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Shared Custody Issues – Further Commentary & Links to Government Correspondence

AMOUNT FOR AN ELIGIBLE DEPENDANT

Whether or not you are eligible to claim the Amount for an Eligible Dependant when you share custody of the child is governed by subsections 118(5) and (5.1)  of the Income Tax Act,  as interpreted by the Canada Revenue Agency and the courts.  These rules have changed a number of times and are quite complex.  If you do not word your agreement carefully, the resulting tax credits can be very unfair. 

For the Child Support Guidelines, shared custody is when both parties have custody of their children between 40% and 60% of the time.  In this case, if both parties are legally required to pay support, either person may claim the Eligible Dependant Amount for one child.  The Eligible Dependant Amount is commonly known by its former name, the Equivalent to Spouse credit.  If there is more than one child, then it is possible for each parent to claim one child. I am assuming you meet all of the other conditions, not just those discussed here (such as being a single parent).

Here is where a problem arises – if your child support agreement states that only one person will pay a set-off amount, only the person receiving the set-off amount may claim the credit.   Now assume that the agreement states that both persons pay each other (with no reference to a set-off amount) and it is clear that both parents have a legal obligation to pay support.  In that case, where there is only one child, either party may claim the credit (as long as they agree on who).  Where there are two or more shared children, both parents may claim the credit.  Just because of the way the agreement is worded and the payment is made can result in the loss of a significant credit (a cash loss to one parent of about $2,500 in PEI).

For example, assume Bobby makes more money than Susie, and they have two children.  So, assume Bobby’s child support payment to Susie will be $1,000 per month, and Susie’s payment to Bobby should be $600 per month.  If the agreement provides for each person to make a payment, both parents can save about $2,500 in taxes.  Now assume their neighbours have an identical situation, but for convenience, only a set-off amount of $400 is paid.  This is obviously the most practical way for payments to be made.  However, in that case, “Bobby” would lose the tax savings of $2,500.

The Canada Revenue Agency Technical Interpretation # 2013-0502091E5 – Eligible Dependent Amount  states, “when a written agreement or court order requires that both parents pay a child support amount but the parents agree (outside of the court order or written agreement) to use a “set-off” arrangement such that only one parent makes a payment for the difference”, then both parties can claim the credit.  However, my discussions with CRA officials indicate that this side agreement “may” be satisfactory, but it will depend on the facts of each situation.  That is not the clarity we need!

I provided my opinion of the unfairness of the rules in a report presented to government officials and parliamentarians in January 2017.  I asked about 20 officials for their opinion as to whether this was fair or not, and received not one opinion (just a few acknowledgements).  If you wish more details, see links to my correspondence at the end of this article.  I also made pre-budget submissions (for the 2017 and 2018 federal budgets) asking for a change to improve this legislation, and filed a Service Complaint with the CRA to correct one their publications, which was misleading the public into believing that both parents could each claim a child.  The CRA revised their publication to take out the misleading example , but no legislative changes have been made at this stage.  Lots of time, money and publicity is provided by the Minister of Finance and the Prime Minister about improving fairness in the tax system, especially for the middle class.  I suspect this minor change would help more people in the lower class, and I think should be an important fix.

CANADA CHILD BENEFIT

The definition of shared custody is not the same for “sharing” child support as it is for sharing the Canada Child Benefit.  In a recent 2018 development, in the Tax Court case of Lavallee v. The Queen (2018 DTC 1152), the Honourable Justice B. Russell concluded that the Canada Child Benefit (CCB) should not be shared by the parents because the custody ratio was 42%/58%. The judge stated that “equal or near equal” would require no more than a 25% differential. This means that custody between 44.45% and 55.55% is required before the CCB can be shared by the parents.  So, if you have a shared custody arrangement that only gives you custody between 40% and 44.45%, the Canada Revenue Agency may give 100% of the CCB to your former spouse and nothing to you.  Even though Justice Canada says that 44% is approximately 50% of the time, Finance Canada say, “No, it is not” based on the above case.  You may calculate your Canada Child Benefit by clicking on this government calculator .

CONCLUSION

You should review your particular situation with your tax and legal counsel to ensure their interpretation of the CCB and Eligible Dependant Amount entitlements for you are appropriate, and are based on the most recent interpretation of the law.  Things may have changed after I wrote this, such as a change in the law or a reversal of the Tax Court decision on a subsequent appeal, or simply because your advisors may believe I have misinterpreted these situations.

MY CORRESPONDENCE TO THE GOVERNMENT

January 2019 – Correspondence to the Minister of Finance (and copies to select other MPs and government staff) issued January 2, 2019 asking that the definitions of sharing be identical for the Eligible Dependant Amount and the Canada Child Benefit, and that all credits related to shared children be equally shared by both parents.  I provided extensive calculations in the attached report showing the impact on parents and children. Click here – Copy of letter to Minister of Finance, Jan 2, 2019 re Tax and CCB Issues.  If you read this and see an error in my conclusions, please tell me.  I will update this post upon receiving any meaningful reply from the government or web site responses.  I encourage you to contact your own MP if these rules are impacting you (and let me know via my contact page of any of your own thoughts, impacts or progress).

January 2017 – At that time, I sent a report to the Minister of Finance (and copies to select other MPs and government staff) providing extensive background on the Eligible Dependant Amount issue.  The CCB issue was not apparent at that time.  Click here if you wish to review that report, including a history of my attempts in 2016 to get action –  Shared Custody and Income Taxes in Canada – Not Fair to All 

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