Tax Tip Thursday

Would you like $6,000? Because we just saved one of our clients that much money because we were thorough in seeking information.

Today I will talk about some of the specifics of the case, but it’s a good example for why we have such long questionnaires and why we ask so many questions of our clients. Specifically, I am going ot talk about child support payments, separation agreements, and the eligible dependent non-refundable tax credit.

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

Tax Credits

This is the easy part.

When you have children and no spouse, you can often claim one of them as an “eligible dependent”. 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 to about a $2,000 reduction in taxes if you owe any).

When people are separated and there is 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 on lawyers, but they never consider the accountant. That could be a mistake! If there’s only one child, there will be a tug of war. Most end up with an every other year scenario of claiming the child. The important part is that if you are paying child support, then you could lose the opportunity to make this claim. HOWEVER, if you get the separation agreement structured properly, both people can come out on equal footing on the matter.

Not having any separation agreement at all could also play into your hands nicely, though. If there are two children, it becomes easier because then each adult can claim a child on their taxes. You might argue over who gets the younger one because that means more years of tax claims, but it’s a smaller fight to be had. Same rules apply to support payments here, though.

Click here for a link to the Government of Canada article on child custody and eligible dependents.

Child Support

It is rare that payments of child support are tax-deductible, but having the terms specified in the separation agreement can be very important regarding being able to claim the eligible dependent credit we discussed earlier. If you are paying child support (and are the only one paying it), then you CANNOT claim the eligible dependent tax credit.

If you have a court order or written agreement that requires both parents to pay support, then there is an opportunity to still claim the eligible dependent credit.

I am not sure if lawyers are becoming better-informed or if it has become more widely accepted, but I am seeing more cases where both parents have support obligations in a shared custody arrangement. 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 or claiming one child each if there’s more than one.

It requires some cooperation between recently separated parents, but both people can come out ahead if they do this! It can make a world of difference, that added deduction.

Splitting Up?

It is not straightforward to do this properly! Do yourself a favour and be informed before going into the separation agreement.

If you are in a situation and you are not sure how it could unfold, contact us at the office and we can get your taxes prepared properly to provide you with a review of your situation to determine the best course of action BEFORE the separation is completed.

Do yourself a favour! Give us a call or book an appointment today and we’ll get you prepared.

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.