Without A Net: Unintended Tax Consequences of Child Support Payments

By Matthew Canzer
Categories: Blog, Family Law, Tax

What a great night out that was! I owe you $100 for my concert ticket, and you owe me $150 for dinner and drinks. Why don’t you just give me $50 and we’ll call it even Steven?

While most people don’t think twice about settling their debts this way, parents who owe each other child support payments would be wise to cut separate checks for each other rather than one parent pay the net difference. Otherwise, the parent making the net payment will be disqualified from claiming a personal tax credit for the child, even if that parent shares childcare responsibilities.

Here’s how the legislation works: under section 118(1) of the Income Tax Act a taxpayer can deduct a non-refundable personal credit. The size of the credit depends on the taxpayer’s personal circumstances, such as their age, marital status, and whether they care for dependants such as children or elderly adults. Under section 118(5) of the Act, a separated or divorced parent who pays child support to the other parent cannot claim the credit with respect to that child. This is because, in theory, a parent who is paying child support is not caring for the child on a daily basis; the other parent is, and so the other parent is more deserving of the credit.

In reality, many separated or divorced parents share custody and childcare responsibilities, and sometimes pay each other support for different months in the year. This would be a convenient way to arrange support payments if, say, the child lived with one parent for the summer months, or if the child switched residences every month. Such an arrangement has the unwanted effect of disqualifying both parents from claiming the credit because both parents pay child support, such that neither could claim the credit.[1]

Enter section 118(5.1) of the Act, which provides that if both parents pay each other child support such that both would be disqualified from claiming the credit, then section 118(5) does not apply. In other words, if both parents are required to pay support to each other, then one of them can still claim the credit.[2]

With this narrow exception, Parliament’s intention to ease the financial burden of caring for children is still given proper effect since at least one parent can claim the credit.

Unfortunately, family lawyers and tax lawyers were not quick enough to catch the quagmire that would ensue if agreements and court orders for child support simply required one parent to pay the net difference to the other parent, reflecting their shared custody agreement and their respective income levels.

The Tax Court of Canada has consistently rejected taxpayers’ arguments that such orders and agreements, which are usually based on the net difference between each parent’s obligations under the Federal Child Support Guidelines, trigger section 118(5.1) of the Act.[3] In such cases, the parent paying the net difference is not entitled to the credit, while the parent receiving the net difference is so entitled, despite their shared childcare responsibilities.

So what can be done to preserve the higher-paying parent’s ability to claim the credit in a shared custody situation?

The separation agreement or court order should contain provisions requiring each parent to pay support to the other, and the parents should make separate payments even if there is overlap. This will ensure that section 118(5.1) of the Act is triggered and that both parents are eligible, even though only one parent may claim the credit.[4]

Consult with a member of our tax law group for advice regarding how these provisions might apply to your particular circumstances. If you are considering varying an agreement or court order, a member of our Family Law group would be pleased to advise you and assist.

[1] This was the problem arising in a trilogy of cases: Slade, [2005] 5 CTC 2285 (TCC); Leclerc, [2007] 2 CTC 2448 (TCC); and de Moissac, [2007] 1 CTC 2001 (TCC).

[2] Section 118(4) of the Act deploys an Alternative Dispute Resolution reminiscent of the Judgment of King Solomon: if the separated parents can’t agree who gets to claim the credit, neither can claim it.

[3] See, for example Verones, 2013 FCA 69; Perrin, 2010 TCC 331; and Cunningham, 2012 TCC 279.

[4] See note 2, above.