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Shared Custody and Separation – Critical Financial Issues and Decision Making

What You Need to Know

If you are sharing custody of your child(ren) with your ex-partner, it is important to know a few things:

  • Calculating Basic Child Support

The Federal Child Support Guidelines legislation (the “Guidelines”) defines shared custody as existing when separated 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 (See Section 9 of the Guidelines). In most cases, it is done by calculating child support twice. Calculate support to be paid by each parent using the the child support table amount for each individual’s income. You then have two choices. Pay each other the gross amount, or the higher income parent may pay the difference (a “set-off” amount). Continue reading before deciding.

  • Claiming the Amount for an Eligible Dependant

A single parent with a dependent child is usually able to claim a tax credit for that child (the “amount for an eligible dependant”, formerly called the “equivalent to spouse amount” – abbreviated below as “EDA”). As noted above, when you calculate your child support obligations, you will be calculating two amounts – one for you and one for your former partner. I suggest that the wording of your agreement should be similar to this:

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.”

DO NOT state that you are going to pay only a “set-off” amount. Why?

The above wording is intended to be evidence that both of you each have a legal obligation to pay child support. If you agree to pay only a set-off amount, then only one of you will have a legal obligation. With the aforementioned wording, if you have only one shared child and are a single parent, you can choose which one of you claims the EDA on your tax return (saving about $2,500 in taxes). To be fair to each parent, you 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 be better for the taxable person to claim the credit. If you have two or more children, each person could claim one child – you just need to choose which child. To warn you again, with a set-off payment, you lose the flexibility of choice if you have only one child, and with two children, you lose out on one tax credit worth about $2,500.

If there is a risk that one parent will not honour their payment requirements, then a set-off arrangement may be necessary. Consider doing a “side agreement” if this is required. The Canada Revenue Agency (CRA) has said a side agreement may be acceptable, but a “may” is no guarantee.

 

  • Claiming the Canada Child Benefit (CCB) and GST/HST credit

The definition of shared custody differs for the CCB. The law for CCB says that custody should be “equal or near equal.” In the 2018 Tax Court case of Lavallee v. The Queen (2018 DTC 1152), the judge stated that “equal or near equal” would require no more than a 25% differential in child time with each parent. By my calculations (I have seen nothing from the CRA), this means that custody must be between 44.45% and 55.55% before the CCB can be shared by the parents. (The difference of 11.10 divided by 44.45 is 25%.)

Calculate your time carefully. For shared custody situations, it is only fair, in my opinion, that each parent should receive one-half of the normal CCB (and HST/GST credit) based on their individual incomes. As long as the child support is shared, each parent should apply for CCB.  I raised this issue by letter to the Minister of Finance.  In a letter to me dated March 21, 2019, he stated that the CCB will be shared “provided the recipients meet the requirements under the Canada Revenue Agency’s (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).”  This sounds like everything is okay for sharing CCB under the same terms as the child support legislation, except in some limited situations (hence, the use of the term “generally”).  Everything should be okay, but I will be a bit wary because of the aforementioned case.

More Detail on Legislation and Rulings

If you want to know more about why these illogical situations arise, keep reading. Note that I brought the EDA issue to the attention of government in 2016 and several times since, without any success in getting change. I have raised the CCB issue with them in January 2019.  For more details on my attempts, see this article with copies of my correspondence attached.  The current status of legislation as of December 31, 2018 is as follows:

Federal Child Support Guidelines, Section 9

In the Federal Child Support Guidelines, legislation by the Department of Justice sets out that custody is considered shared by parents when they have physical custody of “a child for not less than 40% of the time.” The Guidelines provide that support is still based on the tables, but “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” should be considered. In most circumstances, the table amounts are still used, with each parent paying the other parent the table amount based on their income.

This 40% 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. A $30,000 salary would normally trigger basic child support payments of $442.00 per month in PEI, similar in other provinces. In sole custody cases, this payment is made by one person; in shared custody with parents of equal incomes, such payments would be paid to each other or be offset. This provision makes sense because each parent has the children roughly equal in time, and would have the same child rearing expenses. A line between shared and sole custody needs to be drawn somewhere, and the Department of Justice established this 40/60% threshold in 1997.

Amount for an Eligible Dependant, Income Tax Act Sections 118(1)(b), 118(5) and 118(5.1), Case of Verones v. R (2013 FCA 69) and CRA 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. This credit is reported on the tax return as the Amount for an Eligible Dependant. 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 would create 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) is supposed to fix this. This section has been interpreted by the courts and the CRA to mean that if both parents make individual payments to each other based on a legal obligation to do so, then the EDA can still be claimed.

If there are two children being shared, both parents can both claim the eligible dependant amount. However, if the higher income parent only pays a set-off amount, that parent is denied the credit. In the interpretation of the court, a set-off payment is only one legal obligation, and is treated the same as a sole custody arrangement. Even if the higher income parent has custody for 60% of the time, that parent will get no credit. If there is only one shared child, the eligible dependant amount cannot be split. The parents must agree who gets the credit.

By not fixing the law (which has been “broken” since at least 2013 for the EDA), the federal government apparently believes this unfairness is appropriate. This is so even though 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 in favour of the recipient of a set-off payment. The “net” recipient gets a table amount of support that has been reduced by the EDA, but also gets the EDA. Meanwhile, the payer receives credit for a support payment from the recipient that has been reduced by the EDA but does not receive any EDA, leaving them short by approximately $2,500.

In addition, our government apparently does not understand the financial problems to one parent dealing with a “deadbeat parent,” which are made worse by the two payment system encouraged by legislation. 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 required. In that case, the lower income parent must have $342 available on the payment date to meet his or her obligation. 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 was being paid, he or she would only be short by $100.

Canada Child Benefit, Income Tax Act, Section 122.6, and Tax Court case of Lavallee v. The Queen (2018 DTC 1152)

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.” Unlike the EDA law, there is no specific ratio specified. In a 2018 development, in the Tax Court case of Lavallee v. The Queen (2018 DTC 1152), the Honourable Justice B. Russell concluded that the CCB should not be shared by the parents in that particular case because the custody ratio was 42%/58%. The judge stated that “equal or near equal” should be no more than a 25% differential.   A 40% – 60% ratio used in the Child Support Guidelines legislation would not meet this test. This difference could create a hardship condition for certain parents should their share be 40% or more but less than 44.45%.  However, the Minister of Finance, as quoted above, suggests that CRA generally follows the 40% – 60% rule.

Concluding Remarks

I contacted my MP and many other MP’s, Senators and public civil servants to ask the legislation to be fixed.  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.” [emphasis added]

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, do not understand the inconsistencies in the law, do not understand the concepts of fairness and logic and/or are unwilling or unable to justify the reasoning of the existing rules to me. Tread carefully through this maze with experienced professional advice.  If you face difficulties, I encourage you to contact your Member of Parliament (and use my Contact Page to offer me any comments on this article or your experience).

Footnotes:

[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