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When a child lives with both parents in a shared parenting arrangement, the Federal Child Support Guidelines allow each parent to pay child support when the child resides with the other parent. Many parents will choose to offset the amount owed by the lower-income party so that only one payment must be exchanged. Notably, a parent’s eligibility to claim the dependant tax credit depends on whether child support is paid. Parents expecting to claim the tax credit should note that specific requirements must be met.
Income Tax Act Sets Out Eligibility Criteria
Section 118(5) of the Income Tax Act prohibits an individual from claiming credit if the claimant pays a “support amount” for the wholly dependent person. A “support amount” is defined as spousal or child support that arises from either a written agreement or a court order, and which is payable on a periodic basis. However, section 118(5.1) provides an exception to the prohibition. One parent can claim the tax credit when both parents pay the child support to the other.
In Verones v. Canada, the children resided 50% of the time with each parent. The appellant paid monthly child support, including a set-off of the amount his former spouse was required to contribute for the time the children resided with him. The appellant argued that both spouses paid child support to each other, and the set-off merely avoided the unnecessary exchange of cheques between them. The Tax Court of Canada determined the appellant was not entitled to claim the dependent person tax credits. The appellant claimed his situation fell within the exception and was entitled to the tax credit.
The Set-Off Does Not Equate to a Support Payment
The Federal Court of Appeal indicated that in the context of support payments and the wholly dependent person’s credit, any focus on a set-off simply distracts from the genuine issue, which is “whether or not the appellant is the only parent making a child support payment” under an agreement or order. Looking Contino v. Leonelli-Contino, that case articulated that the principle behind child support is the parents’ joint financial obligation to children “in accordance with their relative abilities to contribute to the performance of that obligation”. For the court in Verones, once the parent’s obligations to the children have been determined, one parent may be obligated to pay the other in their performance of that obligation. However, the concept of set-off “does not translate the parents’ respective obligation to contribute to child rearing into a “support payment.”
The court order only directed the appellant to make child support payments. Even though the former spouse’s income was considered in setting the amount that the appellant, as the higher-income spouse, was to pay, it was clear that his payments constituted a “support amount” under the Income Tax Act. The mother’s contribution to the children did not meet the definition since no court order or written agreement required her to make child support payments to the appellant. Consequently, the appellant was not entitled to the tax credits.
Focus is on Whether a Parent is Required to Make Child Support Payments
In Matchett v. The King, the issue was whether the husband’s eligible dependent credit was properly disallowed, whether the prohibition against receiving the tax credit in section 118(5) applied, or whether the exemption in section 118(5.1) arose. The husband and his ex-spouse separated and entered into a separation agreement that provided for equal parenting time. In the agreement, the spouses set out the income of both the husband and the wife and agreed that the husband would pay the wife child support in the amount of $289.00 per month, which was calculated, including the set-off of support based on the wife’s income. The husband testified that he paid one cheque to the wife, representing the set-off amount and that this avoided the inconvenience of sending cheques to each other. He also submitted a jointly signed letter with his ex-spouse stating that they each claimed the tax credit concerning a particular child.
Here, the separation agreement only required the husband to pay child support. The wife’s income was considered when calculating the amount of support that should be paid, and that income amount also appeared in the agreement. However, the Tax Court concluded that the agreement did not require her to pay child support to the husband based on her stated income. Courts have routinely interpreted section 118(5) as requiring “a clear expression of one parent’s obligation to pay child support to the other.” In a scenario where both parents are required to pay support to each other, the section would prohibit both of them from claiming the credit, in which case the exception in 118(5.1) would allow them to claim the credit.
The husband pointed to Lawson v. The Queen, a decision of the Tax Court of Canada that permitted both spouses to claim the credit despite mutual obligations to pay and only a single one-way payment occurring. However, the judge found that Lawson’s circumstances were significantly different. First, the payment obligation was not based solely on the Federal Child Support Guidelines. Also, different wording was included in the separation agreement and the subsequent minutes of the settlement, which more clearly indicated that each parent was to pay child support to the other. In Matchett, the judge concluded the husband was not eligible for the tax credit as legislation and case law were straightforward about the wording required to qualify for the tax credit. Going forward, Justice Wong signalled that the spouses might consider updating the wording of their agreement to reflect their true intentions for income tax purposes.
Plan Ahead to Take Advantage of the Tax Credit
Entitled to the dependant tax credit can be more complex than parents anticipate. Courts have concluded that the focus on any set-off distracts from whether a parent is making a child support payment. Parties need to be aware of this when preparing a separation agreement and should carefully consider the wording of their agreements; otherwise, their expectation to access or share the tax credit may go unfulfilled.
Windsor Family Lawyers Helping Clients Understand The Complexities Of Child Support And Tax Credits
If you are confused about child support and the eligible dependent tax credit in shared parenting situations, contact the experienced family lawyers at Johnson Miller Family Lawyers in Windsor. Our team can help you navigate the complexities of child support and tax credit eligibility, ensuring your agreement accurately reflects your intentions and maximizes your financial benefits. Call 519.973.1500 or contact us online to schedule a confidential consultation to discuss your circumstances.
