11 March 2009 External T.I. 2008-0300281E5 - Child tax credit

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.

Principal Issues: Computation of the child tax credit under paragraph 118(1)(b.1) where parents of a child have divorced; the divorced parents have equal shared custody of the child; and each divorced parent has a new spouse or common law partner.

Position: It might be argued that no child tax credit is available in these circumstances. However, CRA's assessing position appears to allow a child tax credit provided only one parent makes the claim.

Reasons: In our view there could be a technical problem with paragraph 118(1)(b.1) of the Act.

XXXXXXXXXX 								2008-030028
									Michael Cooke, CA
March 11, 2009

Dear XXXXXXXXXX :

Re: Child Tax Credit - Paragraph 118(1)(b.1) of the Income Tax Act (the "Act")

We are writing in response to your letter of November 7, 2008, wherein you asked for our opinion on the availability of the child tax credit under paragraph 118(1)(b.1) of Act in the following circumstances.

Briefly, you describe a joint custody situation where a child lives with one parent for six months in the year and another parent for six months in the year. The child's parents are divorced and continue to live separate and apart; however, each parent has a new spouse or common law partner. It is also understood that no child support is paid by either parent. You are concerned that in these circumstances no one would be able to claim the child tax credit in respect of that child because it does not appear that either of the tests outlined in the provision are met.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Circular and the other publications referred to in this letter are available on our website at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Notwithstanding the above, we are prepared to offer the following general comments.

Generally speaking, paragraph 118(1)(b.1) of the Act allows a parent of a child who is under the age of 18 at the end of a taxation year to claim a child tax credit of $2,000 (indexed after 2007) for each such child where:

• the child ordinarily resides throughout the taxation year with that parent together with another parent of the child ("Test #1" - see subparagraph 118(1)(b.1)(i) of the Act); or
• the child would qualify as a wholly dependent person of the parent under paragraph 118(1)(b) of the Act for that taxation year ("Test #2" - see subparagraph 118(1)(b.1)(ii) of the Act).

Pursuant to paragraph 118(4)(b) of the Act, only one parent may claim the child tax credit for a particular child. We further note that pursuant to subsections 252(1) and (2) of the Act, a spouse or common law partner of the child's biological parent would also be a parent of that child for the purposes of the child tax credit.

Where the biological parents of a child are divorced or separated but each lives with a new spouse or common law partner throughout the year, we agree with your conclusion that because neither biological parent would be eligible for the wholly dependent person credit, neither would satisfy Test #2 in respect of the child tax credit. Accordingly, in the fact pattern described, the availability of the child tax credit depends on whether Test #1 can be met. To make this determination, the meanings of the phrases "ordinarily resides" and "throughout the year" must be considered.

The courts generally consider that the phrase "ordinarily resides" means the place where the individual regularly, normally or customarily lives, in the settled routine of his or her life. This is a question of fact. It is our view that the phrase "throughout the year" for the purposes of Test #2 means that the child must be considered to ordinarily reside with two parents (who are spouses or common law partners who are not separated and living apart) each day in the particular calendar year except where subsection 118(9.1) of the Act applies (i.e. the year of birth, adoption or death). We note that an individual can be considered to ordinarily reside in a particular location but nonetheless spend periods of time away from that residence.

Therefore, where the child's biological parents have divorced or separated and each parent has a new spouse or common law partner, the fact that the child may have stayed/lived with both biological parents at some time during the year pursuant to a shared custody arrangement would not necessarily preclude a finding of fact that the child ordinarily resided throughout the particular year with one of the child's biological parents together with that parent's new spouse or common law partner. This would satisfy Test #1.

Notwithstanding the above, in circumstances in which the child's settled routine in a particular year results in his or her ordinary residence literally being divided equally between the child's biological parents and assuming no child support is paid by either parent, administratively, the CRA would be prepared to allow a child tax credit provided only one parent claims the credit for that child.

We trust our comments will be of assistance to you.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch