Family Law and Taxes

November 9, 2020

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% 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.

Cox & Palmer’s Family Law Group is well versed and able to provide you with guidance on these important benefits and tax credits. Our lawyers can help you structure your settlement in a way that maximizes the benefits and provides relief to families and children.

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