Parents paying child support can get dependant tax credit denied

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Among the many personal non-refundable credits some taxpayers can claim on their personal tax return is the “eligible dependant credit,” sometimes referred to as the “equivalent-to-spouse” amount. The credit is available to a taxpayer who does not have a spouse or partner, but who lives with a dependent parent or grandparent, child, grandchild, brother or sister who is either under the age of 18 or is wholly dependent on the taxpayer due to a physical or mental disability.

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For 2024, the dependant amount is $15,705, which at the federal 15 per cent non-refundable tax credit rate is worth $2,356. A parallel provincial credit is also available and its value depends on which province you live in. The credit amount is reduced dollar-for-dollar by the net income of the dependant, and may only be claimed once per household each year, by one individual. About one million taxpayers claimed this credit in 2021.

For parents who are separated or divorced and still have minor children living at home, the entitlement to the credit can be complex, as it will depend on whether child support is being paid and to whom. Under the Income Tax Act, the credit cannot be claimed by a taxpayer who pays child support to their former spouse or partner. A recent case decided by the Tax Court in October dealt with the entitlement to the credit.

The taxpayer and his now ex-spouse had separated in March 2016. The couple entered into a written separation agreement in July 2016, which provided for equal shared custody of their two minor children, with each parent having the kids for an equal number of days over a repeating four-week cycle.

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When couples separate, the Federal Child Support Guidelines are used to legally determine the amount of child support one parent must pay to the other parent to help support their children. The guidelines work on the principle that both parents should share the same portion of their income with their children as if they lived together. The guidelines set out monthly child support amounts in a table that uses the paying parent’s level of income, and the number of children eligible for support.

In the case of 50/50 custody, the child support is typically calculated for each parent, the lower amount is deducted from the higher, and the higher earning parent pays the other parent the difference. This is known as “set-off” support.

Under the terms of this couple’s agreement, based on the husband’s annual income of $55,000 and the wife’s income of $36,500, the husband was to pay to his ex-wife, beginning in September 2016, the child guideline amount of $289 per month, “being an amount calculated on the set-off of support based upon the respective income of the parties.” Each year, financial information was to be exchanged between spouses as to their respective incomes, and the support for the following year would be adjusted accordingly.

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The taxpayer argued that one cheque representing the set-off amount was paid by him to his ex-spouse for “net convenience, i.e. to avoid the inconvenience of sending cheques to each other.”

The Canada Revenue Agency denied the taxpayer’s claim for the dependant credit 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 always had a mutually agreed shared 50/50 custody agreement for both children, they agreed to each claim the dependant credit with respect to a particular child, and doing so “keeps things as equal as possible between them financially.”

A prior decision of the Federal Court of Appeal found that in the context of support payments and the dependant credit, the “concept of set-off distracts from the real issue which is whether or not (the taxpayer) is the only parent making a child support payment.”

In that case, the taxpayer paid monthly child support in an amount that represented a set-off between what he and his former spouse were each required to contribute under the guidelines. While their respective guideline incomes were referenced in the court order, only the taxpayer was directed to pay a support amount.

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That court considered the Supreme Court of Canada’s statement that the underlying principle behind the guidelines is that spouses have a joint financial obligation to support their children in accordance with their relative abilities to do so. After determining their respective obligations to contribute under the guidelines, one parent may be required to make child support payments to the other; however, “the set-off concept does not transform the respective obligations into support payments for income tax purposes.”

In the current case, the couple’s separation agreement only required the taxpayer to pay child support. With respect to his ex-spouse, while her income was taken into consideration in the guideline calculation and the income amount appears in the agreement, there is no requirement in the agreement that she pay child support to the taxpayer based on her guideline income.

While the judge appreciated the taxpayer’s arguments, she noted that the case law and tax legislation are clear in that they don’t permit the taxpayer to claim the dependant credit since he was the sole payor of child support.

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She did, however, encourage the taxpayer and his ex-spouse to consider updating the wording of their separation agreement to “reflect their stated intentions for income tax purposes,” which may allow him to reopen the past ten years of tax returns and request reassessments to allow the credit under a special rule in the Tax Act designed for situations when neither parent can otherwise claim the dependant credit.

In 2008, a similar case was brought to Tax Court, in which a taxpayer tried to argue that Canada’s tax law discriminates against divorced dads like him, who share custody of their children and pay child support to their former spouses. As part of his divorce settlement, he and his ex-wife had agreed that each would claim the dependant credit for one of their two daughters for whom they shared joint custody. But the CRA denied his claim as he was the sole parent paying child support.

The judge in that case went on to explain that the amount that the taxpayer was required to pay as child support under the guidelines already takes into account the fact that, as someone who pays support, he would not be entitled to claim the dependant credit, and as a result, his child support payment is less than it would have been if he were entitled to claim the credit.

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

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