Shared Custody Parenting: Income Tax Issues - LawNow Magazine

Shared Custody Parenting: Income Tax Issues

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Since the introduction of the Federal Child Support Guidelines (FCSG) in 1997, custody arrangements have affected child support obligations for Canadian parents. The greatest flexibility applies to “shared custody” situations. Under the FCSG, a child is in shared custody where each parent “exercises a right of access to, or has physical custody of” the child at least 40% of the time over the course of a year.

Sharing the Income Tax Benefits

As is often the case, the Income Tax Act (ITA) was slow to catch up with developments in the child support rules. Before July 2011, only one parent could receive benefits such as the Canada Child Tax Benefit (now the Canada Child Benefit), the Universal Child Care Benefit (now repealed) and additional credits for children under programs such as the GST/HST credit.

In some cases, CRA permitted parents in shared custody arrangements to alternate which of them would receive these benefits over the course of the year. In other cases, the parents agreed on which of them would claim these benefits. As many were, and are, income-tested, directing all benefits to the lower-income parent often resulted in the family receiving significantly greater total benefits for a child.

Effective July 2011, the ITA caught up. It provided that each “shared-custody parent” would be entitled to 50% of the child-related benefits they would have been eligible for had the child been in their sole custody. However, the ITA did not adopt the FCSG definition of “shared custody”. Instead the ITA required that:

  • the parents “reside with the qualified dependant on an equal or near-equal basis”, and
  • each parent “primarily fulfil the responsibility for the care and upbringing of the qualified dependant when residing with the qualified dependant”.

Typically, the “qualified dependant” is a child, but the term can also apply to other dependants.

The issue here is what “equal or near-equal basis” means.

Canada Revenue Agency

The Canada Revenue Agency (CRA) interpreted the term “equal or near-equal” consistently with the FCSG, although their publications did not refer to percentages. One example provided was a child residing with one parent three days a week and the other four days a week (so about 43% and 57%). Many people assumed that the same 40% minimum time applied for these purposes, and that basis seemed to be adopted in some Tax Court cases. No Tax Court decision accepted a percentage less than 40% as meeting the requirements for “shared custody”.

Federal Court of Appeal

However, in two decisions released on March 27, 2019 (Lavrinenko v The Queen, 2019 FCA 51 and Morrissey v The Queen, 2019 FCA 56), the Federal Court of Appeal ruled that the ITA definition was not the same as the FCSG. Rather, the Court concluded that the ITA required a more equal basis, while acknowledging that a precise quantification was not realistic. The Court’s analysis suggested that equal or near-equal custody required that the child reside with each parent at least 45% of the time.

This created significant uncertainty. Parents with custody arrangements meeting the FCSG test (40% minimum) had relied on that rule also applying to benefit entitlements and, in some cases, had created child support agreements relying on sharing these benefits.

Department of Finance

On August 29, 2019, the Department of Finance released draft legislation amending the ITA’s definition of “shared-custody parent” to align the ITA rules with the FCSG rules. It set the minimum requirement at 40% custody by each parent. The proposed legislation also allows for parents to reside with the child on an “approximately equal basis”. This was stated to provide flexibility where the child generally resides with each parent in the 40% to 60% range and the parents try to reside with the child on as near an equal basis as possible, but this does not occur in a particular month due to unusual circumstances.  Examples such as illness or summer vacation schedules causing a split of 38% to 62% in a particular month were provided.

The ability to split benefits related to children does not extend to credits for an “eligible dependant” for income tax purposes.The proposal’s stated intent is to ensure that CRA’s current administrative practice is supported in law, with no change to the benefit payments any family is currently receiving in accordance with CRA’s interpretations.

Of course, the government was not in session when this draft legislation was released and was, at the time this article was written, engaged in an election campaign. The draft legislation is to be retroactive to July 2011 – the start of the ability to split these benefits between shared-custody parents. Hopefully, the legislation will be implemented in the fairly near future.

Dependant Claims

The ability to split benefits related to children does not extend to credits for an “eligible dependant” for income tax purposes. The child of a single parent is a common individual for whom this credit is available. The credit requires the taxpayer meet the following criteria at some time in the taxation year:

  • be unmarried (including common-law partnerships) or be separated (the taxpayer and their spouse or common-law partner neither live together nor support each other); and
  • maintain a “self-contained domestic establishment” (e.g. a house or apartment) where the taxpayer supports a dependant (various relatives, including a child under the age of 18, can qualify) who is dependent on the taxpayer for support.

Because the tests can be met at any time in the year, the credit is available in the year of separation.

This credit is indexed for inflation, reduced based on the income of the dependant, and can save over $1,800 of federal taxes in 2019. All provinces have analogous provincial credits. The Alberta credit can save over $1,900 of provincial taxes in 2019.

For shared custody arrangements, both parents would normally qualify to claim each child. However, two restrictions can cause issues:

  1. Only one person can claim a specific dependant. Where two or more taxpayers eligible to claim a specific dependant cannot agree on who will receive the credit, it is denied to all of them. It is not possible to split this claim – one parent must claim the full amount. Parents with more than one child could each claim a different child.
  2. A taxpayer cannot claim a dependant for whom they are required to pay a support amount. Basically, this prevents the parent required to pay child support from claiming any of the children for whom support is payable. However, if neither parent would be permitted to claim the child because of this restriction, the restriction does not apply and either parent is permitted to claim the child. In other words, if each parent is required to pay child support to the other at some time in the year, for the same child, either may claim that child as an eligible dependant, provided the other criteria are met.

For shared custody arrangements, the FCSG provides that child support is determined by computing the support each parent would be required to pay if the other parent had sole custody of the child. These amounts are then set off against one another. For example, if the children’s mother would be required to pay $1,500 of monthly support to their father if he had sole custody, and the father would be required to pay $1,000 of monthly support if the children’s mother had sole custody, typically the mother would be required to pay $500 per month. Some parents have argued that this computation means that both parents are required to pay support, so either can claim the child (or each may claim one child when there are two or more).

On August 29, 2019, the Department of Finance released draft legislation amending the ITA’s definition of “shared-custody parent” to align the ITA rules with the FCSG rules.The Tax Court has generally held that only the parent required to make a payment (the mother, in the example above) is required to pay support. As such, only the parent receiving support payments may claim the eligible dependant credit for any of the children. In some cases, where the support amounts are different from the FCSG amounts, the Tax Court has ruled that both parents are required to pay child support, so either may claim credits for the children. For example, in a 2017 Tax Court decision (Lawson vs. The Queen, 2017 TCC 131), the FCSG amounts payable by the taxpayer to his former spouse were set off against support payments required from the former spouse in respect of travel costs incurred by the taxpayer in order to facilitate the shared custody arrangement. The courts look closely at the terms of the support obligation in making such determinations.

Claims that both parents are required to pay support typically attract CRA scrutiny. A Tax Court appeal may be required to permit each parent to claim credits for one child where CRA does not consider that each parent is required to pay support.

Conclusion

Availability of income tax benefits for children of former spouses can become complex. The above addresses only a few commonly available tax benefits. These issues should be considered in negotiating arrangements between the parents to avoid future disputes. Unfortunately, this often requires additional professional advice, adding further costs and stress to an already unfortunate situation.

Authors:

Hugh Neilson
Hugh Neilson
Hugh Neilson, FCPA, FCA, TEP, is an independent contractor with Kingston Ross Pasnak LLP, and a member of the Video Tax News editorial board in Edmonton, Alberta.
 


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