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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.
|
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.
|
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.
|
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.
|
|
Ken’s
claim
|
Spousal
tax credit
|
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
|
|
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
|
|
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
|
$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
|
A payor parent has the dual obligation of providing support
for the child while he or she is living with him and also of providing support for
the child while he or she is with the other parent. After 1997 child support
payments are no longer deductible by the payor
parent. The recipient parent receives her child support payments “tax-free”.
The recipient parent may also claim an AED for one, but not more than one, child while he or she is living with
her. Intuitively, you would think that the payor
parent would be eligible to claim his child as a dependent under the ITA. This
is not the case. Section 118(5) of the ITA denies the AED to the payor parent where he is paying child
support after the separation. As noted by T.C.J. Hershfield
in Donovan
v. Canada, [2005] T.C.J. No. 494
the impact of s. 118(5) is “fiscally inequitable”, supports “a discriminatory
practice” and is “at best a misguided social policy” that needs to be addressed
in the family law unless Parliament amends the ITA. This policy of denying the AED when child support is payable but permitting the recipient parent to
claim it does not violate the Charter.
This
is so even if the payor parent has the child 60% of
the time and the recipient parent only 40% of the time. Moreover, shared
parenting does not necessarily mean less child support payable by the parent
with the higher income, as the court must also consider the added cost of
maintaining two households, and the conditions, means, needs and other
circumstances of the parents and the child: Contino v. Leonelli-Contino, 2005 SCC 63. The fixed and variable costs of raising a child in two separate
households will invariably go up and the parent with the ability to pay will be
called upon to contribute more. Despite this, the parent with the added burden,
the payor parent, is not eligible for the AED.
|
Ex. 5: As
above except Ken pays child support for the children. Ken has an income of
$60,000 and Barb has an income of $30,000. Ken has the children 4 nights a
week and Barb has them 3 nights a week. On a straight set off basis Ken pays
base Guideline child support of $490 a month or $5,880 a year. Ken can claim
a spousal tax credit up to the date of separation, or an AED for the rest of the year for one of the children, but thereafter is
not eligible for an AED for any of the children because he is paying child
support to Barb. He may not claim both. In 2005 Ken may claim an AED for only one of the children. In 2006, and subsequent years, he is
not eligible. However, Barb is eligible to claim an AED for any one, but not more than one, of the children. In 2005 Barb
receives $2,450 in child support from Ken. Barb may claim the AED for any of the children. In 2006, and subsequent years, Barb
received $5,880 in child support and up to $2,553.90 (if the tax credit for
2006 remains the same). If she claims the AED for Beth, she may not claim the
AED for either Carla or Sam.
|
|
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
|
$490
|
|
$490
|
|
|
|
Months payable in the year
|
5
|
|
12
|
|
|
|
Total payable
|
$2,450
|
|
$5,880
|
|
|
|
|
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
|
|
$490
|
|
$490
|
|
|
Mos. receivable in the yr.
|
|
5
|
|
12
|
|
|
Total receivable
|
|
$2,450
|
|
$5,880
|
This
discriminatory social policy is more glaring when one looks at how it operates
in the context of second families or mixed families. If a parent pays child
support for a child of a previous relationship he may not be eligible to claim
an AED for a child of a subsequent relationship in certain
circumstances: see the comments of T.C.J. Rip in Giorno v. Canada, [2005] T.C.J. No. 117.
Other Tax Credits for Infirmed Children
Over 18
In
some cases a couple may be responsible for the care of a child over the age of
18 who continues to be dependant because of mental or physical infirmity. Similar
to the AED either of the parents may be eligible for an amount for infirmed dependant age 18 or
older tax credit (“AID”) for their dependant adult child but the CRA will pay it to only one of the parents. Where a parent is entitled to
claim an AED for a dependent adult child no one may also claim the
AID. The federal AID for 2005 is available where a dependant’s income is less
than $9,308 a year up to a maximum credit of $575.70 (15% of $3,848). The
Alberta AID applies where a dependant’s income is less than $9,531 a year up to
a maximum credit of $394 (10% of $3,940).
In
some cases a caregiver amount may also be claimed for a dependant adult child.
The federal caregiver amount is available where a dependant’s income is less
than $16,989 a year up to a maximum credit of $575.70 (15% of $3,848). The Alberta caregiver amount applies where a dependant’s income
is less than $17,397 a year up to a maximum credit of $394 (10% of $3,940).
In
a shared parenting situation it may not be clear who is entitled to claim the
AID. The separation agreement should provide for this. The same rules as to the
AED apply. The parent with the lower income should apply
for the AID or caregiver amount.
