Tax Tip Thursday

There are a few things that are important relative to the tax credits that are available as well as the support payments, if any.

Let’s start with the easy part!

Tax Credits

When you have children and no spouse, you can often claim one of them as an “eligible dependant”. This is a specific tax term. The long and the short of it is that you can claim a non-refundable tax credit of $13,000, which translates into a tax reduction of approximately $2,000 if you had any tax payable.

When people are separated and there is only one child, this is something that needs to be worked out in the separation agreement. People don’t seem to mind spending tens of thousands of dollars on lawyers, but don’t seem to consider talking to an accountant about these things. Personally, I think that is a mistake!

So, if there is only one child, needless to say there is a tug of war. Most end up with an every other year scenario of claiming the child as an eligible dependant. The part that is important is that if you are paying child support, you could lose the opportunity to make this claim! BUT, if you get the separation agreement structured properly, both parties can come out on equal footing on that matter. More on that later.

If there are two or more children, it becomes easier because each parent can claim a child as an eligible dependant. You might need to arm wrestle over who gets the younger one (because you get to claim them for more years), but nobody loses out completely.

For your reference, the Government of Canada article about child custody and claiming an eligible dependant.

Child Support Payments

Payments of support for children are almost never deductible, but having the terms specified in the separation agreement can be very important with regard to being able to claim the eligible dependent credit I discussed earlier. If you are paying child support (and are the only one paying it), then you CANNOT claim the eligible dependant tax credit.

A court order or written agreement that calculates child support obligations based on the Federal Child Support Guidelines does not necessarily establish a requirement for both parents to make child support payments for purposes of the Income Tax Act!

Also, the fact that both parents’ incomes are used to calculate child support payments is not sufficient to establish a requirement that both parents make such payments. Unless the order or written agreement clearly establishes that both parents are required to pay child support, only one parent is considered to be making child support payments. In this case, the payer cannot claim the amount for an eligible dependant, and the recipient may be able to claim the amount if they are otherwise eligible to do so.

So I’m not sure if lawyers are becoming better informed or if it has become more widely accepted, but I am seeing a lot more of BOTH parents having child support obligations in shared custody arrangements. One is usually higher and bears the brunt, but having the agreement written this way allows both parties to make claim either on alternating years for one child situations, or every year with two or more children.

Again, this is an important detail and can make a world of difference to the added deduction. It does require cooperation, but both parties can come out ahead.

Not Straightforward

This is definitely not the simplest matter to figure out, and there are more details involved that I have not covered here. Do yourself a favour when you’re working out your separation agreement and get informed!

If you would like someone to look at the financial side of yours, I would be happy to help! Just give me a call and we can get started.

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.