SNAKES AND LADDERS: SHARED CUSTODY, CHILD SUPPORT, AND THE ELIGIBLE DEPENDENT TAX CREDIT (Line 30400)

Authored by Carolyn L. Seitz, KC

The rules set out in the Income Tax Act are convoluted. The rules related to child support where parties share custody and residency of children can also be complex. Combining the two of them frequently results in a headache.

Section 9 of the Child Support Guidelines governs child support where a child lives with each parent more than 40% of the child’s time. Under section 9(a), the parties are to review what each of them would have paid the other under section 3 of the Guidelines if that child lived primarily with the other parent. As a starting point, they subtract the smaller payment from the larger, with the net amount to be paid. This is generally referred to as a “set-off” and is easy to determine and calculate. Subsections (b) and (c) then complicate matters: the parents are also to take into account “the increased costs of shared parenting time arrangements” and “the conditions, means, needs and other circumstances of each spouse and of any child for whom support is sought.”

Cases have consistently stated that subsections (a), (b), and (c) are all to have equal weight; that “simple set-off” should not be automatically applied; and that shared residency does not even necessarily mean that there should be any reduction from what the payer parent would have paid had the child lived primarily with the recipient parent, depending on the result of the analysis of (b) and (c).

The “increased costs of shared parenting” have never been particularly well defined, other than a recognition that there may be some duplication of costs that would not have been incurred had the child lived primarily with one parent and that not every dollar spent by a payer parent is saved by the recipient parent.

Similarly, “conditions, means, needs and other circumstances” of the parents and child is a broad statement, lending itself to multiple interpretations. Courts have found that there should not be a large difference in the standard of living when a child moves between households, but the application of this paragraph will be very dependent on the specific circumstances of the parents.

Many families flee the fog of subsections (b) and (c) to the clarity of (a)’s simple set-off. This often results in the notional payment of support by the lower-income earner and the actual payment of the set-off amount by the higher earner. Unfortunately, that causes the paying parent to run afoul of the Income Tax Act if he or she wants to claim the eligible dependent credit. As any parent can only claim one child, it makes sense where the parents have more than one child that each parent claims one. Even where they only have one child, it may make sense that the dependent credit be shared in some fashion. However, no one ever accused the Income Tax Act of being all that sensible.

The following simple rules apply:

• A taxpayer can claim only one eligible dependent in a year.
• A separated parent who is not claiming a new spouse as a dependent can claim one child instead.
• The eligible dependent credit cannot be shared between parents in any one year; however, parents can agree to annually alternate claiming the credit.
• If both parties claim the same child in the same year, both parties will be denied the claim.

Then it gets complicated:

• A taxpayer who is paying child support cannot claim the eligible dependent credit.
• However, if the rule that a support payer cannot claim the credit for a child results in no one being able to claim that child, that rule will be negated with respect to that child.

The end result is:

If you have shared residency and your support agreement is calculated on a set-off basis, for each parent to be able to claim the eligible dependent credit either for different children or on an alternating basis for the same child:

• Your Court Order must state the amount that each party is to pay the other (“The Plaintiff shall pay the Defendant $400 per month in child support and the Defendant shall pay the Plaintiff $750 per month in child support”); and
• You must actually pay that amount to the other party. No paying the net amount!

The obligation to pay, and the actual payment by each parent to the other, prevents either from claiming the Eligible Dependent Credit. This, in turn, suspends the rule that a support-paying parent cannot claim it, allowing both parents to do so.

For those who want the details, here are the Income Tax Act sections:

• Section 56.1(4) – Defines child support as any support payment that is not defined as spousal support. “Definitions (4) The definitions in this subsection apply in this section and section 56. child support amount means any support amount that is not identified in the agreement or order under which it is receivable as being solely for the support of a recipient who is a spouse or common-law partner or former spouse or common-law partner of the payer or who is a parent of a child of whom the payer is a legal parent. (pension alimentaire pour enfants)”
• Section 118 – Allows for the Eligible Dependent Credit to be claimed: 118(1)(a) allows a taxpayer to claim a spouse as an eligible dependent.

o?? 118(1)(b) allows a taxpayer to claim a different person (including a child) who is wholly dependent as an eligible dependent if not claiming a spouse.

o?? 118(5) – Any taxpayer who is paying child support cannot claim that child as an eligible dependent.

o?? 118(5.1) – If the provisions of section 118(5) result in no one being able to claim a particular child as a dependent, section 118(5) shall not apply.

o?? For section 118(5.1) to apply in a shared custody situation, both parents must pay child support to one another.

·?????? “Section 118 (5) Support (5) No amount may be deducted under subsection (1) in computing an individual’s tax payable under this Part for a taxation year in respect of a person where the individual is required to pay a support amount (within the meaning assigned by subsection 56.1(4)) to the individual’s spouse or common-law partner or former spouse or common-law partner in respect of the person and the individual:

(a) lives separate and apart from the spouse or common-law partner or former spouse or common-law partner throughout the year because of the breakdown of their marriage or common-law partnership; or (b) claims a deduction for the year because of section 60 in respect of a support amount paid to the spouse or common-law partner or former spouse or common-law partner.

Where subsection (5) does not apply (5.1) Where, if this Act were read without reference to this subsection, solely because of the application of subsection (5), no individual is entitled to a deduction under paragraph (b) or (b.1) of the description of B in subsection (1) for a taxation year in respect of a child, subsection (5) shall not apply in respect of that child for that taxation year.”