Significant financial and non-financial issues arise during the breakdown of a relationship. This article addresses the various tax claims and related benefits for children that should be considered in the finalization of a separation or divorce agreement. These issues can also be relevant for parents who never lived together.
Common Law Partners
For income tax purposes, two individuals who cohabitate in a conjugal relationship are treated the same as a married couple if, either that cohabitation has continued for at least a year, or they have a child together. For purposes of the article, the term “spouse” includes common-law partners.
For joint custody arrangements, the CRA conducts a detailed review to determine which parent is eligible for benefits. This review attempts to determine where the children spend most of their time and who is primarily responsible for their upbringing.
For income tax purposes, you are generally considered separated when you start living separate and apart from your spouse because of a breakdown in the relationship for a period of at least 90 days, assuming you have not reconciled.
Universal Child Care Benefit (UCCB) And Canada Child Tax Benefit (CCTB)
Under the current UCCB program, families receive $160 per month for each child under the age of 6, and $60 per month for children ages 6 to 17 regardless of the their income level. This amount is taxable to the lower income spouse. A single parent can often designate this income to be reported by a child instead, but this must be the child claimed as an eligible dependent if such a claim is made.
The CCTB provides a non-taxable monthly amount to lower income families. This benefit starts to phase out when family income reaches $44,701 (2014 income; some items, including UCCB, are excluded) at a rate of 2% of income above that level. For families with two or more children, the reduction is 4% of the excess income. The income level at which the benefit is completely phased out is dependent on the number of children in the family.
During the recent election campaign, the Liberals promised to replace the UCCB and CCTB with the new Canada Child Benefit (CTB). The CTB will start at $6,400 per year for children under the age of 6 and $5,400 per year per child 6 to 17 years old. The benefit starts to phase out when the family income exceeds $30,000, as following:
|No. of Children
|$30,000 – $65,000
Liberal documents estimate family income of $150,000 as the breakpoint where families will receive less under the new model, with no payments at approximately $190,000 of family income ($160,000 if the family has no children under the age of six). Since publication, the Canada Child Tax Benefit has been proposed to commence in July, 2016. The phase -out provisions were modified from the election proposals, and the chart above has been revised to reflect the rates announced in the 2016 Federal Budget.
Impact of Relationship Breakdown
If a parent is required to make child support payments in relation to a specific dependent, they are not eligible to claim that dependent. Every July, CCTB eligibility is revised based on your and your spouse’s income tax returns from the prior year. If you are separated for a consecutive period of 90 days, it is important to notify the CRA of this change as soon as possible on CRA Form RC66 (online at http://www.cra-arc.gc.ca/E/pbg/tf/rc66/README.html). CRA will recalculate your eligibility considering your new marital status, and only your income. Similarly, remarriage, including a new common-law relationship, should be reported so payments are adjusted.
If you are the individual who ordinarily resides with a child and are primarily responsible for their care and upbringing, you will usually be the one who is eligible for these benefits. They cannot be shared between parents.
For joint custody arrangements, the CRA conducts a detailed review to determine which parent is eligible for benefits. This review attempts to determine where the children spend most of their time and who is primarily responsible for their upbringing. This review can include letters from neighbours to verify that the children live at a particular address and how much time they spend there, letters from school outlining contact information on file, enrollment documentation in extra-circular activities, and of course, a copy of the signed court order or separation agreement outlining the custody arrangements. Parents can object to the CRA’s assessment if they are dissatisfied with the results.
If one parent has custody of the children the majority of the time and is the primary caregiver, that parent is entitled to the benefits.
Where both parents satisfy the “ordinarily resided with” and “primary care” requirements, each will be entitled to half of the benefits which would be paid if they were the sole primary caregiver. This is another reason the CRA should be updated when custody changes.
Child Care Expense Deductions
Only one eligible dependent claim can be made per household. For example, where two single parents live together, each with a child they could claim as an eligible dependent, only one of them can claim the credit.Effective in 2015, the child care expense limits rose to $8,000 ( from $7,000) for children under age 7, to $5,000 (from $4,000) for children aged 7 through 16, and to $11,000 (from $10,000) for children eligible for the Disability Tax Credit, regardless of age.
In general, the amount paid for childcare services rendered in the year (up to the limits listed above) may be deducted when the taxpayer lives alone (you do not have a “supporting person”), or by the taxpayer with the lower income where the taxpayer lives with a “supporting person” (usually a spouse).
Impact of Separation
These claims are available only where the costs are incurred to permit the parent to earn income, usually from employment or self-employment, or to enable the parent’s education. The parent residing with the children is eligible to claim the deduction for costs they pay. In joint custody situations, where the children live with each parent at different times in the year, both parents may claim the deduction for the periods when the children resided with them, to the extent that they paid the expenses.
For a period of separation, the higher income spouse will be eligible to claim childcare expenses.
Where a parent has a new spouse, the lower income spouse will normally have to claim the deduction for the childcare expenses, even though they may not relate to that spouse’s children.
If you are separated for a consecutive period of 90 days, it is important to notify the CRA of this change as soon as possible on CRA Form RC66Where a settlement arrangement requires that one parent pay for the childcare expenses and be reimbursed for a portion of these expenses by the other parent, the parent is considered to have paid childcare expenses only to the extent of their costs, net of the reimbursement received. The reimbursing parent is considered to have paid childcare expenses in the amount of the reimbursement. This would differ from the recipient paying childcare expenses from child or spousal support payments received.
Eligible Dependent Credit
The eligible dependent credit provides a significant non-refundable credit, potentially reducing taxes by $3,520 (2015 in Alberta) where the taxpayer meets the following requirements at any time in the year:
- they did not have a spouse, or were not living with, supporting or being supported by that person;
- they supported a dependent in the year; and
- they lived with that dependent in a home they maintained.
Eligibility for this credit becomes more complicated where parents share custody. Both parents could meet the requirements and therefore could technically be eligible to claim this credit. However, only one person may claim each child in any given year. Written agreement as to who will claim each child is advisable.
For income tax purposes, you are generally considered separated when you start living separate and apart from your spouse because of a breakdown in the relationship for a period of at least 90 days, assuming you have not reconciled.If a parent is required to make child support payments in relation to a specific dependent, they are not eligible to claim that dependent. Where both parents are required to pay support in relation to the child, this restriction is overridden, and either may be entitled to a claim. The courts have generally ruled that, where the Federal Child Support Guidelines for shared custody result in support amounts that consider what each parent would pay if the other had sole custody, only the parent required to make a payment is “required to pay support”. However, some judges have indicated that an agreement or order that explicitly required payments by each parent could result in both parents being required to pay support, so either parent could claim the child.
Only one eligible dependent claim can be made per household. For example, where two single parents live together, each with a child they could claim as an eligible dependent, only one of them can claim the credit.
The CRA commonly reviews these claims. Supporting the claim usually requires evidence of residence of the child, a copy of the written separation or custody agreement, evidence that the other parent is living in a separate residence, agreement between the parents on who will claim the credit, and other items.
Other Income Tax Considerations upon Separation
Parents are generally able to claim amounts they paid for other credits related to children, including children’s fitness credits, children’s arts credits, public transit credits , and medical expenses, within the usual requirements and limits of such claims.
There are numerous other income tax issues arise from a separation or divorce, that are unrelated to the children, so these are not discussed here.
Usually a breakdown in a relationship will mean a decrease in finances available to the family. Planning for the tax implications subsequent to the breakdown can greatly assist in optimizing the benefits available, and avoiding later disputes.