By Bronwen Bruch
How support payment details can enable or impede claims of an eligible dependant on your income taxes.
The separation process broaches a variety of complex issues, such as finance, family law, and mental health—it is no wonder, then, that the process often requires the combined efforts of collaborative professionals to reach an optimal outcome. Likewise, a robust Separation Agreement considers input from diverse specializations and a variety of relevant precedents and policies. This attention to detail is particularly valuable in the case of child support and its evolving influence on tax credit eligibility; if not appropriately managed, this legal and financial issue can result in a potential forfeit of thousands of dollars in tax refunds.
The Eligible Dependant Issue
The eligible dependant amount, as outlined in section 118(1)(b) of the Income Tax Act, is a tax credit available to qualified single parents with custody of children below age 18. A prominent limitation, however, lies in the issue of shared custody—if both parents support the dependant(s), who can claim the eligible dependant amount?
The situation is complicated by a disparity between precedents in family law and the Income Tax Act. Often, in cases of shared custody, support obligations are calculated with the assumption that the higher-income parent will pay a “set-off” amount to the lower-income parent. For example, after entering both parents’ incomes into the Child Support Table, the payment obligation of the lower-income parent would be subtracted from that of the higher-earner for a net payment amount. Unfortunately, under subsection 118(5) of the Income Tax Act, this one-way method of payment only allows for the lower-income parent, the “payee,” to claim the eligible dependant amount (provided he or she satisfies additional eligibility criteria, such as single marital status).
Dependant Claims By Both Parents
Subsection 118(5) of the Income Tax Act does not allow for an individual to claim the eligible dependant amount if he or she is obligated to pay child support; however, subsection 118(5.1) allows for an exception provided both parents pay child support to each other (as opposed to one party paying a set-off amount). In instances of one dependant, parents can then choose to alternate eligible dependant claims; in instances of multiple dependants, each parent is eligible to claim one dependant (again, provided all other requirements for eligibility are also met).
To qualify, the obligation of both parties to pay support must be included in the Separation Agreement. Moreover, as the recent appeal of Harder v. The Queen [2016] demonstrates, the Canada Revenue Agency may not only require the written confirmation of two-way payments, but also evidence of those payments. In the case of Harder, the paying parent forfeited thousands in tax credits due to a lack of written or actual evidence of two-way payment obligations—in paragraph 11 of the appeal, the court stressed the necessity of payment evidence such as cheques or e-transfer records.
Unfortunately, the scenario of two-way payment obligations can often give way to new concerns. For example, if one parent earns a significantly lower income and depends on payments from the higher-earner in order to fulfill his or her own payment obligations, this introduces the potential for bouncing support cheques.
Evidently, the matter of shared custody dependant claims does not often allow for a simple solution, but a consultation with a trained professional such as a Chartered Financial Divorce Specialist, an Accredited Family Mediator with a financial background, or a Collaborative Financial Professional can help to clarify your options.
If you have any questions or would like to discuss the matter further, please do not hesitate to get in touch; we are more than happy to help.
Further Reading
• Canada.ca: Can you claim the amount for an eligible dependant?
• The Income Tax Act, subsections 118(1)(b) (Wholly Dependant Person), 118(5) (Support), and 118(5.1) (Where Subsection [5] Does Not Apply)
• The Divorce Act, sections 15.1 (Child Support Orders) and 26.1 (Guidelines)
• Federal Child Support Guidelines
Bronwen Bruch is a Chartered Professional Accountant (CPA, CMA), Financial Divorce Specialist, and Accredited Family Mediator; she has also received collaborative training. Bronwen has been working in the mediation field for over five years, and enjoys using her experience to assist others.
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