Home Personal Finance Dad and mom paying baby help can get dependant tax credit score denied

Dad and mom paying baby help can get dependant tax credit score denied

0
Dad and mom paying baby help can get dependant tax credit score denied

[ad_1]

Jamie Golombek: CRA denied divorced dad’s declare, displaying the significance of separation settlement wording

Article content material

Among the many many private non-refundable credit some taxpayers can declare on their private tax return is the “eligible dependant credit score,” typically known as the “equivalent-to-spouse” quantity. The credit score is offered to a taxpayer who doesn’t have a partner or accomplice, however who lives with a dependent guardian or grandparent, baby, grandchild, brother or sister who’s both below the age of 18 or is wholly depending on the taxpayer as a consequence of a bodily or psychological incapacity.

Commercial 2

Article content material

For 2024, the dependant quantity is $15,705, which on the federal 15 per cent non-refundable tax credit score fee is value $2,356. A parallel provincial credit score can also be obtainable and its worth relies on which province you reside in. The credit score quantity is decreased dollar-for-dollar by the web earnings of the dependant, and should solely be claimed as soon as per family every year, by one particular person. About a million taxpayers claimed this credit score in 2021.

For fogeys who’re separated or divorced and nonetheless have minor kids dwelling at residence, the entitlement to the credit score could be advanced, as it is going to rely upon whether or not baby help is being paid and to whom. Underneath the Earnings Tax Act, the credit score can’t be claimed by a taxpayer who pays baby help to their former partner or accomplice. A latest case determined by the Tax Court docket in October handled the entitlement to the credit score.

The taxpayer and his now ex-spouse had separated in March 2016. The couple entered right into a written separation settlement in July 2016, which supplied for equal shared custody of their two minor kids, with every guardian having the youngsters for an equal variety of days over a repeating four-week cycle.

Article content material

Commercial 3

Article content material

When {couples} separate, the Federal Little one Assist Pointers are used to legally decide the quantity of kid help one guardian should pay to the opposite guardian to assist help their kids. The rules work on the precept that each dad and mom ought to share the identical portion of their earnings with their kids as in the event that they lived collectively. The rules set out month-to-month baby help quantities in a desk that makes use of the paying guardian’s degree of earnings, and the variety of kids eligible for help.

Within the case of fifty/50 custody, the kid help is often calculated for every guardian, the decrease quantity is deducted from the upper, and the upper incomes guardian pays the opposite guardian the distinction. This is called “set-off” help.

Underneath the phrases of this couple’s settlement, primarily based on the husband’s annual earnings of $55,000 and the spouse’s earnings of $36,500, the husband was to pay to his ex-wife, starting in September 2016, the kid guideline quantity of $289 per thirty days, “being an quantity calculated on the set-off of help primarily based upon the respective earnings of the events.” Every year, monetary info was to be exchanged between spouses as to their respective incomes, and the help for the next 12 months can be adjusted accordingly.

Commercial 4

Article content material

The taxpayer argued that one cheque representing the set-off quantity was paid by him to his ex-spouse for “internet comfort, i.e. to keep away from the inconvenience of sending cheques to one another.”

The Canada Income Company denied the taxpayer’s declare for the dependant credit score 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 at all times had a mutually agreed shared 50/50 custody settlement for each kids, they agreed to every declare the dependant credit score with respect to a selected baby, and doing so “retains issues as equal as attainable between them financially.”

A previous resolution of the Federal Court docket of Attraction discovered that within the context of help funds and the dependant credit score, the “idea of set-off distracts from the true challenge which is whether or not or not (the taxpayer) is the one guardian making a toddler help cost.”

In that case, the taxpayer paid month-to-month baby help in an quantity that represented a set-off between what he and his former partner had been every required to contribute below the rules. Whereas their respective guideline incomes had been referenced within the court docket order, solely the taxpayer was directed to pay a help quantity.

Commercial 5

Article content material

That court docket thought of the Supreme Court docket of Canada’s assertion that the underlying precept behind the rules is that spouses have a joint monetary obligation to help their kids in accordance with their relative skills to take action. After figuring out their respective obligations to contribute below the rules, one guardian could also be required to make baby help funds to the opposite; nevertheless, “the set-off idea doesn’t rework the respective obligations into help funds for earnings tax functions.”

Within the present case, the couple’s separation settlement solely required the taxpayer to pay baby help. With respect to his ex-spouse, whereas her earnings was considered within the guideline calculation and the earnings quantity seems within the settlement, there is no such thing as a requirement within the settlement that she pay baby help to the taxpayer primarily based on her guideline earnings.

Whereas the choose appreciated the taxpayer’s arguments, she famous that the case regulation and tax laws are clear in that they don’t allow the taxpayer to assert the dependant credit score since he was the only payor of kid help.

Commercial 6

Article content material

She did, nevertheless, encourage the taxpayer and his ex-spouse to contemplate updating the wording of their separation settlement to “mirror their said intentions for earnings tax functions,” which can permit him to reopen the previous ten years of tax returns and request reassessments to permit the credit score below a particular rule within the Tax Act designed for conditions when neither guardian can in any other case declare the dependant credit score.

In 2008, an identical case was delivered to Tax Court docket, during which a taxpayer tried to argue that Canada’s tax regulation discriminates in opposition to divorced dads like him, who share custody of their kids and pay baby help to their former spouses. As a part of his divorce settlement, he and his ex-wife had agreed that every would declare the dependant credit score for one in every of their two daughters for whom they shared joint custody. However the CRA denied his declare as he was the only guardian paying baby help.

Really helpful from Editorial

The choose in that case went on to clarify that the quantity that the taxpayer was required to pay as baby help below the rules already takes into consideration the truth that, as somebody who pays help, he wouldn’t be entitled to assert the dependant credit score, and in consequence, his baby help cost is lower than it could have been if he had been entitled to assert the credit score.

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


For those who favored this story, join extra within the FP Investor publication.


Bookmark our web site and help our journalism: Don’t miss the enterprise information it’s essential know — add financialpost.com to your bookmarks and join our newsletters right here.

Article content material

[ad_2]