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One
of the harsh realities of separation and divorce is that it creates two separate
households for the family. Many parents are not prepared for the associated economic
hardship. Anything that improves the financial circumstances of the parents
and, in turn, the standard of living for the children following separation should
be seized upon. A carefully prepared separation agreement helps ensure that the
parties maximize the tax benefits and minimize the tax consequences of
separation and divorce.
Often
missed in a separation agreement is a simple clause which determines which
parent is entitled to the child tax credits and deductions available to the
family under the Income Tax Act
(“ITA”). Even when such a clause is included it is often misunderstood and
underutilized. As a result many parents fail to maximize the tax benefits
available to the family after the separation. Worse, the failure to appreciate
the impact and importance of child tax credits and deductions often creates
unnecessary friction between the parents down the road. A typical family may be
entitled to over $10,000 a year in child tax credits and deductions. Here, a
little planning goes a long way.
Child Tax Benefit
The
Canada Child Tax Benefit (“CCTB”) is an initiative of the federal government designed
to provide low and middle income families with a tax-free monthly subsidy to
help them with the cost of raising their children. Generally, the CCTB is only
available if: (a) the applicant lives with the child; (b) the child is under 18
years of age; (c) the applicant is the primary caregiver; (d) the applicant is
a resident of Canada; and (d) the applicant, or cohabiting spouse or common law
partner, is a Canadian citizen, a permanent resident, or other qualified person
for immigration purposes. The CCTB consists of a basic benefit and a National
Child Benefit Supplement (NCBS) for low income families. It is calculated from July
to June each year. The CCTB standard benefit is $1,228 each for the first two
children and $86.00 for the third and each additional child, plus a supplement
of $243.00 for each child under the age of 7. In Alberta the standard benefit is $1,124 for children under 7,
$1,200 for children 7 to 11, $1,343 for children 12 to 15, and $1,423 for
children 16 to 17. For 2005-06 the maximum basic benefit is available for
families with net incomes of $35,595 or less for one child. For 2005-06 the
maximum NCBS is available for families with net incomes of $21,480
or less for one child.
Similar
to the CCTB the Alberta Family Employment Tax Credit (“AFETC”) is a program
offered by the Alberta government to help low and middle income working
families with the cost of raising their children. Generally, for 2005-06 the
AFETC is available if: (a) the applicant has lived in Alberta for at least one
month; (b) the applicant is a parent of a child under 18; (c) the annual family
working income is more than $2,760; and (d) the family’s net income is less
than $37,500 for one child or less than $50,000 for two or more children. The
AFETC provides up to $550 a child for up to a maximum of $1,500 for the family
for the calendar year. For 2006-07 and subsequent years the maximum credit
amounts will be indexed to inflation.
The
Child Disability Benefit (CDB) is a federal initiative to provide tax-free
benefits to low and middle income families of children under the age of 18 with
a severe or prolonged mental or physical impairment. The maximum benefit is
$2,000 a year for 2005-06. It is included with the CCTB and CSA payments. For
2005-06 the maximum CDB is available for families with net incomes of $35,595
or less for one child.
When
couples are together it does not matter who receives the child tax benefit, it
will simply be a joint asset to be used for the support of the entire family.
Besides, the amount of the benefit is based on family net income. However, when
couples separate or divorce two separate households are created and the child
tax benefit may come into play.
After
separation the parent’s should elect between them who is the primary caregiver
for tax purposes. Where no election is made the ITA presumes the female parent
to be the primary caregiver, but the presumption is lost where both parties
claim to be the primary caregiver. The presumption in favour of the female
parent does not violate the Charter: see Campbell v. Canada, [2005] F.C.J. No. 2063 (F.C.A.).
In
many cases this is not an issue as the parent who is the primary caregiver of a
child is often specified in an agreement, order or judgment as the party with
the primary care or with the day to day care of a child. This is true for split
custody situations as well.
The
problem arises however where parties have entered some form of shared parenting
arrangement. A shared parenting arrangement occurs where a parent has access or
physical custody of a child at least 40 percent of the time over a year. In
shared parenting both parents may be the primary caregiver. Both parents may also
be eligible for the child tax credit even though the CRA will only pay one parent the child tax benefit.
Unless
there is a written agreement or a valid court order there may be conflict as to
who gets the child tax benefit. When both parents make a claim for the same
period only one parent is eligible for the child tax benefit, so the CRA will make a determination and deny the other parent’s claim. Any
amounts mistakenly paid to the ineligible parent for that period must be
repaid. It is a factual inquiry. The CRA uses eight factors to make that determination:
(a)
the supervision
of the child’s daily activities and needs;
(b)
the maintenance
of a secure home environment;
(c)
the arrangement
of, and transportation to, the child’s medical appointments;
(d)
the arrangement
of, participation in, and transportation to the child’s school and
extracurricular activities;
(e)
the attendance to
the child’s needs when he or she is ill;
(f)
the regular
attendance to the child’s hygiene needs;
(g)
the provision of
guidance and companionship; and
(h)
the existence of a valid court order.
