A divorcing person must be made aware that there are a number of benefits and tax deductibility strategies which can be utilized after the parties separate.
CHILD SUPPORT IS NOT TAX DEDUCTIBLE
Please be aware that since May 1, 1997 child support orders or agreements made subsequent to that date lead to child support not being deductible by the payor nor taxable in the hands of the payee. Sadly, this new tax regime has meant less money for children and $400 million more tax revenue for the federal government. This is because payors, generally men, often pay tax at a higher marginal tax rate than recipients generally women. Some experts believe this change has led to more shared custody claims.
Similarly, any variations of child support orders made after May 1, 1997 also end the former tax deductible and tax inclusive status. Contact us before any variation application is made to ensure it makes sense. In some cases, we have blocked variation applications as it makes no sense when the receiving spouse has a very low marginal tax rate and the payor has a very high tax rate.
SPOUSAL SUPPORT
Spousal support amounts continue to be taxable in the hands of the recipient and deductible to the payor spouse if there is a written agreement or court order. Please be careful about making voluntary payments in the absence of court orders or signed agreements as the spousal support payments will likely be found to be non-deductible. If you have made such payment contact Lorne MacLean to discuss a strategy to try to retroactively declare such payments tax-deductible.
TAX DEDUCTIBILITY OF LEGAL FEES
The law for deductibility of legal fees is ambiguous. The decision of Bayer v. MNR held that legal expenses incurred by the payor spouse to reduce the spousal support payments under an existing agreement were not deductible.
However, in R. v. Burgess, the court held that legal fees incurred to establish a right to support amounts whether child or spousal are not deductible, but legal costs incurred to enforce a pre-existing right to support are deductible. However, Canada Customs and Revenue Agency’s position in paragraph 18 of Interpretation Bulletin 99R5 is that legal fees incurred to enforce pre-existing rights to support amounts, or to defend against an application for reduction of support payments are deductible.
But in direct contradiction to R. v. Burgess, in a decision called Gallien v. the Queen, the court allowed the deduction of legal fees to obtain spousal support on the basis that the right to spousal support exists under the Divorce Act and provincial laws.
Based on the case law as at July 6, 2002, Canada Customs and Revenue Agency’s new position was that they would continue to follow the Guidelines in IT-99R5 which meant legal costs incurred to establish spousal support would remain non-deductible but since children have a pre-existing right arising from legislation to support, legal costs to obtain an order for child support will be deductible.
Legal costs to obtain an increase in spousal or child support or to make child support not taxable are not deductible.
As at the writing of this article, the Canada Customs and Revenue Agency was undertaking a general study of the deductibility of legal fees relating to support.
In short, it is important that you consult with a tax advisor and make all the claims for deductibility for legal fees to which you are entitled.
As at the writing of this article there is court authority for the deductibility of both spousal support and child support related legal fees and you should make every effort to obtain the full tax deduction to which you are entitled. These savings can really help!
CANADA CHILD TAX BENEFIT
This benefit is a single non-taxable monthly payment made to the custodial parent of children under the age of 18. Included in this benefit is the Canada Child Benefit Supplement and the BC Bonus. In order to receive the Canadian child tax benefit you must be the person mainly responsible for the care and upbringing of the child, you must live with the child, you must be a resident of Canada for income tax purposes, or a Canadian citizen or a permanent resident or a visitor to Canada or a holder of a minister’s permit.
You and your spouse are required to file tax returns in order that Canada Customs and Revenue Agency can calculate the benefit and send payment. Once the parties have separated the custodial parent may notify the Canada Customs and Revenue Agency within 11 months of the separation and the base year income of the parents will be deemed to be that of the custodial parent only. Please note you must be separated for at least 90 days.
Exciting options for receipt of this benefit can occur under the following situations:
- Joint custody The payment of the child tax benefit goes to the primary caregiver of the children;
- In cases of shared custody where the parents share equal time with the children the parties can opt to share the Child Tax Benefit but they must draft a letter setting out their arrangement and attach that letter to their application for the Child Tax Benefit.
- A 60-40 split would not likely enable the Child Tax Benefit to be shared.
Click here for an online calculation.
EQUIVALENT TO SPOUSAL TAX CREDIT DEDUCTION
When the parties are together the higher income spouse may under certain circumstances claim a spousal tax credit for the lower earning spouse.
However, after separation the parties are able under certain circumstances to claim an equivalent to spouse tax credit for a child they have care and control of.
To claim this credit you must not claim the spousal tax credit and you must be separated. If you have a maintained a residence with another person in this case a child of the marriage then if you
- Do not pay support for that child,
- Are the only parent claiming the equivalent to spousal tax credit for that child then you are entitled to the credit.
Please note that in cases of split custody or even shared custody if structured properly where each parent has primary residence or custody of one of the children, each parent would be entitled to make the equivalent to spouse tax credit claim for the child they have custody of or primary residence of. Danger! If both spouses claim the credit Canada Customs and Revenue Agency will deny both claims. If only one child is involved consider an agreement that entitles parents to share the credit in alternate years. Again, using this strategy both parties can save money!
This deduction can be significant but remember if you pay support for the child you are not entitled to claim the equivalent to spousal tax credit. Call Lorne MacLean to obtain assistance in this area.
Presumably, the thinking of Canada Customs and Revenue Agency is that if you are paying support for the child you do not have custody of that child and hence cannot receive a deduction.
CHILD CARE EXPENSES DEDUCTIBILITY
In certain circumstances of shared custody the higher earning spouse may in fact be able to deduct child care expenses. Again, the deductibility of these expenses can be highly beneficial. The maximum claim for a child under age 7 for child care expenses is $7,000 per year and it reduces to a maximum of $4,000 per year for children over age 7.
These expenses must be paid for child care, nursery school, day camp, or an educational institution.
Please note these payments to a parent or supporting person of the child would not qualify as deductible expenses nor would a payment to a person under age 18 who is related to the taxpayer be deductible.
There are a number of restrictions which must be satisfied before the higher income earning taxpayer can deduct the expenses. Please consult with a tax advisor in this area.
The Canada Custom and Revenue Agency’s administrative position in cases where custody is shared between parents at different times during the year then both taxpayers may claim a deduction for the year with no reduction for the amount claimed by the other taxpayer.
Thus in cases where each parent shares custody of a child, it appears possible that both parents can directly claim their portion of the child care expenses paid and some advisors believe that there may be no reduction in the amount claimable by each parent despite the fact that the other parent is making a claim as well.
Once again this is a complex area and you should contact your tax advisor.
