Unintended Consequences of Set Off Child Support
Separated and divorced spouses who have a shared parenting arrangement for their minor children should be aware of a potential unexpected pitfall when it comes to claiming their child as a dependent on their income tax return.
The Federal Child Support Guidelines (the “Guidelines”) establish a framework for the noncustodial parent to provide a monthly amount of child support to the custodial parent. The support is designed to help the custodial parent to cover some, although not all, of the children’s expenses. The Guidelines specify the quantum payable according to a grid commensurate with the payor’s income.
However there are an increasing number of families whose post separation parenting arrangement is either “split custody” or “shared custody”. Split custody is when each parent has custody of one or more children. In this scenario the amount of a child support payable is the difference between the amounts that each spouse would otherwise pay if a child support order were sought against each of the spouses. Shared custody is when the primary residence of the children is split relatively equally between both parents. To qualify as shared parenting each parent must have the child(ren) for at least 40% of the time. In shared parenting the child support payable is the difference between what each parent would have to pay the other for the support of the children in their care. Paying the difference between the two amounts is commonly called paying the “set-off” amount of child support.
For example Parent A’s obligation to Parent B for the children in B’s care is $1,000 per month. Parent B’s obligation to Parent A for the children in A’s care is $250 per month. A would pay $750 per month in child support to B since this is the difference between A’s obligation and B’s obligation.
It is fairly common practice in family law for the higher income earning parent to send the lower income parent a cheque for the “set off” figure. This is not surprising since this arrangement appears to be practical, efficient and relatively simple. However in light of recent developments in tax law I urge my clients to exercise caution with this issue.
Both the Tax Court of Canada and the Federal Court of Appeal have recently ruled on the tax implications of paying only the “set off” amount of child support. Despite the wording contained in the Guidelines and despite the common practice, these two Federal Courts have ruled that the language used in the Income Tax Act does not permit the exchange of only “set off” amounts without adverse tax consequences. These court decisions have determined that if both parents want to be able to each claim one child as a dependent in a shared or split parenting arrangement, both parents must actually pay to one another their respective “full table” amount of child support. These Courts have ruled that if the child support only goes one way, i.e., if the higher income spouse pays only the “set off” child support, it will frustrate that party’s ability to claim one child as a dependent on their income tax returns. Although it may seem artificial or redundant for parents to be sending each other cheques that cross in the mail, I urge my clients to do just that, since this is the way to ensure that their child’s tax deductibility remains protected Because the ability to claim a minor child as a dependent is a significant tax savings year after year, I urge my clients to make sure they actually physically pay their full amount of child support obligation to the their former spouse by either physically writing a cheque or by sending an etransfer.