Child Care Expense Deduction
A
parent may deduct qualifying child care expenses if the services were provided
so that parent can work, carry on a business, attend school or conduct research.
The child care expense deduction reduces net income. Eligible child care
expenses include a nursery or day care, a day camp or day sports school, a
boarding school or camp, and an educational institution. It does not include
medical expenses, clothing, transportation or education costs, and most forms
of board and lodging. The child must live with the parent and be under 16 years
of age or dependant because of a physical or mental infirmity.
Normally,
a parent may deduct actual child care expenses up to an allowable amount. The
allowable amount is equal to 2/3 of a parent’s earned income up to a fixed
amount that is determined by the age, and physical and mental condition of the
children. The maximum allowance per child is:
(a)
$10,000 for each
child for whom a disability tax credit may be claimed;
(b)
$7,000 for each
child under 7;
(c)
$4,000 for each
child over 6 and under 16; and
(d)
$4,000 for each
dependant child over 15 who has a physical or mental infirmity.
The
general rule is only the parent with the lower income is entitled to the tax
deduction. In the event both parents have the same income neither parent will
be allowed the tax deduction unless they file a joint election. In a single
household there is no requirement that the parent claiming the tax deduction be
the parent who actually paid the child care expenses. In a single household the
amounts paid come from joint assets, so it does not matter which parent
actually paid the child care expenses.
After
parents separate each may individually claim his or her child care expenses, so
long as the child lives with them and for only expenses they paid. In a shared
parenting arrangement a child lives with both parents for part of the year.
Each parent may claim a tax deduction for the child without reference to any
amounts claimed by the other parent and each parent may claim a tax deduction
for any child care expenses incurred to permit him or her to work, carry on a
business, attend school or conduct research. If the parent enters a new
relationship the new spouse may become a supporting person and the only person
eligible to deduct household child care expenses, even if the parent with the
higher income is paying all of the child care expenses for his child of a
previous relationship.
In
most cases the tax deduction is claimed by the parent with the lower income,
who is also usually the parent claiming the child tax benefits and the AED, but in fact the tax deduction should be claimed by the parent with
the higher income who is not claiming the child tax benefits and AED. First, a claim for a child care deduction operates to reduce the
child tax benefits. Second, the family as a whole maximizes the possible tax
benefits if the parent with the higher income claims the tax deduction. While
the child tax benefits are specifically designed to provide the most support to
families with the lowest income, the child care deduction is designed to
provide the maximum benefit to middle income families. A properly drafted
separation agreement should provide that the parent with the higher income
receive the tax deduction, which frees up more money for the family unit as a
whole. To achieve this result the parent with the higher income should directly
pay the child care costs and claim all of it.
Private School, Pre-school and
After-School Programs
While
there is no direct tax credit for private school fees, a payor
parent may be entitled to deduct it as a payment to a special needs school or a
religious school subject to certain limitations.
A
payment of tuition fees and board and lodging is typically not considered a
medical expense. However, a parent with a child in a special needs school may
be entitled to claim it as a medical expense where, by reason of mental or
physical infirmity, the child’s care or care and training required the
equipment, facilities and personnel provided by the school: see Marshall
v. Canada, [2003] T.C.J. No. 394.
The
general rule is that tuition fees are not considered charitable donations.
However, a parent with a child attending a religious or a secular/religious
school may be entitled to claim a charitable donation, provided the school is a
registered Canadian charitable organization: see Woolner v. Canada,
[1997] T.C.J. No. 1395. Amounts paid by a parent above the actual operating
costs of the school will be used to determine the charitable donation portion
of the school fees. Furthermore, a payment to a religious school by a person
who is neither the parent nor the guardian of a student and for which no
benefit is obtained, is entitled to the full value of the donation.
Where
possible, the family’s medical expenses should be claimed by the parent with
the lower income in lower and middle income families. Tuition fees and board
and lodging for a child in a special needs school may be a qualified medical
expense. This can be adopted into a properly drafted separation agreement.
Subject
to the anti-avoidance rules, a carefully crafted separation agreement may
provide that the school fees are paid by a relative, so that the full value of
the fees is considered a donation for tax purposes. Do so with great caution.
Further
a portion of the fees may be eligible for the child care deduction if the fees
relate to child care rather than education, such as a lunch program, an
after-school program, a boarding school or a camp. Here to, the parent with the
higher income should pay the fees for the child care deduction, as discussed
above. The full cost of a pre-school may be considered a child care expense for
tax purposes. As a child care deduction the tuition for pre-school should be
claimed by the parent with the higher income, if possible.
