provided with an email addressed to a CCB applicant dated July 22, 2019 from the Office of the Minister of National Revenue stating that CRA will define shared custody as 40% to 60% over the next few months while CRA and the Department of Finance discuss the matter.  What a mixed up affair for the public to figure out.

Concluding Remarks

It is a shame that our political leaders do not appreciate the importance of these amounts of cash to low and middle income families raising children. Why not share all child related tax credits and benefits equally in shared custody arrangements (including disability and caregiving credits for infirm children)? Why not define “shared custody” in the same way in all legislation? Tread carefully through this maze. There is always hope that common sense will prevail, and the laws will be changed – which is why you should verify if there have been any changes since this article went to publication.

To review my correspondence to and from various government officials, including the Minister of Finance on this issue, see my web site article – My “Shared Custody” Communications with the Government.

[1] The Department of Justice Canada, Child Support Team Research Report, titled, Formula for the Table of Amounts Contained in the Federal Child Support Guidelines: A Technical Report, sets out the formula used to determine child support amounts. Specifically, it says, “Not included in the calculation of the receiving parent’s taxes are the federal Child Tax Benefit and the GST rebate for children. These are deemed to be the government’s contribution to children and not available as income to the receiving parent. The only difference in tax calculations between the two parents is the inclusion, in the calculations for the receiving parent, of the federal equivalent-to-spouse deduction and certain provincial tax reductions and credits.” The equivalent-to-spouse deduction is now called “the amount for an eligible dependant.”

Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum