How a tax credit could be more trouble than it’s worth for former spouses

Family lawyers are frustrated over an outdated tax law that’s creating trouble for former spouses who are engaged in shared parenting arrangements to care for their children.

The law in question is Section 118(5) of the federal Income Tax Act, which governs whether or not former spouses could collect the eligible dependent tax credit. According to the Law Times, it stipulates that one who pays a former spouse support for a child could not claim the eligible dependent tax credit for the child.

There is an exception, however. As indicated in s. 118(5.1), the provision is nullified if applying it would mean nobody receives credit for the child, which opens the door for both parents to claim credits when they share custody and each owe support to the other.

In many shared parenting arrangements, the former spouses don’t have the same income, so one ex-spouse owes the other a larger amount in child support. This has been followed by a practice of convenience wherein the higher-income parent would simply pay the other the difference of the amounts they owe each other. The assumption, as apparently backed by information on the Canada Revenue Agency (CRA) website, has been that the set-off approach would still trigger the exception in s. 118(5.1), meaning both parents can claim credits.

But in Harder v. The Queen, a 2016 case heard by the Tax Court of Canada,  presiding judge Justice Randall Bocock ruled that the CRA could disallow a father’s claim for credits because the set-off arrangement with his ex-wife effectively made him the sole payer of child support, so s. 118(5.1) would not apply. With that interpretation, the judge sent the family law bar reeling.

“The whole concept of shared parenting is much more prevalent in Canada than 20 years ago,” noted ohn Schuman, a partner at Devry Smith Frank LLP. “We long ago wandered down that path in family law, but apparently not in tax law.”

In Harder, Bocock urged family law lawyers to disregard the set-off approach in cases where separating spouses seek joint custody. Instead, he said, they should be able to “effect actual periodic payments by both spouses to each other,” which would be documented as a historical record of cheques or e-transfers from one former spouse to the other.

But Mimi Marrello, a family lawyer with Ottawa law firm Low Murchison Radnoff LLP, called the suggestion unrealistic. “If one former spouse is expected to pay $200 and the other is supposed to pay $400, I can guarantee that, at some point, someone will not pay,” she said.

Marrello also noted frustration among clients in shared parenting arrangements who want set-off payments. “They don’t understand why they can’t both claim credits without actually paying each other, and I can’t give them a good answer other than, ‘Because the CRA says so,’” she said.

Related stories: 
Spousal spat uncovers business's sketchy tax history
The challenges faced by single clients