Registered Education Savings Plans
When
there are sufficient funds to do so, parents should set aside funds for a
child’s future education. An RESP is a
tax-deferred method of setting aside funds for a child’s post-secondary
education. A subscriber can invest up to $4,000 per child a year up to a
lifetime contribution of $42,000 per child. The RESP is exempt from income tax. When the promoter makes educational
assistance payments (EAPs) to the beneficiary, the
student must declare it as personal income. If the child does not pursue
post-secondary education, the investment earnings must be paid to the
subscriber as accumulated income payments (AIPs) or
rolled over into the subscriber’s existing RRSPs. There
are two advantages of the RESP: (a) it is a tax-deferred education savings program;
and (b) currently, both the federal and Alberta governments provide “seed money” through the Canada
Learning Bond, the Alberta Centennial Education Savings Plan, and the Canada
Education Savings Grant.
Most
parents never put much thought into what happens to the RESP when a child grows up. A payor parent
benefits the most from an RESP because EAPs reduce a payor parent’s financial obligation for a child’s
education. Without an RESP both parents are expected to contribute their
proportionate share of the costs of post-secondary education. Since the
promoter will pay EAPs of up to $5,000 a year, a payor parent need only “top-up” his proportionate share of
the difference.
Where
incomes are nearly equal both parents contribute to a child’s education about
equally. Where incomes are disproportionate the parent with the higher income
must contribute the larger share of the costs. In the former the RESP may be put in the names of both parents. In the latter the RESP should be entirely set up by the parent with the higher income, unless
the parents prepare for how the RESP should be
collapsed should the child not attend college or university.
Often
parents want the RESP to be put in the joint names of both parents. When a
child does not attend college or university the RESP can be collapsed into the subscriber’s own RRSP, provided there is
sufficient contribution room. The government “seed” money has to be repaid but
not the investment earnings associated with them. Where a parent pays all of
the RESP contributes he alone should benefit from the collapse
of the RESP, but it is more often the case that both parents
contribute some money to the plan. An RESP may be collapsed when all beneficiaries of the plan are 21 or older
and none of them attend college or university, the plan has been running for 10
years or more, and the subscriber is a Canadian resident. A maximum of $50,000
may be collapsed into the RRSP of the subscriber or his spouse; the rest incurs
income tax at the current rate plus 20%. An RESP must be collapsed by March 1 of its 26th year. A properly
drafted separation agreement can address how an RESP is collapsed. Often, it is easier if the plan is in only one parent’s
name.
Tuition Fees and Education Amounts
Students
receive a non-refundable tax credit for tuition fees paid to a college or
university. In Alberta the combined rate is 25%. For a $10,000 program this
could mean up to a $2,500 tax credit. Furthermore, a parent of a child 16 years
of age or older may be eligible for a tax credit if the child is registered in
a certified trade or vocational program.
A full-time
student also receives a non-refundable education tax credit of up to $105 (15%
of $400 for federal tax and 10% of $450 for Alberta tax) for each month he or she is enrolled in a
qualifying post-secondary program. A part-time student may claim a non-refundable
education tax credit of up to $31.50 (15% of $120 for federal tax and 10% of
$135 for Alberta tax) for each month he or she is enrolled in a qualifying
post-secondary program provide he or she is required to do at least 12 hours a
month of school work. For a typical 8 month school year the maximum education
tax credit is $840.
When
parents do send a child to college or university a parent may be eligible for
the tuition and education amounts, regardless of who actually paid the fees and
living expenses or where the child resides. A child may transfer up to $5,000
of the unused portion of his or her tuition and education amounts to a designated
parent. Only one parent may claim the unused portion. The student must decide
which parent is entitled to the tuition fee and education tax credit.
Most
parents understand their obligation for a child’s post-secondary education. A
properly drafted separation agreement will allocate responsibility for those
costs. It should also allocate the unused portion of any tuition and education
amounts. In most cases the payor parent will claim
the unused portion. Tuition and education amounts reduce taxable income. In
that case the payor parent’s cost of post-secondary
education is softened by a non-refundable tax credit. This should be confirmed
in a separation agreement.
