When a Family Law case settles, there are a number of tax implications that must be taken into consideration. Originally, only one person in the relationship was entitled to receive the Child Tax Benefit, Universal Child Care Benefit, and the child component of the G.S.T./H.S.T. credit. This clearly created a problem for parents who shared custody of a child where the child resides equally with both parents.
In 2010, this problem was resolved so that both parents would be eligible to receive those benefits (provided they were eligible based upon their income levels). However, that type of an arrangement regarding a sharing of those government benefits must be spelled out in the Separation Agreement or Court Order.
A married person may claim his or her lower income-earning spouse as an eligible dependent and thus obtain a tax credit worth as much as $10,320.00. A separated or divorced person may claim a child as equivalent to spouse and obtain a similar credit. However, if the divorced or separated couple does not agree in advance who will obtain the credit, then Canada Revenue Agency will disallow both claimants. In effect, one divorced spouse can block the other from receiving the credit. This matter was brought before the Court and it was ruled that the Income Tax Act would need to be re-drafted so that divorced people are not deprived of the popular tax credit available to married couples. However, the Judge’s views on this topic were just that; advisory views.
The Income Tax Act grants a tax credit to individuals who support a low-income spouse. It also grants a comparable credit to a divorced individual who can show that he or she supports a relative, including a child. But there’s catch, though: only one spouse can claim the credit. If one spouse objects, then neither can claim the credit.
Anyone who has been through a contentious divorce knows that getting your ex-spouse to agree on anything can be a challenge. Getting your ex to agree that you should get a tax credit worth up to $10,320.00? Good luck. The law, as it currently stands, effectively gives ex-spouses a veto as to whether or not their former partner should receive the tax credit.
The Judge in the test case stated “it cannot be the law that one hostile party, acting unreasonably, can exercise a veto on the lawful entitlement of another party. Instead of resolving the dispute, the Canada Revenue Agency simply throws up its hands and denies the deduction to everyone, thereby enriching itself.” The Court went on to state that hopefully by this case being brought before the Court it would serve two purposes. First, to convey a message to the Family Law lawyers that this is an issue that should routinely be addressed at the time of separation and within a Separation Agreement or a Court Order where joint custody is an issue. Second, to convey a message to the legislators that, notwithstanding the good intentions to provide taxpayer relief, because that is what this credit is designed to do, with zero sum approach of denying any credit without agreement can, in certain circumstances, create a harsh and unfair result contrary to their intention of providing relief. It may, indeed, be time to create a better mouse trap.
In addition, the legal fees incurred by a spouse to obtain (or maintain) child support and/or spousal support are tax deductible in the hands of that parent. Unfortunately, the same is not true for the parent who was brought to Court being asked to pay child or spousal support.
If you have any tax questions, you should speak with an accountant or a lawyer well-versed in the area.
Walter Drescher is a partner at the Law Firm of Cobb & Jones LLP. If you have any questions, please contact him or ask a lawyer of your choice.