Who gets to claim the children as dependents at tax time? Sometimes the answer to this question is straightforward. Parents with primary physical custody of their children can claim them as dependents and claim a deduction. Other times, such as when parents share custody and residence of their children this can become substantially more difficult. A dependent credit can only be claimed by one person. This means that Canada Revenue will not split your credit between you and your former spouse or partner (even if you ask nicely).
For this reason, family law lawyers will frequently craft agreements that address the inability to equally claim a dependent credit for children. For example, if there is more than one child each party may claim a different child or children as dependents, or the parties can alternate claiming the children on their taxes or agree to split the refund received by one parent upon receiving their credit.
Parents who share residence with their children should be very careful, however, in how they agree to share the eligible dependent credits as CRA may not always co-operate with their best laid plans.
In the case of Harder v. The Queen, 2016 TCC 197 (CanLII), a husband and wife made a separation agreement with the assistance of lawyers. It was agreed that the husband and wife would share custody and residence of their two children. As is often the case in shared residential custody arrangements, the parties entered their respective incomes into specialized software used by lawyers to determine what their relative child support
obligations were going to be under the Child Support Guidelines.
The parties agreed that the husband’s annual income was $59,523.00 and that based on his income, he should pay monthly child support to his wife in the amount of $894.00. They also agreed that the wife had an annual income of $23,574.00 and that she should pay to her husband child support in the amount of $356.00 a month. Logically, the parties agreed that the husband’s child support obligation would be reduced by the amount his
wife owed to him. In this case, the proper offset amount was $538.00 a month.
The parties went on to agree that the husband would be claiming the eligible dependent tax credits for one half of year and the wife the other half, and adjusted the support payable by the husband to consider the tax savings that he would receive from this arrangement.
This seemed like a simple and perfectly reasonable arrangement. Nonetheless, there was a problem. When Mr. Harder tried to claim his eligible dependent and child tax credits from CRA, he was denied. He lost tax credits worth over $13,000.00. Mr. Harder challenged the denial in court. He argued that the parties had made an agreement based on shared custody, and that should entitle him to receive the dependent and child tax credit.
The CRA argued that the Income Tax Act states that only a child support recipient, and not a child support payor can claim the eligible dependent credit for a child. Because Mr.Harder was paying child support directly to his wife, and not receiving any child support directly from his wife, he could not claim the children as eligible dependents, despite the agreement for shared custody. Justice Bocock agreed with the argument made by the CRA and denied Mr. Harder the relief he sought. He was sympathetic to Mr. Harder, but was bound by the wording of the Income Tax Act and the case law interpreting it.
Justice Bocock ended his decision with strong advice to Family Law lawyers, stating: “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.”
For lawyers and separated parents, this means that if they want to make sure they can claim a dependent credit in shared custody arrangements, it is far wiser to take the counter-intuitive route of agreeing that both will pay child support to each other, whether by check, e-transfer or otherwise, and making sure that this is written into their separation agreements or court orders. While it may make more sense to have a single payment that incorporates a logical “set off” amount, it can be a rather costly error with little opportunity for correction.