A 2013 Federal Court of Appeal decision (Verones v R, 2013 FCA 69), followed by a 2016 decision of the Tax Court of Canada (Harder v R, 2016 TCC 197) have resulted in a potential tax consequence to separated and divorced spouses who have a shared or split parenting arrangement for their children, specifically when claiming their children as dependents on their taxes.
Normally, where one parent is the primary caregiver of the children, the Federal Child Support Guidelines (the “Guidelines”) set out a monthly amount of child support payable to the custodial parent by the noncustodial parent. The amount payable is calculated using a table based on the payor’s income and is called the “table amount” of child support. This may seem straight-forward; however, as a result of the Verones and Harder decisions, a difficulty arises in situations where the parenting arrangement between separated or divorced spouses is either “split custody” or “shared custody”.
Split custody, or split parenting, is when each parent has the primary care of one or more children. In such a situation, each parent is responsible for paying to the other parent the full table amount of child support required for the child or children that are not in their primary care.
Shared custody, or shared parenting is when both parents have primary care of the children on a relatively equal basis. Pursuant to the Guidelines, each parent must have the children for at least 40% of the time to qualify for shared parenting. In this situation, the child support payable is the difference between what each parent would have to pay the other for the support of the children if the other parent were to have primary care of the children.
In split parenting or shared parenting arrangements, it has been common practice to calculate the table amount of child support each parent would pay, and then have the higher income earner pay the difference to the lower income earner. This is referred to as the “set off” amount.
However, since the Verones and Harder decisions, clients and family law lawyers alike should be careful to consider how to make child support payments in split parenting and shared parenting arrangements, as paying only the set off amount could mean that a parent will not be able to claim a child as a deduction on their taxes. The Federal Court of Appeal in Verones and the Federal Tax Court of Canada in Harder have ruled that the Income Tax Act only allows both parents to claim a child as a tax deduction if each parent actually pays to the other the full table amount of child support due. This is because subsections 118(5) and 118(5.1) of the Income Tax Act require, at minimum, a “proper documentary and evidentiary record”. This is a change from the common practice, as it means that each parent must now factually pay the other the full table amount of child support by way of either a physical cheque or e-transfer in order to take advantage of the tax deductibility by both parents of one or more of their children.
An arrangement of this sort could lead to problems where one parent either pays his or her child support late, or does not pay it at all. The parent who paid would then be enriching the parent who did not pay, or paid late. If that parent is the higher income earner, it could put the lower income earner in a situation where he or she cannot meet financial obligations.
It is not an ideal situation, but until such time as the legislation is amended, each parent should be sure to pay the full table amount of child support to the other if they both wish to claim one or more children as a tax deduction.
Candice is a family lawyer with First Law Corporation, a distinct practice within Quay Law Centre.