A recent Canadian Tax Court Case has important implications for parents with shared custody and the way child support is paid and collected. The decision in Harder v. The Queen changes the way parents with shared custody must deal with child support. It is likely that most parents with shared custody will have to change their child support arrangements and the Family Responsibility Office will have to change its procedures to prevent running into tax problems.
How Shared Custody, Child Support and Taxes Used to Work
The Supreme Courts set the rules for child support in shared custody in it decision in Contino v. Leonelli- Contino. At paragraph 49 of that decision, the Supreme Court said that the starting point for calculating child support in shared custody, which persists unless it results in an unfair sharing of the costs of raising the children, is that the parents calculate what each of them would owe under the Child Support Guidelines Tables and set those amounts off against each other. In the majority of shared parenting situations, consistent with the Supreme Court’s decision, parents agreed to use set-off the child support amount such that the parent with the higher income made a child support payment that reflected the set off amount.
Part of the basis of this set-off approach is that each parent gets some of the tax benefits associated with caring for the children in a shared custody situation. The amount of child support under the tables takes into account the tax deductions/benefits available to parents for having children.
The CRA’s policy on tax credits and benefits for parents in shared custody situations states that when parents share custody of their children, they must rotate the benefits/credits for the children such that each parent gets the tax benefits for the children for six months of the year. That policy was last updated in July 2015.
As a result of this policy, parents with shared parenting set off support against each other and each claimed half the tax benefits for the children for whom they had shared custody.
The Significant Changes to Child Support to Avoid Tax Problems
According to Justice Block in his tax court decision in Harder v. The Queen, the Courts, Family Arbitrators, Family Mediators, Family Lawyers and separated parents did not properly consider the Section 118(5) of the Income Tax Act in making the above-described child support arrangements. That section of the Income Tax Act states that a person who has to pay support for a dependent cannot claim tax deductions or benefits with respect to that dependent. Children are dependents. So, that means that, notwithstanding the Canada Revenue Agency saying that benefits must be rotated in shared custody situations, a parent paying child support may not claim those benefits.
Based on the Supreme Court’s decision in Contino about setting off support in shared parenting, and the CRA’s policy that benefits be rotated in shared parenting, it seemed logical to interpret the “set-off support” paid in shared custody situation as parents notionally paying each other, but simplifying the logistics of that by having the payments flow only one way – from the higher-income parent to the lower-income parent. This is how child support orders and agreements were written and how the FRO processed support.
However, in Harder v. the Queen, Justice Block stated that interpretation was wrong under tax law. Where parents set-of child support amounts, this resulted in only one parent receiving support and one parent paying support. Under the wording of section 118(5) of the Income Tax Act, the parent paying support could not claim the benefits and credits in relation to the child or children for whom that parent was paying child support.
According to the decision in Harder v. the Queen, the correct thing to do is for each shared custody parent to actually pay the full table child support amount to the other parent so that the full table support is flowing both ways. The Family Responsibility Office should collect the full child support amount payable by each parent and pay it to the other parent, essentially having the support between the parents cross paths as doing a “set off” will have negative tax consequences for at least one of the parents.
There are some obvious practical problems with the approach set out in Harder v. the Queen. For example, a lower-income parent may not have the funds available to make the support payment until receiving the support from the higher income parent. That would cause one of the support payments to “bounce” and one parent to “overpay” by not getting the support back to which he or she is entitled. It will also dramatically increase the cost for the Family Responsibility Office, and the support collection agencies in other provinces, to enforce child support in shared parenting arrangements.
However, as Justice Block points out, this complicated and tedious approach to child support in shared parenting is required by section 118(5) of the Income Tax Act and it is the way things must be done until Parliament changes the law.
32 – How to Change a Support Order
Justice Block’s decision in Harder v. the Queen means that most parents with shared custody will have to change what they are doing for child support. It may also mean that they have to change their child support order or separation agreement to reflect how the Income Tax Act requires child support to be paid so that both parents can get the tax benefits related to raising the children. The Ontario Family Law Podcast and this video give some general advice about how to change a support order or agreement. However, the rules for separation agreements require that separated parents and spouses consult with a family lawyer, and they will probably speak to a lawyer who understands both family law and tax law to make sure the agreement or court order does what they expect.
Obviously, parents who have just separated and who are planning on sharing custody of their children will want to make sure that their child support order or separation agreement complies with the requirements to maximize the tax relief for them. Again, they should contact an excellent family lawyer to make sure that happens. To learn even more about child support, get a copy of this easy to understand book on the basics of Ontario Family Law as a paperback, or download it immediately as a $9.99 e-book for Kindle, Kobo, or iPad/iPhone/Mac. You may also want to listen to this podcast or watch this video. You can also use the search on the right to find lots more articles about marriage and divorce.
Obviously, there can be a lot of money involved in child support cases and only could really help a child with his or her needs (or not). You need to get the help of a lawyer immediately to avoid financial hardship. Contact Certified Specialist in Family Law (and author of the book above), John Schuman, by emailing him or by calling 416-446-5847. We answer all inquiries promptly and we can arrange for you to come in quickly for a consultation (charged at a reduced hourly rate).