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Taxes separated parents

Tax implications for divorced or separated parents

Tax season is soon upon us and for a lot of our clients that means trying to maximize tax savings. The government of Canada offers a number of programs to help families. Learn more about the tax implications and tax savings opportunities in Canada if you are separated or divorced.


Eligible Dependents

When parents separate the eligible dependant credit can be assigned to a child. This can generate a significant source of cash.


If the parenting arrangement is such that one person is in primary care of the child or children, then he or she will be receiving child support and will similarly be entitled to the eligible dependant credit for one child. This is the important piece. You cannot claim this deduction if you are paying support for the child.


However, if parents are in a shared parenting arrangement where the child or children are spending approximately equal time with each parent, then if there is more than one child, each parent can claim one child.


Careful drafting of agreements is necessary in order to make sure these rights are preserved for parents. An agreement that provides only one set-off amount based on each person’s income and the Federal Child Support Guidelines will not be sufficient. If you are new to a shared parenting arrangement, it is important to create or amend a parenting and support contract so that Canada Revenue Agency (CRA) will allow each parent to claim one child.


Disagreement about who is claiming which child or even making the claim without a formal agreement in place could be problematic for CRA.


Eligible Dependent Claims are commonly reviewed by the CRA and often supporting documents will be required to verify the claim. A separation agreement is a key piece of supporting documentation, but additional evidence about separate residences and the amount of time a parent has a child in his or her care may also be required.


Separation starts a phase in a parent’s life where record keeping in important. It is important for reconciling payments of child support on an annual basis; including Section 7 expenses (like child care, medical, extra-curricular and educational expenses). It is also important to guard against reviews and audits by tax authorities.


We advise clients to figure out a record keeping system early after separation and resolve to maintain it until their children are no longer eligible for support and for a period of time afterwards..


Canada Child Tax Benefit, GST/HST Credit, Universal Child Care Benefit

These three benefits work differently in terms of payment, qualifications and the policies driving them. When parents are separated, it is the parent who has primary care and control of the children or child that is eligible for these benefits.


However, where the parents are sharing parenting equally, these benefits work differently and may also be shared. In respect of the Universal Child Care Benefit, the parents can elect that each parent be paid the monthly amount for 6 months of the year.


In respect of the Canadian Child Tax Benefit, in a shared parenting arrangement, each parent has the opportunity to apply for benefit and if they qualify based on their income (in each of their households alone or based on family income if they are re-partnered) for the number and ages of the children, then the monthly benefit will be cut by 50% and the reduced amount is the CCTB amount that each parent would receive monthly. Each parent is given the opportunity to apply.


There is NO option for the parents to agree or for the court to order that the lower income parent in a shared parenting arrangement should receive the full benefit instead of the 50% amount.


If a family is new to a shared parenting arrangement, FORM RC66 from the CRA should be submitted to apply to share the benefits.


The Liberal party campaigned on promises to replace the Universal Child Care Benefit and the Canadian Child Tax Benefit with a new scheme called the Canada Child Benefit. This has not yet made its way into legislation. The benefit will mostly assist families with lower incomes and once families have combined incomes over $150,000.00 the benefit will decrease from the level of assistance received through the current scheme.


It appears once household income is over $200,000, no benefits are available at all. It is not clear yet whether this benefit will be shareable for families who are separated and are sharing parenting of their children.


Children’s Fitness Tax Credit and Child Care Expense Deductions

These can be valuable deductions and credits for families with busy children. When parents are separated the person who actually incurs these expenses is entitled to claim them on his or her taxes. It is important to get and keep receipts for these expenses.


With the Fitness Tax Credit, whoever incurs the expense can claim it, however, the limit is still $1,000 per child.


The Child Care Expense Deduction is more complicated. In cases of a primary care parenting arrangement, only the parent in primary care can claim the child care expense. The contributing parent, of course, only contributes to the net cost of the total expense.


In a shared parenting arrangement, the first parent may claim the expense NET OF THE REIMBURSEMENT from the second parent. The second parent claims the amount of the reimbursement. Receipts between the parents should be issued to be clear about who paid what amount.


BE CAREFUL!! If a parent enters into a new relationship, and the new partner who is not the parent of the child is the lower earner in the new couple, he or she may be the eligible person to claim the deductions for child care on their taxes. These sorts of expenses are generally shared between parents as section 7 expenses. However, it is only the net, or after tax, amount that should be shared.


A lot of families have agreements to reconcile last year’s child support and set a new number going forward after tax returns have been exchanged. This is an important annual task to take care of.


It can be challenging for some families to do this without help and not all families will qualify for the Alberta Recalculation Program. At Moe Hannah we would be happy to help you run some quick calculations to figure out what the sharing ought to have been over the last year and to help estimate a sharing arrangement for the year coming up.


If you are incurring these expenses and don’t have an order or agreement in place yet, bring those expenses to the table. They can have an impact on what our recommendations will be for spousal support. Including those expenses in our calculations and analysis will also help you make non-legal decisions with a clear picture of cash flows in hand.


Contact us for more information>>