To
avoid this problem a well drafted separation agreement or court order should
specify who is entitled to the child tax benefit.
The
benefit can be shared but each parent must specify, and agree, as to what
periods the child was actually in their care. This can be tedious and may be
counterproductive. Since the amount of the child tax benefit declines as family
net income increases it makes better sense for the parent with the lower income
to claim it. This ensures the maximum amount possible is made available to
assist the two households. This can be illustrated by the following example.
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Ex. 1: Bob
earns $90,000 a year and Sue earns $30,000 a year and they have three
children. Gwen (age 6), Brad (age 10) and Helen (age 14) While they were
together their family net income was $120,000 and the child tax benefit for
2005-06 is $51.64 a month or $619.68 a year. If Bob claims the child tax
benefit in 2005-06 for the children after they separated he would only be
entitled to $151.65 a month or $1,819.80 a year, but if Sue claims the child
tax benefit she would receive $582.24 ($486.41 CCTB and $95.83 AFETC) a month
or $6,986.88 a year. Over the course of the year the family benefits from $5,167.08
more if Sue claims the child tax benefits than if Bob claims them.
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Amount for Eligible Dependant Tax Credit
In
calculating personal taxes for a year a taxpayer is eligible to claim
non-refundable tax credits to reduce taxable income. Every individual taxpayer is
entitled to a basic personal tax credit.
The basic federal and Alberta personal tax credit is $8,648 and $14,523,
respectively. A married person who is not separated and who supports his or her
spouse is also entitled to a spousal or
common law partner tax credit. When a couple separates a spousal tax credit
is available for the period in a taxation year before the separation but not
for any period thereafter unless the parties reconcile.
Most
couples understand the advantage of the spousal tax credit for reducing the
amount of income tax payable by the family unit. The federal spousal tax credit
for 2005 is available where a spouse’s income is less than $8,079 a year up to
a maximum credit of $1,101.60 (15% of $7,344). The Alberta spousal tax credit applies where a spouse’s income is
less than $14,523 a year up to a maximum credit of $1,452.30 (10% of $14,523).
After
a couple separates the higher income spouse is no longer eligible to claim the
spousal tax credit. An individual who does not claim a spousal tax credit and
who was not married or was married but did not support, or was not supported
by, a spouse, may be entitled to an amount
for eligible dependant tax credit
(“AED”) for a qualified relative. The qualified relative
must live with the taxpayer and includes a child under the age of 18 or over
the age of 18 who is wholly dependent for support. Similar to the spousal tax
credit the maximum federal and Alberta AED for 2005 is $1,101.60 and $1,452.30, respectively.
In
the year of the separation the higher income spouse may only claim a spousal
tax credit or an AED but not both. He may choose the tax credit which is
most beneficial to him. In some cases it is more beneficial to claim the
spousal tax credit for a former spouse and in other cases it is more beneficial
to claim the AED for a child. Consult an accountant for more specific
advice.
The
AED has some limitations. An individual may only claim an
AED for one person in a year. It cannot be claimed by
both parents for the same child. For a single child, only one of the parents is
eligible. If there are two or more children each parent may be eligible to
claim the AED for a different child. However, if a parent pays
child support for a child after the separation, he cannot also claim the AED for that child except in the year of the separation.
Many
parents today opt for shared parenting as a way of sharing parental
responsibilities and maximizing access. In a shared parenting arrangement it
may not be clear who is entitled to claim the AED for a child as both parents are similarly responsible for the day to
day care of the child. If the parents cannot agree the ITA denies the AED to both of them. Neither parent receives the AED. Often this is triggered by a claim for the AED by both parents for the same period. A properly drafted separation
agreement or court order should allocate who is entitled to claim the AED and how it should be allocated where there is a change of primary
care.
If
child support is payable the AED should be
allocated to the recipient parent as the payor parent
is disqualified except in the year of the separation. In subsequent years the payor parent will not be eligible and the family will be unnecessarily
denied the AED.
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Ex. 2: Ken
and Barb have one child, Carla. Ken and Barb have shared custody of Carla.
They separate on July 31, 2005. No child support is payable. Ken may be eligible
for a spousal tax credit up to the date of the separation, or an AED for Carla for any period Carla lives with him after the separation.
He may not claim both.