Medical Expense Tax Credit
A
parent may claim a small non-refundable tax credit for qualifying medical
expenses incurred for the family in a year. The medical expense tax credit
reduces taxable income. For 2005 a parent may deduct up to 15% (10% for Alberta
tax) of qualifying medical expenses incurred by his family that exceed the
lesser of either 3% of his net income or $1,844 ($1,889 for Alberta tax). The
family amount does not include a child over the age of 18. A parent may also
claim up to $750 ($1,500 for Alberta tax) for a dependent relative, which includes a
dependant child over the age of 18. For incomes under $61,467 ($62,967 for Alberta tax) a parent receives 15% (10% for Alberta tax) of all qualifying medical expenses over 3% of
his net income. For incomes over $61,467 ($62,967 for Alberta tax) a parent receives 15% (10% for Alberta tax) of all qualifying medical expense over $1,844
($1,889 for Alberta tax).
The
medical expenses must qualify. Qualifying medical expenses may include, without
limitation, payments made to a doctor, a dentist, a hospital, a qualifying clinic,
a group home, and a special school or institution, and for an ambulance,
special transportation for medical purposes, reasonable travel expenses for
medical purposes, artificial limbs, aids and other devices and equipment, eye glasses,
guide dogs, organ transplants, reasonable renovations to a dwelling,
rehabilitative therapy, drugs and medications, and even dentures. It does not
include homeopathic medicine: Poesiat v. Canada, [2003] T.C.J. No. 503.
After
a separation most medical expenses for the children are paid by one of the
parents and the other parent contributes his or her share of the cost. Only one
parent holds the invoice for tax purposes. For the lower and middle income
families the parent with the lower income should pay and claim the medical
expenses. This is true even when medical expenses are substantial as the tax
credit depends solely on the taxpayer’s income and not the amount of the claim.
It does not matter who claims the medical expenses when both incomes exceed
$62,967 for 2005. This is demonstrated with the following examples.
|
Ex. 6: Graham’s
net income is $90,000 and Kimberley’s
is $30,000. They are divorced. There are three children. The qualifying
medical expenses for their children are $3,000 for 2005.
|
|
Kimberley’s claim
|
Federal
tax credit
|
Alberta tax
credit
|
|
Qualifying medical expense
|
$3,000
|
$3,000
|
|
Reduction of 3% of net income –
$30,000 x 3%
|
$900
|
$900
|
|
Allowable amount
|
$2,100
|
$2,100
|
|
Non-refundable tax credit rate
|
15%
|
10%
|
|
|
$315
|
$210
|
|
|
|
Graham’s claim
|
Federal
tax credit
|
Alberta tax
credit
|
|
Qualifying medical expense
|
$3,000
|
$3,000
|
|
Basic reduction
|
$1,844
|
$1,889
|
|
Allowable amount
|
$1,156
|
$1,110
|
|
Non-refundable tax credit
rate
|
15%
|
10%
|
|
|
$173.40
|
$111.10
|
|
Ex. 7: The
same as above except the qualifying medical expenses are $30,000.
|
|
Kimberley’s claim
|
Federal
tax credit
|
Alberta tax
credit
|
|
Qualifying medical expense
|
$30,000
|
$30,000
|
|
Reduction of 3% of net income –
$30,000 x 3%
|
$900
|
$900
|
|
Allowable amount
|
$29,100
|
$29,100
|
|
Non-refundable tax credit rate
|
15%
|
10%
|
|
|
$4,465
|
$2,910
|
|
|
|
Graham’s
claim
|
Federal
tax credit
|
Alberta tax
credit
|
|
Qualifying medical expense
|
$30,000
|
$30,000
|
|
Basic reduction
|
$1,844
|
$1,889
|
|
Allowable amount
|
$28,156
|
$28,111
|
|
Non-refundable tax credit
rate
|
15%
|
10%
|
|
|
$4,223.40
|
$2,811.10
|
|
Ex. 8: The
same as above except Graham’s net income is $150,000 and Kimberley’s is $70,000.
|
|
Kimberley’s claim
|
Federal
tax credit
|
Alberta tax
credit
|
|
Qualifying medical expense
|
$30,000
|
$30,000
|
|
Basic reduction
|
$1,844
|
$1,889
|
|
Allowable amount
|
$28,156
|
$28,111
|
|
Non-refundable tax credit rate
|
15%
|
10%
|
|
|
$4,223.40
|
$2,811.10
|
|
|
|
Graham’s
claim
|
Federal
tax credit
|
Alberta tax
credit
|
|
Qualifying medical expense
|
$30,000
|
$30,000
|
|
Basic reduction
|
$1,844
|
$1,889
|
|
Allowable amount
|
$28,156
|
$28,111
|
|
Non-refundable tax credit
rate
|
15%
|
10%
|
|
|
$4,223.40
|
$2,811.10
|
For further
information please do not hesitate to contract the author of this
Article, Robert Omura
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