Mother and father paying little one 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,” generally known as the “equivalent-to-spouse” quantity. The credit score is accessible to a taxpayer who doesn’t have a partner or associate, however who lives with a dependent father or mother or grandparent, little one, grandchild, brother or sister who’s both underneath the age of 18 or is wholly depending on the taxpayer as a result of 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 price $2,356. A parallel provincial credit score can also be out there and its worth is dependent upon which province you reside in. The credit score quantity is decreased dollar-for-dollar by the web earnings 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 fogeys who’re separated or divorced and nonetheless have minor kids dwelling at house, the entitlement to the credit score will be complicated, as it can rely on whether or not little one help is being paid and to whom. Below the Revenue Tax Act, the credit score can’t be claimed by a taxpayer who pays little one help to their former partner or associate. A current 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 kids, with every father or mother having the youngsters for an equal variety of days over a repeating four-week cycle.

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

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

Below the phrases of this couple’s settlement, primarily based on the husband’s annual earnings of $55,000 and the spouse’s earnings of $36,500, the husband was to pay to his ex-wife, starting in September 2016, the kid guideline quantity of $289 monthly, “being an quantity calculated on the set-off of help primarily based upon the respective earnings 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 “web 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 at all times had a mutually agreed shared 50/50 custody settlement for each kids, they agreed to every declare the dependant credit score with respect to a selected little one, and doing so “retains issues as equal as attainable between them financially.”

A previous resolution of the Federal Courtroom of Enchantment discovered that within the context of help funds and the dependant credit score, the “idea of set-off distracts from the actual problem which is whether or not or not (the taxpayer) is the one father or mother making a baby help fee.”

In that case, the taxpayer paid month-to-month little one help in an quantity that represented a set-off between what he and his former partner have been every required to contribute underneath the rules. Whereas their respective guideline incomes have 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 of 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 kids in accordance with their relative talents to take action. After figuring out their respective obligations to contribute underneath the rules, one father or mother could also be required to make little one help funds to the opposite; nevertheless, “the set-off idea doesn’t rework the respective obligations into help funds for earnings tax functions.”

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

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

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She did, nevertheless, encourage the taxpayer and his ex-spouse to contemplate updating the wording of their separation settlement to “mirror their said intentions for earnings tax functions,” which can enable him to reopen the previous ten years of tax returns and request reassessments to permit the credit score underneath a particular rule within the Tax Act designed for conditions when neither father or mother can in any other case declare the dependant credit score.

In 2008, an identical case was delivered to Tax Courtroom, by which a taxpayer tried to argue that Canada’s tax legislation discriminates in opposition to divorced dads like him, who share custody of their kids and pay little one 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 in all their two daughters for whom they shared joint custody. However the CRA denied his declare as he was the only father or mother paying little one help.

The decide in that case went on to elucidate that the quantity that the taxpayer was required to pay as little one help underneath 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 consequently, his little one help fee is lower than it might have been if he have been entitled to assert the credit score.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. [email protected].

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