Family Law And Taxes – Tax


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The area of law where family and taxes cross paths can be
difficult to navigate. This article will outline the most relevant
income tax issues facing couples who are separating or people
considering separation.

Child Related Tax Issues

The Canada Child Benefit

  • This is a tax-free benefit paid to
    parents monthly, available to both separated and intact families.
    In intact families, where both parents live in the same home with
    the child, the Canada Revenue Agency (“CRA”) usually
    considers the female parent as being primarily responsible for the
    care and upbringing of the child.

  • On separation, it is important that
    the parties update their marital status with the CRA in order to
    ensure the correct benefits are calculated. In situations of shared
    parenting (or where the child or children spend approximately equal
    amounts of time in each home), the CRA will calculate the amount
    each parent will get separately, using their respective adjusted
    family net income and then each parent will receive 50{5565a835e8436fceab45047feb07d9b08a17131f67bfa451fc3dea7831c5a73d} of that
    amount on a monthly basis.

  • Many parents try to maximize benefits
    during the separation process and may agree that one party will
    continue to receive the full amount of the Canada Child Benefit.
    This is a risky venture as the CRA is not bound to comply with
    these arrangements. A word of caution can be found at paragraph 52
    of the Honourable Justice Morrison’s decision in (S.L.) v.
    A.(B.A.)
    , 2013 NBQB 372:

52 Even if there was such an agreement, I would refuse to grant
the petitioner’s request on public policy grounds. The
petitioner had a positive obligation to advise CRA if any
information in her application for benefits was inaccurate or
changed (see Exhibit P-1, page 275). Clearly, the petitioner did
not meet that obligation. She continued to receive tax benefits at
the expense of the taxpayer for children whom she knew were not in
her care. She knowingly failed to report accurate information to
CRA and as a result the benefits she received were improper. Even
if I accepted that the respondent acquiesced in this arrangement,
the petitioner cannot transfer her liability to the respondent.
Simply put, the petitioner received financial benefit from the
taxpayer under false pretenses and is obligated to repay the funds.
The petitioner’s request that the respondent indemnify her in
this regard is denied.

The Child Disability Benefit and Disability Tax Credit
(“DTC”)

  • The Child Disability Benefit is a
    tax-free monthly payment made to families with a child under the
    age of 18 who has severe and prolonged impairment in physical or
    mental functions.

  • The DTC is a tax deduction available
    to be transferred to parents who have a child who has a severe and
    prolonged impairment. The DTC is not available if you are required
    to pay child support for the child in question.

  • If a parent’s application for the
    DTC on behalf of their child has been approved by the CRA and that
    parent is in receipt of the Canada Child Benefit, they do not need
    to apply for the Child Disability Benefit as it will be
    automatically sent by the CRA.

Childcare Expense Deduction

  • In intact families, generally it is
    the parent with the lower net income who will be able to claim
    eligible child care expenses on their income tax return.
  • For separated families, if the child
    resides with only one parent, then that parent is able to claim the
    childcare expenses that they paid as a deduction. In cases of
    shared parenting, each parent may only claim childcare expenses
    incurred for the portion of the year the child lived with that
    parent and the amount claimed must be based on the actual amounts
    paid by that parent.

Amount for an Eligible Dependant
(“equivalent-to-spouse”) Tax Credit

  • This is a tax credit or a deduction
    that is available when you meet the following three criteria at the
    same time at any time in the calendar year:
  1. You did not have a spouse or
    common-law partner or, if you did, you were not living with,
    supporting, or being supported by that person; and

  2. You supported a dependant; and

  3. You lived with the dependant in a
    home you maintained.
  • Two people cannot claim this credit
    for the same dependant. Therefore in situations of shared parenting
    (where a child resides in both homes), unless there is an
    agreement, neither party can make the claim.

  • If a parent is paying child support
    for the child that they intend to claim, then this deduction cannot
    be claimed for that child. This is complicated in situations of
    shared parenting where both parents may be paying support to one
    another for the child. In these cases it is extremely important to
    reach an agreement in writing on how this benefit will be treated
    and to clearly outline the payments being made by both parties to
    the other for the support of the child.

