10 August 2010 External T.I. 2010-0374871E5 - Wholly dependent person 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: Under what circumstances could spouses who are separated and reside apart each claim the 118(1)(b) wholly dependant person tax credit in respect of their two children for whom they share full custody?

Position: Question of fact as it depends on the particular circumstances.

Reasons: Interpretation of the relevant provisions of the Act.

XXXXXXXXXX 								2010-037487
									T. Posadovsky, CMA
									(613) 952-8283
August 10, 2010

Dear XXXXXXXXXX ,

Re: Wholly Dependent Person Tax Credit

We are writing in response to your letter of July 14, 2010, wherein you asked for an interpretation on the application of the amount for an eligible dependent, which is also known as the "wholly dependent person" or "equivalent to spouse" tax credit. Specifically, you wish to know under what circumstances an individual, who is separated from his spouse and shares custody of his two young children, is eligible to claim a non-refundable tax credit for a wholly dependent person in respect of one of the two children.

The particular circumstances outlined in your letter appear to relate to a factual situation involving specific taxpayers. As explained in Information Circular 70-6R5, Advance Income Tax Rulings, this Directorate does not comment on transactions involving specific taxpayers except by way of an advance income tax ruling in respect of proposed transactions. When the situation involves a specific taxpayer and a completed transaction, the question should be directed to the appropriate Tax Services Office for their views, along with all relevant facts and documentation. However, we are prepared to offer the following general comments which may be of assistance.

Our Comments

Where an individual does not claim a spousal tax credit under paragraph 118(1)(a) of the Income Tax Act (the "Act"), the individual may be eligible to claim a tax credit under paragraph 118(1)(b) in respect of a wholly dependent person provided the individual meets the conditions in that paragraph. In order for a child to be considered "wholly dependent" on a parent, the parent must be responsible for the usual day-to-day activities of raising the child. Whether an individual meets the conditions under paragraph 118(1)(b), or whether the child who is wholly dependent on a parent resides with the individual at any time in the year, is a question of fact and can only be determined by examining all of the facts in a given situation.

In addition to the conditions in 118(1)(b), subsections 118(4) and 118(5) of the Act impose further limitations, such as: an individual cannot claim the credit in a taxation year in respect of more than one person; the credit cannot be claimed by more than one individual for the same person or the same domestic establishment; the credit in respect of a person cannot be shared between otherwise eligible individuals; and no credit in respect of a person is allowed where an individual is required to pay a "support amount", as defined in subsection 56.1(4) of the Act, in respect of that person in the years following the year of marriage breakdown. Note that this last restriction applies even in cases where such support payments are not made or, if made, are not deductible.

To relate the applicable provisions of the Act to your query, we present three scenarios under different circumstances:

Scenario 1

Taxpayers Mr. A and Mrs. B have been separated since 2007 and share custody of their two children. No support amount in respect of the children is required to be paid by either parent. Both parents maintain separate self-contained domestic establishments that provide accommodations for both children and the children reside with each parent for approximately 50% of the year. Neither parent has remarried or resides with a common-law spouse. Both parents otherwise meet the criteria for the credit under paragraph 118(1)(b) of the Act and when the children are residing with a particular parent, that individual is responsible for the usual day-to-day activities of raising the child.

In general, where custody of two or more children is shared, and each parent otherwise meets the criteria for claiming the wholly dependent credit under paragraph 118(1)(b), one parent can claim the credit for one of the children and the other parent can claim the credit for another child.

The eligibility for the wholly dependent person amount does not depend on custody arrangements per se and it is always a question of fact whether an individual meets the requirements provided by paragraph 118(1)(b) of the Act. In order for a child to be considered wholly dependent on a parent, the parent must be responsible for the usual day-to-day activities of raising the child, such as ensuring the child attends school, preparing regular meals, etc. In other words, the child would have to live with the parent during the days in question. This can be contrasted with situations where the parent only has visitation rights or "legal access" rights where the child would still be considered to be living with the other parent. Whether a child is wholly dependent on a parent "at any time in the year" is a question of fact and can only be determined by examining all of the facts in a given situation. Although the child must be wholly dependent at some time during the year, the Act does not set out a specific length of time necessary for a parent to qualify for the credit.

Scenario 2

The facts are the same as in scenario 1, however, Mr. A paid periodic support payments in respect of the children to Mrs. B pursuant to the separation agreement.

Where spouses or former spouses live separate and apart throughout the year, paragraph 118(5)(a) of the Act prevents an individual from claiming the wholly dependent person credit under paragraph 118(1)(b) in respect of a child if the individual is required to pay a support amount to that individual's spouse or former spouse in respect of that child.

Note that where more than one child is the subject of support payment arrangements, whether or not a parent is required to pay child support in respect of a particular child is a question of fact that may require an examination of the written agreement or court order for determination. Where a parent is required to pay a support amount for a particular child, this would not preclude that parent from claiming the wholly dependent person amount for another child for whom no support is payable, provided all of the other conditions are met.

Scenario 3

Same facts as in scenario 1, but pursuant to the separation agreement, both parents make support payments in respect of the children to each other.

Prior to 2007 where in the same taxation year both parents paid support amounts, as defined in subsection 56.1(4) of the Act, in respect of a child, neither parent would be eligible for the credit. For 2007 and later years, new subsection 118(5.1) of the Act provides that, in such a case, the Act is to be read without reference to subsection 118(5). This ensures that one of the parents may claim the credit under paragraph 118(1)(b) if they otherwise qualify and can agree on who will claim the credit. Again, in the situation where custody of two or more children is shared, and each parent otherwise meets the criteria, one parent can claim the credit for one of the children and the other parent can claim the credit for another child.

We trust that these comments have been of assistance.

Yours truly,

Randy Hewlett
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch