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: Application of subsection 118(5.1) and its impact on the Eligible dependent tax credit.
Position: See response.
Reasons: The legislation.
December 9, 2019
Lyne Bourdeau HEADQUARTERS
Acting Senior Programs Officer Income Tax Rulings Directorate Collections and Verifications Renee Sigouin
Branch (613) 670-8903
2019-081810
Eligible dependent credit
This memorandum has been prepared in response to your email of July 30, 2019, in which you requested our views on the application of subsection 118(5.1) of the Income Tax Act (the Act) in shared custody situations where child support payments are made using a "set-off" arrangement, and how such arrangements impact a taxpayer’s ability to claim an eligible dependent credit (EDC) pursuant to paragraph (b) of the description of B in the formula in subsection 118(1) of the Act (hereafter referred to as paragraph 118(1)(b)). You have specifically asked that we provide our views on the application of subsection 118(5.1) in circumstances where support amounts and “set-off” amounts are calculated in accordance with the Federal Child Support Guidelines.
The Canada Revenue Agency's (CRA) general views regarding eligibility for personal tax credits in circumstances where support amounts are required to be made by an individual are explained in Guide P102, Support Payments and Income Tax Folio S1-F3-C3, Support Payments (the Support Payments folio). Information more broadly relating to the EDC is outlined in paragraphs 2.40 to 2.59 of Income Tax Folio S1-F4-C2, Basic Personal and Dependant Tax Credits (for 2017 and subsequent tax years).
As outlined in paragraphs 3.74 and 3.75 of the Support Payments folio, subsection 118(5) precludes an individual from claiming a personal tax credit under subsection 118(1) for a particular person for a tax year if the individual is required to pay a support amount (within the meaning assigned by subsection 56.1(4)) for that person to his or her current or former spouse or common-law partner. This rule applies only if the individual lives separate and apart from the current or former spouse or common-law partner throughout the year because of the breakdown of their marriage or common-law partnership, or if the individual claims a deduction for the year under section 60 for support amounts paid to the current or former spouse or common-law partner.
Sometimes more than one individual is required to pay a support amount for the same child in a tax year. This may occur where there is shared custody or where there is a change in custody during the year. In such cases, subsection 118(5.1) ensures that one individual can still claim the EDC or the Canada caregiver tax credit for an infirm child (which is claimed under paragraph (b.1) of the description of B in subsection 118(1)). However, both individuals must agree on who is entitled to claim these personal tax credits in respect of a particular person. If the parties cannot agree, paragraph 118(4)(b) of the Act prevents both individuals from claiming the credit.
In the recent Tax Court of Canada decision Bayrack v The Queen, 2019 TCC 53, Justice Wong made the following observation with respect to these provisions:
“Distilling the provisions down to their practical effect for the purposes of the present appeal - if only one parent pays child support, then subsection 118(5) applies to preclude a deduction under subsection 118(1). However, if both parents pay child support to each other, then subsection 118(5.1) applies to preclude the application of subsection (5). The result would then be that the deduction under subsection (1) is allowed.”
Where parents live separate and apart due to a breakdown in their marriage or common-law partnership, and share custody of two or more minor children, one parent may be able to claim the EDC for one child, and the other parent may be able to claim the credit for another child. However, a particular parent must meet all of the requirements to claim a particular child and ensure that the limitations listed in subsections 118(4) and 118(5) do not apply. This is described in paragraph 2.57 of Income Tax Folio S1-F4-C2.
In the context of a shared custody situation, in order for subsection 118(5.1) to apply, both parents must be precluded from deducting an EDC or the Canada caregiver tax credit for an infirm child, because of subsection 118(5). In order for subsection 118(5) to apply to both parents, they must each be “required to pay a support amount (within the meaning assigned by subsection 56.1(4)”.
The concept of a support amount and how this term is defined in subsection 56.1(4), is described in paragraph 3.10 of the Support Payments folio, wherein it is stated:
“… an amount is a support amount if:
- it is payable or receivable as an allowance on a periodic basis;
- it is paid for the maintenance of the recipient, the children of the recipient, or both;
- the recipient has discretion as to the use of the amount; and
- where the recipient of the amount is the spouse or common-law partner or former spouse or common-law partner of the payer, the parties are living separate and apart because of a breakdown of their relationship and the amount is receivable under an order of a competent tribunal or under a written agreement; or
- where the recipient is the parent of a child of whom the payer is a legal parent, the amount is receivable under an order of a competent tribunal in accordance with the laws of a province or territory.” [Emphasis mine]
The courts have provided guidance on the circumstances in which an amount is considered to be receivable “under an order of a competent tribunal or under a written agreement” for purposes of satisfying the definition of support amount in subsection 56.1(4). This includes the court’s interpretation of these rules in situations of shared custody where support amounts and “set-off” amounts are calculated in accordance with, or with reference to, the Federal Child Support Guidelines, or otherwise. These cases can be distinguished between those where:
- the court order or written agreement establishes that only one individual is required to make child support payments – in these cases, the exception in subsection 118(5.1) will not apply, the payer will be precluded from claiming the EDC pursuant to subsection 118(5) and the recipient may be able to claim the amount, provided they are otherwise eligible.
- the court order or written agreement clearly establishes that both individuals are required to make child support payments – in these cases, subsection 118(5.1) will apply to ensure that one of the individuals can claim the EDC, as long as there is agreement as to whom will make the claim. If they cannot agree, paragraph 118(4)(b) of the Act will prevent both individuals from claiming the EDC.
It is important to distinguish between the requirement for two legal obligations to pay a support amount (as defined in subsection 56.1(4)) and the requirements under child support guidelines to use the incomes of both parents to determine the ultimate single support amount required to be paid by one spouse. The requirement to use both incomes is not equivalent to having two legal obligations.
The leading case in this area is Verones v. The Queen, 2013 FCA 69, where the Federal Court of Appeal (FCA) stated that, although the Federal Child Support Guidelines gave consideration to the incomes of both the payer and the recipient to determine the quantum of child support in that case, only the payer was considered to have, for purposes of the EDC, a legal obligation to pay a support amount.
In paragraphs 6 and 8 of Verones, the FCA stated:
“[6] The whole discussion about the concept of set-off is a mere distraction from the real issue, i.e. whether or not the appellant is the only parent making a "child support payment" in virtue of "an order of a competent tribunal or an agreement", as defined under the Act.
…
[8] Once each parent’s obligation vis-à-vis the children is determined, the higher income parent may be obligated to make child support payments to the lower income parent as part of his or her performance of said obligation. However, in the end, the set-off concept does not translate the parents’ respective obligation to contribute to child rearing into a "support payment” as defined in the Act.”
The Tax Court of Canada (TCC) has made similar observations since this time, in various informal procedure decisions, in determining what constitutes a legal requirement to pay a support amount. For example, in Lawson v. The Queen, 2017 TCC 131, Justice Miller stated:
“[26] The court appears to distinguish between obligations to contribute (not a support amount) and legal requirements to pay (a support amount). The Guidelines establish the obligations to contribute but only one person is required to pay...”
In Bayrack v. The Queen, 2019 TCC 53, Justice Wong stated:
“In the present appeal, both the Appellant and his former spouse were obliged to maintain the children of the marriage according to their relative financial means. The support payments made by the Appellant represented a set-off of their respective financial abilities rather than a set-off of respective child support payments.” [Emphasis mine]
In Huneault v. The Queen, 2017 TCC 70, Justice Boyle stated:
“[10] In short, this decision is then driven by the Federal Court of Appeal decision in Verones on the netting of amounts to be contributed under child support guidelines not being able to help a parent if that parent is the only parent obligated under the agreement to actually pay child support. That is how the provision of the statute reads and how the Federal Court of Appeal and this Court have interpreted it.
[11] While I'm not unsympathetic to complaints that this may not make sense or advance any underlying policy, I'm a judge of the Tax Court, I can't rewrite the law, I can't rewrite the agreement, and I can't interpret the law differently than the Federal Court of Appeal.”
Lastly, I note the comments of Justice Hogan in Groves v. The Queen, 2017 TCC 66, wherein he stated:
“[25] Past decisions of this Court and the Federal Court of Appeal have consistently rejected arguments based on shared custody arrangements involving net support payments governed by the Federal Guidelines. In Verones v. The Queen, the Federal Court of Appeal conclusively determined that this type of set-off arrangement does not satisfy the requirements of the exception contained in subsection 118(5.1). This issue has also been considered several times by this Court in various permutations since then without any subsequent departure from the reasons of Trudel J. A. in Verones (see the reasons for judgment of V. Miller J. in Commet v. The Queen, those of Bocock J. in Harder v. The Queen and those of Woods J. (as she then was) in Sauve v. The Queen). Because of the principle of stare decisis, this Court is similarly bound in this appeal to apply the decision of the Federal Court of Appeal.”
In contrast to the above, however, where a court order or written agreement supports the existence of a legal obligation of both individuals to pay child support, then if the parents agree to use a “set-off” arrangement (that is, both parents are required to pay support to each other, but only one parent makes a child support payment for the difference), subsection 118(5.1) of the Act could still apply.
For example, in Ruel v. The Queen, 2017 TCC 93, a TCC decision heard under the informal procedure, Justice D'Arcy determined that the court order concerned clearly provided that both individuals were required to make support payments. In paragraph 30 of the decision, Justice D’Arcy stated:
“The set-off provided for in … the … Court Order represents a method by which the former spouse can pay a portion of the child support she is required to pay in respect of P under the … Court Order. That support payment is effected by the set-off. This is different from the situation in Verones where the Court used the Federal Guidelines to calculate a single support payment in respect of two children.”
In summary, a court order or written agreement that calculates child support obligations based on a statutory scheme (such as 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 parent's income is used to calculate child support is not sufficient to establish a requirement that both parents make child support 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 EDC, and the recipient may be able to claim the amount, provided they are otherwise eligible to claim the amount. It is a question of fact as to whether a particular written agreement or court order imposes a legal obligation on both parents to pay child support. This is consistent with the information provided in Guide P102, in the section entitled Child custody and the amount for an eligible dependant, under the heading Shared Custody, and the jurisprudence noted above.
I trust this information is of some assistance. However, if you have any further questions in relation to this matter, please don’t hesitate to contact me.
Yours truly,
Lita Krantz, CPA, CA
Manager, Tax Credits and Ministerial Issues
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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