Jamie Golombek: CRA denied divorced dad’s declare, displaying the significance of separation settlement wording
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Among the many many private non-refundable credit some taxpayers can declare on their private tax return is the “eligible dependant credit score,” generally known as the “equivalent-to-spouse” quantity. The credit score is obtainable to a taxpayer who doesn’t have a partner or accomplice, however who lives with a dependent mum or dad or grandparent, little one, grandchild, brother or sister who’s both underneath the age of 18 or is wholly depending on the taxpayer because of a bodily or psychological incapacity.
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For 2024, the dependant quantity is $15,705, which on the federal 15 per cent non-refundable tax credit score charge is price $2,356. A parallel provincial credit score can also be out there and its worth is determined by which province you reside in. The credit score quantity is decreased dollar-for-dollar by the online earnings of the dependant, and will solely be claimed as soon as per family annually, by one particular person. About a million taxpayers claimed this credit score in 2021.
For folks who’re separated or divorced and nonetheless have minor kids residing at dwelling, the entitlement to the credit score may be complicated, as it’ll rely upon whether or not little one assist is being paid and to whom. Below the Revenue Tax Act, the credit score can’t be claimed by a taxpayer who pays little one assist to their former partner or accomplice. A current case determined by the Tax Courtroom 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 offered for equal shared custody of their two minor kids, with every mum or dad having the youngsters for an equal variety of days over a repeating four-week cycle.
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When {couples} separate, the Federal Youngster Help Tips are used to legally decide the quantity of kid assist one mum or dad should pay to the opposite mum or dad to assist assist their kids. The rules work on the precept that each mother and father 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 little one assist quantities in a desk that makes use of the paying mum or dad’s stage of earnings, and the variety of kids eligible for assist.
Within the case of fifty/50 custody, the kid assist is often calculated for every mum or dad, the decrease quantity is deducted from the upper, and the upper incomes mum or dad pays the opposite mum or dad the distinction. This is called “set-off” assist.
Below 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 30 days, “being an quantity calculated on the set-off of assist primarily based upon the respective earnings of the events.” Every year, monetary data was to be exchanged between spouses as to their respective incomes, and the assist for the next 12 months can be adjusted accordingly.
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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 little one, and doing so “retains issues as equal as doable between them financially.”
A previous resolution of the Federal Courtroom of Attraction discovered that within the context of assist funds and the dependant credit score, the “idea of set-off distracts from the true problem which is whether or not or not (the taxpayer) is the one mum or dad making a baby assist cost.”
In that case, the taxpayer paid month-to-month little one assist in an quantity that represented a set-off between what he and his former partner have been every required to contribute underneath the rules. Whereas their respective guideline incomes have been referenced within the court docket order, solely the taxpayer was directed to pay a assist quantity.
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That court docket thought-about the Supreme Courtroom of Canada’s assertion that the underlying precept behind the rules is that spouses have a joint monetary obligation to assist their kids in accordance with their relative talents to take action. After figuring out their respective obligations to contribute underneath the rules, one mum or dad could also be required to make little one assist funds to the opposite; nonetheless, “the set-off idea doesn’t remodel the respective obligations into assist funds for earnings tax functions.”
Within the present case, the couple’s separation settlement solely required the taxpayer to pay little one assist. With respect to his ex-spouse, whereas her earnings was considered within the guideline calculation and the earnings quantity seems within the settlement, there isn’t a requirement within the settlement that she pay little one assist to the taxpayer primarily based on her guideline earnings.
Whereas the decide appreciated the taxpayer’s arguments, she famous that the case legislation 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 assist.
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She did, nonetheless, encourage the taxpayer and his ex-spouse to think about updating the wording of their separation settlement to “mirror their said intentions for earnings tax functions,” which can enable him to reopen the previous ten years of tax returns and request reassessments to permit the credit score underneath a particular rule within the Tax Act designed for conditions when neither mum or dad can in any other case declare the dependant credit score.
In 2008, the same case was delivered to Tax Courtroom, during which a taxpayer tried to argue that Canada’s tax legislation discriminates towards divorced dads like him, who share custody of their kids and pay little one assist 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 among their two daughters for whom they shared joint custody. However the CRA denied his declare as he was the only mum or dad paying little one assist.
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The decide in that case went on to elucidate that the quantity that the taxpayer was required to pay as little one assist underneath the rules already takes into consideration the truth that, as somebody who pays assist, he wouldn’t be entitled to assert the dependant credit score, and consequently, his little one assist cost is lower than it might have been if he have 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.
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