Tuition Tax Credit

  • Students who are enrolled full-time
    in eligible programs are eligible for a non-refundable tuition tax
    credit to reduce their income taxes payable. If a child has no tax
    to pay or their taxes payable are reduced to nothing without
    claiming the full amount of the tax credit, they may transfer up to
    $5,000.00 to a parent. The child may also choose to carry forward
    unused fees to a future year.

  • The treatment of the Tuition Tax
    Credit is important to consider during the separation process,
    particularly in cases where expenses for post-secondary education
    are being discussed.

Support Related Tax Issues

Deductibility of Spousal Support

  • Child Support is not taxable for the
    recipient or deductible by the payor.

  • Spousal Support is deductible when
    the following 5 criteria are met:
  1. There is a written agreement or court
    order that lists the specific payment to be made to the
    recipient.

  2. The recipient and payor are living
    separate and apart due to a breakdown in the relationship.

  3. The payment is made to support the
    recipient and the recipient can use the payment as they see
    fit.

  4. The timing of the payments are
    periodic and set out in the court order or written agreement.

  5. The payments are made to the
    recipient or the government agency enforcing the collection of
    support payments.
  • The rules created for the
    deductibility of spousal support are more complicated when they
    relate to payments made before a court order or written agreement
    is reached, where they are made to third parties, and when they are
    paid in a lump sum.
  1. Payments made before a court order or
    written agreement is reached – these payments can only be deducted
    if the written agreement or court order states that any amount
    previously paid is included in the court order or written agreement
    and this is only applicable for the year in which the
    written agreement or court order exists and the year previous.

  2. Specific Purpose and Third Party
    Payments – most commonly, these are payments made directly to
    a mortgage or utility provider. In this case, because the recipient
    cannot use the payment as they see fit, the court order or written
    agreement must state that the recipient will include the payments
    in income and the payor can deduct them.

  3. Lump sum payments – these are not
    deductible because they are not paid on a periodic basis. However,
    if the lump sum payment is made to bring the periodic payments
    required by court order or written agreement up to date, then that
    payment would be considered a support payment. There are other
    unique situations affecting the tax treatment of lump sum payments
    and therefore it is important to discuss these issues with a tax
    professional.

Legal Fees

  • If a parent incurred legal fees in
    order to secure either child or spousal support from a former
    partner, the legal fees can be deducted on Line 22100 of their
    income tax return. This applies to support only. Legal fees
    incurred for obtaining a separation or divorce, or relating to
    child custody or access are not deductible.

Property Related Tax Issues

Capital Gains and Primary Residence

  • If parties own more than one
    residence at separation, it is important that they deal with the
    designation of their principal residence so that the eventual sale
    of that home does not trigger capital gains tax. This should be
    discussed and agreed upon in the preparation of a separation
    agreement.

Future Changes

This article is accurate as of the date of publication. There is
on-going lobbying by the Family Law Section of the Canadian Bar
Association for change, particularly regarding the Eligible
Dependent Tax Credit in situations of shared parenting where child
support is only paid by one party. This issue was highlighted in
the Tax Court of Canada’s decision in Harder v.
Canada
, 2016 TCC 197, where the Court wrote:

[11] The practising family law Bar should take note. [.] If
separating spouses, seeking joint custody, wish to avail themselves
of a dependent deduction for both spouses in such situations,
surely family law lawyers can deploy their usual flexible skills to
ignore the set off provisions within the paradoxically named
“Divorce Mate” for a brief moment and mandate and effect
actual periodic payments by both spouses to each other in cases of
shared parenting of two or more children. Surely cheques, or even
their more modern replacement of recurring e-transfers, may
evidence a clearly enumerated, reciprocal and mandatory support
amount paid by each spouse to the other.

[12] Regrettably, until this factual scenario is placed before
the Court, sympathetic appellants, like Mr. Harder, shall have
their appeals dismissed. That result will continue to be both
unfortunate generally and purposively defeating of the child
benefit programme specifically; dependent deductions for a second
child shall remain legally unavailable to a unilateral support
paying parent.

The Canadian Bar Association’s Family Law Section is also
advocating for a change to the documents required for parents to
claim the Canada Child Benefit and the ability for support payors
to deduct their legal fees in a manner similar to recipients.

Key Points to Remember

To avoid delays in payments administered by the CRA, parents
should file their taxes on time every year, keep their marital
status and address up-to-date with the CRA, and provide the CRA
with any information requested.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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