Shared parenting arrangements are becoming increasingly more common. When both parents have access or physical custody of a child for no less than 40 per cent of the time during a year, it is viewed as a “shared-custody” situation. Many lawyers who draft agreements which outline the terms of a shared parenting situation may not fully appreciate how such arrangements may, or, in some cases may not, impact an individual’s eligibility for certain tax credits and benefits. Specifically, shared parenting arrangements may impact a taxpayer’s ability to claim the eligible dependent tax credit, the Canada Child Benefit, and the GST/HST credit.
Eligible Dependent Tax Credit (EDC)
When a taxpayer does not have a spouse, the individual may claim an EDC for an “eligible dependent”. This credit, currently $12,069 federally and $8,985 in Ontario, is available when an eligible dependant resides in a home with, and is wholly dependent for support on, the individual who maintained the home in the year. An eligible dependent includes a child under the age of 18 or a child of any age who is dependent on the taxpayer by reason of mental or physical infirmity. Only one claim is permitted for the same eligible dependent and only one claim is allowed per domestic establishment (i.e. a family unit living in the same house). In situations where parents are separated or divorced, the EDC cannot be claimed by a taxpayer who is required to pay child support, and either claims a tax deduction for the child support or lives apart from the former spouse throughout the year. However, a taxpayer may claim an EDC for an eligible dependent who is not covered by the support payments being made.
Sometimes in shared parenting arrangements, both spouses are required to make support payments for the same child in a tax year. In this situation, the Income Tax Act (Canada) allows parents to claim the EDC for that child, provided they otherwise qualify for the credit and they can mutually agree on who should make the claim. Otherwise, neither are entitled to the EDC. To qualify for the exception, the court order or written agreement must clearly establish that both individuals are required to pay child support payments. The exception does not apply when only one parent makes a child support payment, even if the support payment is calculated as a net amount of what one spouse owes the other from shared-custody (i.e. the support payments for each spouse offset and only the net excess is paid).
When drafting separation agreements, consider the following examples:
- Two children in a shared-custody situation: Each spouse pays child support to the other spouse and each for a different child.In this case, both spouses should be entitled to an EDC in respect of the child not covered by his or her support payments paid.
- One child in a shared-custody situation: Both spouses pay child support to the other spouse and they agree that one spouse can claim the EDC in “even” years and the other spouse can claim the EDC in “odd” years.
Canada Child Benefit (CCB)
The CCB is a non-transferable monthly payment introduced by the Canadian government in July 2016 to help families with the costs of raising children under the age of 18.
If eligible, the primary caregiver for a child under the age of six is currently entitled to a maximum benefit payment of $6,639 per year, and $5,602 for a child between the ages of 6 and 17. The CCB is ground down when family income is greater than $31,120. Generally, in a cohabitating relationship, this amount is paid solely to one of the parents. Where there are “shared-custody parents”, the benefit is split, and each parent can receive up to 50 per cent of the CCB.
Section 122.6 of the Income Tax Act (Canada) defines a “shared-custody parent” as an individual who is one of two parents of the qualified dependant who:
- Are not at that time cohabiting spouses or common-law partners of each other;
- Reside with the qualified dependant on an equal or near equal basis; and
- Primarily fulfil the responsibility for the care and upbringing of the qualified dependant when residing with the qualified dependant. (emphasis added)
In interpreting the phrase “an equal or near equal basis”, the Canada Revenue Agency, as well as the Canadian courts previously permitted some leeway and accepted the 40 per cent guideline as qualifying. However, more recently in Lavrienko v. The Queen (2019 FCA 51) and in Morrissey v. The Queen (2019 FCA 56), the Federal Court of Appeal clarified what constitutes “an equal or near equal basis”. The courts ruled that given it is not always possible to accurately quantify the number of hours that a child resides with each parent, any rounding to the nearest whole number that is a multiple of 10 and another whole number is appropriate. Based on these court decisions, only parents with whom a child resides with between 45 per cent and 55 per cent of the time would meet the definition of a “shared-custody parent” and thus be eligible for a split of the CCB.
On August 29, 2019, in response to the decisions in Lavrienko and Morrissey, draft proposals were made by the government to amend paragraph (b) of the shared-custody definition in the Income Tax Act (Canada). The amendments would eliminate the “an equal or near equal basis” test and replace it with two tests, of which a parent will only need to satisfy one. The first test will provide that each parent resides with the child in question for at least 40 per cent of the time; and the second test, uses the language an “approximate equal basis”. These revisions are intended to be consistent with the concept of shared-custody in the Federal Child Support Guidelines (i.e. 40 per cent guideline). Once enacted, the amendments will be retroactive back to July 1, 2011.
Even though in some amicable marriage dissolutions, a court order or legal agreement will state that the lower income parent will claim the CCB, in a shared-custody situation, the benefit follows the rules and definition of the Income Tax Act (Canada).
The GST/HST credit is a non-taxable amount paid to low- and moderate-income individuals and families. Individuals are generally eligible to receive the GST/HST credit if she or he is a Canadian resident for income tax purposes and meets one of the following criteria:
- Is at least 19 years old;
- Have (or had) a spouse or common-law partner; or
- Is (or was) a parent and lives (or lived) with his or her child.
Parents are also entitled to a GST/HST credit for a child who is younger than 19 years of age, but only one spouse will receive the credit payment in the household. In “shared-custody parent” situations, each parent would only be eligible to 50 per cent of the maximum GST/HST credit. The definition of a “shared-custody parent” for the purposes of the GST/HST credit is the same as the definition used for purposes of determining CCB eligibility and similar to the CCB, even though a court order or legal agreement may state who should be entitled to the credit, the eligibility for and the required amount of the credit follows the tax rules.
Devising shared parenting arrangements can be a stressful issue, but it is important not to overlook the tax consequences of the agreed upon arrangements. In the absence of proper drafting and the understanding of the nuances of the tax rules, the parties involved may not realize the credits and benefits they expect to receive or have agreed to or not agree to share.
This article has been prepared for the general information of our readers. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article. Please note that this publication should not be considered a substitute for personalized tax advice related to your particular situation.