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|
Ken’s
claim
|
Spousal
tax credit
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Amount for
Eligible Dependant
|
|
|
federal
|
Alberta
|
federal
|
Alberta
|
|
Maximum claim
|
$7,344
|
$14,523
|
$7,344
|
$14,523
|
|
Claim period
|
211/365
|
211/365
|
154/365
|
154/365
|
|
Allowable amount
|
$4,245.43
|
$8,395.49
|
$3,098.56
|
$6,127.51
|
|
Non-refundable tax credit rate
|
15%
|
10%
|
15%
|
10%
|
|
|
$636.82
|
$839.55
|
$464.78
|
$612.75
|
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Ex. 3: The
same as above except Ken pays child
support for Carla. Ken earns $60,000 a year and Barb earns $30,000 a year. On
a straight set off basis Ken pays base Guideline child support of $244 a
month or $2,928 a year. Ken can claim a spousal tax credit up to the date of
the separation, or an AED for the rest of the year while Carla lives with
him, but thereafter is not eligible for an AED for Carla because he is paying child support. He may not claim both.
In 2005 Ken may claim the AED for Carla but not in 2006. In 2005 Barb
receives $1,220 in child support. If Barb claims the AED for Carla, she may also claim the AED for Carla. In 2006, and subsequent years, Barb receives $2,928 in
child support and up to $2,553.90 for Carla (if the non-refundable tax credit
remains the same).
|
|
Ken’s
claim
|
AED (2005)
|
AED (2006)
|
|
|
Federal
|
Alberta
|
federal
|
Alberta
|
|
Maximum claim
|
$7,344
|
$14,523
|
|
|
|
Claim period
|
154/365
|
154/365
|
not eligible
|
not eligible
|
|
Allowable amount
|
$3,098.56
|
$6,127.51
|
|
|
|
Non-refundable tax credit rate
|
15%
|
10%
|
|
|
|
|
$464.78
|
$612.75
|
|
|
|
|
|
|
|
|
|
Child support payable
|
|
|
|
|
|
|
Guideline amount
|
$244
|
|
$244
|
|
|
|
Months payable in the year
|
5
|
|
12
|
|
|
|
Total payable
|
$1,220
|
|
$2,928
|
|
|
|
|
Barb’s
claim
|
AED (2005)
|
AED (2006)
|
|
Maximum claim
|
$7,344
|
$14,523
|
$7,344
|
$14,523
|
|
Claim period
|
154/365
|
154/365
|
365/365
|
365/365
|
|
Allowable amount
|
$3,098.56
|
$6,127.51
|
$7,344
|
$14,523
|
|
Non-refundable tax credit
rate
|
15%
|
10%
|
15%
|
10%
|
|
|
$464.78
|
$612.75
|
$1,101.60
|
$1,452.30
|
|
|
|
|
|
|
|
Child support receivable
|
|
|
|
|
|
|
Guideline amount
|
|
$244
|
|
$244
|
|
|
Mos. receivable in the yr.
|
|
5
|
|
12
|
|
|
Total receivable
|
|
$1,220
|
|
$2,928
|
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Ex. 4: As
above except Ken and Barb have three children, Carla, Beth and Sam. Ken and
Barb have shared custody of the children. No child support is payable. Ken
may be eligible for a spousal tax credit up to the date of the separation or
an AED for the rest of the year for one of the children.
He may not claim both. In 2005 Ken may claim the AED for Carla. In 2006, and subsequent years, he may claim up to
$2,553.90 for Carla (if the non-refundable tax credit remains the same). Barb
may claim an AED for one of the children. If Ken claims the AED for Carla for the periods she lives with Ken, Barb cannot also claim
the AED for Carla for the same periods. In 2005 Barb may
claim up to the AED for Beth or Sam. In 2006, and subsequent years, she may
claim up to $2,553.90 for either Beth or Sam (if the non-refundable tax
credit remains the same). The family as a whole obtains an AED of up to
$2,155.06 for 2005 and up to $5,107.80 for subsequent years (if the
non-refundable tax credit remains the same).
|
|
Ken’s
claim
|
AED (2005)
|
AED (2006)
|
|
|
federal
|
Alberta
|
federal
|
Alberta
|
|
Maximum claim
|
$7,344
|
$14,523
|
$7,344
|
$14,523
|
|
Claim period
|
154/365
|
154/365
|
365/365
|
365/365
|
|
Allowable amount
|
$3,098.56
|
$6,127.51
|
$7,344
|
$14,523
|
|
Non-refundable tax credit rate
|
15%
|
10%
|
15%
|
10%
|
|
|
$464.78
|
$612.75
|
$1,101.60
|
$1,452.30
|
|
|
|
Barb’s
claim
|
AED (2005)
|
AED (2006)
|
|
Maximum claim
|
$7,344
|
$14,523
|
$7,344
|
$14,523
|
|
Claim period
|
154/365
|
154/365
|
365/365
|
365/365
|
|
Allowable amount
|
|
