18 April 2000 External T.I. 2000-0009905 - BANKRUPTCY-PERSONAL TAX CREDITS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether an individual who declared bankruptcy during the year
is entitled to claim the equivalent-to-spouse tax credit pursuant to paragraph 118(1)(b) of the Act

Position: Question of fact

Reasons: Pursuant to subsection 118.95 of the Act, for bankruptcies that occur after April 26, 1995, when an individual becomes bankrupt, the calendar year in which the bankruptcy occurs is divided into two taxation years. One taxation year runs from January 1 to the day before the bankruptcy (pre-bankruptcy period), and the other begins on the day of bankruptcy and runs to December 31 (post-bankruptcy period). When an individual becomes bankrupt in a calendar year, the total of the amounts claimed in respect of the equivalent-to-spouse tax credit for both the pre- and post-bankruptcy periods cannot be greater than the amount that could have been claimed had the individual not become bankrupt in the year. See 9900175, 52897 and paragraph 40 of IT-513R, Personal Tax Credits.

XXXXXXXXXX 2000-000990
G. Moore
April 18, 2000

Dear XXXXXXXXXX:

Re: Bankruptcy and Equivalent-to-Spouse Tax Credit

We are replying to your letter of February 24, 2000, regarding whether an individual who is bankrupt in the year can claim an equivalent-to-spouse tax credit pursuant to paragraph 118(1)(b) of the Income Tax Act (the "Act"). You have described the following situation:

The taxpayer has four children (Mrs. X). These children live with their father on a permanent basis; however, Mrs. X has an arrangement which allows her to keep one child for one month of the year in the summer and allows her to have all the children every second weekend. Mrs. X wants to claim one child for the equivalent-to-spouse tax credit. Mrs. X's ex-husband claims a different child for the equivalent-to-spouse tax credit. Mrs. X is not married or living common-law with another individual.

You are also asking whether it makes a difference in our response if there is no support agreement between Mrs. X and her ex-spouse and that Mrs. X neither receives or pays any support.

Our Comments

The transaction described in your letter relates to an actual transaction. Written confirmation of the consequences inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. Where the particular transactions are partially completed or completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature.

The determination of whether an individual is entitled to claim the equivalent-to-spouse tax credit pursuant to paragraph 118(1)(b) of the Act is a question of fact. A review of all of the facts surrounding a situation would be required to conclusively resolve whether an individual is entitled to claim that tax credit. As indicated in paragraph 11 of IT-513R, Personal Tax Credits, (copy enclosed), an individual who does not claim a spousal tax credit for the year and who, at any time in the year, was not married, or was married but did not support nor live with his or her spouse and was not supported by his or her spouse, may claim an equivalent-to-spouse tax credit for a person who is wholly dependant for support on the individual (subject to the dependant's income for the year) if, at that time:

• the individual maintained a self-contained domestic establishment either alone or with other persons;
• the individual lived in the residence; and
• the individual supported a dependant in the residence.

For purposes of the equivalent-to-spouse tax credit, a dependant is a person who is a resident of Canada (except in the case of a child of the individual), related to the individual, and under 18 years of age or wholly dependent by reason of mental or physical infirmity, except where the claim is in respect of the individual's parent or grandparent.

In the above situation, we do not have enough information to determine if Mrs. X would be entitled to claim the equivalent-to-spouse tax credit in respect of one of her children (who is not being claimed as a dependant by her ex-husband for the equivalent-to-spouse tax credit). It is not clear from the information provided whether Mrs. X has visitation rights (legal access) or actual custody of the children during every second weekend or for the one month in the summer (with respect to the one child). The Canada Customs and Revenue Agency has generally not considered a child to be wholly dependant on a parent, for purposes of paragraph 118(1)(b) of the Act, unless the court order provides for the parent to have custodial rights as opposed to visitation or "legal access" rights. However, we have provided our comments below with respect to the other issues you have raised on the assumption that Mrs. X has custodial rights in both situations.

You have asked whether it makes a difference if there is no support agreement between Mrs. X and her ex-spouse and that Mrs. X neither receives or pays any support. Subsection 118(5) of the Act provides that no amount may be deducted under subsection 118(1) of the Act in respect of a person where the individual is required to pay a support amount (as defined in subsection 56.1(4) of the Act) to his or her spouse or former spouse in respect of the person and the individual lives separate and apart from the spouse or former spouse throughout the year because of a marital breakdown or claims a deduction under paragraph 60(b) of the Act for a support amount paid to the spouse or former spouse. Accordingly, Mrs. X would not be entitled to claim the equivalent-to-spouse tax credit if she were required to pay a support amount to her former spouse. As this does not appear to be the case with Mrs. X, she should not be precluded by subsection 118(5) of the Act from making an equivalent-to-spouse claim.

Pursuant to paragraph 128(2)(d) of the Act, for bankruptcies that occur after April 26, 1995, when an individual becomes bankrupt, the calendar year in which the bankruptcy occurs is divided into two taxation years. One taxation year runs from January 1 to the day before the bankruptcy (pre-bankruptcy period), and the other begins on the day of bankruptcy and runs to December 31 (post-bankruptcy period). When an individual becomes bankrupt in a calendar year, the total of the amounts claimed in respect of the equivalent-to-spouse tax credit for both the pre and post-bankruptcy periods cannot be greater than the amount that could have been claimed had the individual not become bankrupt in the year. Subsection 118.95 of the Act provides that the equivalent-to-spouse tax credit be calculated on a pro-rata basis based on the number of days in the period for which the applicable pre-bankruptcy or post-bankruptcy return is filed. The total amounts claimed in both the pre-bankruptcy and post-bankruptcy return with respect to the equivalent-to-spouse credit cannot exceed the amount that would have been deductible had Mrs. X not become bankrupt. When calculating the amount "D" (i.e., the greater of $500 and the income for the year of the dependent person) in the formula for the equivalent-to-spouse tax credit of a bankrupt individual under paragraph 118(1)(b) of the Act, in our view, the correct approach would be to use the income of the dependent person for the periods that correspond to the pre and post-bankruptcy periods of the individuals. In other words, the amount of the claim for the equivalent-to-spouse tax credit on the post-bankruptcy return would be determined using the dependent person's income from the date of bankruptcy until December 31, prorated based on the number of days in the period for which the return is filed.

It should be noted that in the event that Mrs. X has custodial rights to one child for the one month in the summer but is not considered to have custodial rights to the same child throughout the year as a consequence of the arrangement whereby Mrs. X has the children every second weekend, this may cause a problem as a consequence of the bankruptcy. For example, since paragraph 129(1)(d) of the Act establishes two taxation years and paragraph 118(1)(b) of the Act requires that the conditions therein be met "at any time in the year", if the one month in the summer does not overlap with the date of bankruptcy, in our opinion, Mrs. X would only meet the conditions of paragraph 118(1)(b) for one of the two taxation years (that is, either the pre-bankruptcy taxation year or the post-bankruptcy taxation year). In such a case, with respect to the taxation year upon which the conditions of paragraph 118(1)(b) of the Act are met, our comments above still apply and the credit would have to be prorated in accordance with paragraph 118.95(b) of the Act. However, no amount would be deductible under paragraph 118(1)(b) of the Act with respect to the other taxation year (i.e. the pre-bankruptcy or post-bankruptcy return, as the case may be).

We trust our comments will be of assistance to you.

Yours truly,

J. Wilson.

for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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