Dad and mom paying baby 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,” typically known as the “equivalent-to-spouse” quantity. The credit score is on the market to a taxpayer who doesn’t have a partner or companion, however who lives with a dependent mum or dad or grandparent, baby, grandchild, brother or sister who’s both below the age of 18 or is wholly depending on the taxpayer resulting from 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 value $2,356. A parallel provincial credit score can also be out there and its worth will depend on which province you reside in. The credit score quantity is lowered dollar-for-dollar by the web revenue of the dependant, and should solely be claimed as soon as per family every year, 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 youngsters residing at residence, the entitlement to the credit score will be complicated, as it would rely on whether or not baby help is being paid and to whom. Underneath the Revenue Tax Act, the credit score can’t be claimed by a taxpayer who pays baby help to their former partner or companion. A latest case determined by the Tax Court docket 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 youngsters, with every mum or dad having the children for an equal variety of days over a repeating four-week cycle.

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

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

Underneath the phrases of this couple’s settlement, based mostly on the husband’s annual revenue of $55,000 and the spouse’s revenue 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 based mostly upon the respective revenue of the events.” Every year, monetary data was to be exchanged between spouses as to their respective incomes, and the help for the next 12 months could 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 “internet 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 all the time had a mutually agreed shared 50/50 custody settlement for each youngsters, they agreed to every declare the dependant credit score with respect to a specific baby, and doing so “retains issues as equal as potential between them financially.”

A previous choice of the Federal Court docket of Enchantment discovered that within the context of help funds and the dependant credit score, the “idea of set-off distracts from the true situation which is whether or not or not (the taxpayer) is the one mum or dad making a toddler help cost.”

In that case, the taxpayer paid month-to-month baby help in an quantity that represented a set-off between what he and his former partner had been every required to contribute below the rules. Whereas their respective guideline incomes had 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-about the Supreme Court docket of Canada’s assertion that the underlying precept behind the rules is that spouses have a joint monetary obligation to help their youngsters in accordance with their relative talents to take action. After figuring out their respective obligations to contribute below the rules, one mum or dad could also be required to make baby help funds to the opposite; nevertheless, “the set-off idea doesn’t rework the respective obligations into help funds for revenue tax functions.”

Within the present case, the couple’s separation settlement solely required the taxpayer to pay baby help. With respect to his ex-spouse, whereas her revenue was considered within the guideline calculation and the revenue quantity seems within the settlement, there is no such thing as a requirement within the settlement that she pay baby help to the taxpayer based mostly on her guideline revenue.

Whereas the decide appreciated the taxpayer’s arguments, she famous that the case regulation and tax laws are clear in that they don’t allow the taxpayer to say 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 think about updating the wording of their separation settlement to “replicate their acknowledged intentions for revenue tax functions,” which can permit him to reopen the previous ten years of tax returns and request reassessments to permit the credit score below a particular rule within the Tax Act designed for conditions when neither mum or dad can in any other case declare the dependant credit score.

In 2008, an analogous case was delivered to Tax Court docket, during which a taxpayer tried to argue that Canada’s tax regulation discriminates in opposition to divorced dads like him, who share custody of their youngsters and pay baby 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 among their two daughters for whom they shared joint custody. However the CRA denied his declare as he was the only mum or dad paying baby help.

The decide in that case went on to clarify that the quantity that the taxpayer was required to pay as baby help below the rules already takes under consideration the truth that, as somebody who pays help, he wouldn’t be entitled to say the dependant credit score, and consequently, his baby help cost is lower than it could have been if he had been entitled to say the credit score.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Non-public Wealth in Toronto. Jamie.Golombek@cibc.com.

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