March 7, 2022
Honourable Chrystia Freeland, P.C., M.P.
Minister of Finance
House of Commons, Parliament Buildings
Ottawa, ON, K1A 0A6
Dear Minister Freeland,
Re: Amending the Income Tax Act to treat parents and children of separated families fairly
The Academy of Financial Divorce Specialists reiterates 2 areas of tax legislation that are very unfair to parents and children of separated or divorced families.
These points were originally brought up by a Chartered Financial Divorce Specialist in 2017 and multiple times in 2019. The Canadian Bar Association also brought it up in 2020.
Let us start by stating a few facts, based on federal legislation – the Federal Child Support Guidelines (“the Guidelines”)(overseen by Justice Canada) and the Income Tax Act (ITA) (overseen by Dept. of Finance). Assume two children involved with separated or divorced parents who have not re-partnered.
- A parent with sole parenting responsibility for both children will receive support from the other parent.
- That parent can receive the income-tested Canada Child Benefit to assist with child rearing costs.
- That parent can claim an eligible dependant amount (“EDA”) for one of the two children, saving taxes of about $3,200 per year (varies by province).
- Professional fees paid to obtain support are deductible to the recipient parent.
- Child care expenses are deductible to the parent if they meet the required conditions, such as to allow them to work or continue their education.
- If both parents share parenting responsibilities (formerly called shared custody) of two children in a 60/40 or closer ratio, the first step pursuant to subsection 9(a) of the Guidelines is a requirement for support to be calculated based on each parent paying the other parent. This results in the higher income parent paying the most.
- Both parents can receive the Canada Child Benefit on a shared calculation basis.
- If each parent makes a child support payment to the other parent (e.g., $700 one way and $500 the other way), then each parent can claim an EDA pursuant to ITA 118(5.1) for one of the two children, saving about $3,200 each per year in taxes (total family savings – $6,400).
- Instead of needing to budget and save enough money through the month to meet their next child support payment, which is then replaced by a payment received from the other parent, many parents are more practical and agree on one “set-off” amount (e.g., $200). The set-off approach reduces strain on the budget, saves bank charges, decreases the risk of non-payment by either parent and the chances of accidental NSF payments. However, the payer of the set-off amount is now unable to claim the EDA (Section 118.5 of the ITA and the court / CRA interpretation 2013-0502091E5). The result reduces the cash flow available to meet child expenses by $3,200 solely because of the form of payment. This $3,200 annual cost is a logical default position of parents in a do-it-yourself or self-represented case, or if they use a lawyer without related tax knowledge. Same support amount; same children; same parents; but more taxes.
- Professional fees paid by the “net” payer of support are not deductible, but the fees paid by the net recipient, are still deductible. Although both are receiving child support from the other, only the net recipient may deduct them, in contrast to the sole parenting situation where there is only one recipient of support.
- Each parent pays their own child care expenses, and may claim the related tax deduction.
If you revisit the child care expenses, another unfair difference occurs in sole parenting situations.
- A married couple pay child care expenses and meet the tax deductibility tests. This amount is deductible on the tax return of the lowest income spouse (ITA 63(1)). For example, a couple paying $5,000 per year at a tax rate of 40% would save $2,000, for a net cost of $3,000 to the family.
- The same couple now separate, and one parent has sole parenting responsibility for the children, who continues to pay the same amount for child care expenses. The court order or agreement usually states that the other parent must share payment of this expense. pursuant to paragraph 7(1)(a) of the Guidelines. The parent with sole parenting responsibilities must now deduct this additional support payment from his or her child care expenses before claiming them on his or her tax return pursuant to ITA 63(1)(d). If the Section 7 support payment is $3,000, the net tax deduction is now $2,000, and the tax savings are only $800. Total cost of both parents is $4,200 instead of $3,000. Same costs; same children; same parents; but more taxes.
Solution 1: The EDA and other related child tax credits, such as the Canada Caregiver Amount and the Disability Tax Credit, should be mandatorily shared by both parents whenever the Canada Child Benefit is shared. The Canada Child Benefit is required by law to be shared when custody is shared. In contrast to the current rules for set-off arrangements, the amounts determined by the Guideline child support tables would also then be appropriate for shared custody situations. This is because the child support amounts are calculated presuming the receipt of the EDA by each parent receiving support.
Solution #2: ITA 63(1)(d) should exclude child care expense reimbursements when required by a written separation agreement or court order.
Solution #3: Professional fees should be deductible for any situation where a person is the recipient of support, even in a shared custody scenario where that person is a “net” payer.
Fairness and equality to all individuals in similar circumstances should be an underlying foundation of the Income Tax Act. Canadians dealing with the challenges of relationship breakdowns and trying to raise children as single parents deserve better.
“We ask that you please review and respond with the course of action that you will take, specifying the next steps to deal with these inequities that are outlined in this letter.”
Linda Cartier CFP CFDS R.F.P. PRP ELP
Academy of Financial Divorce Specialists
 The Department of Justice Canada, Child Support Team Research Report, titled, Formula for the Table of Amounts Contained in the Federal Child Support Guidelines: A Technical Report, sets out the formula used to determine child support amounts. Specifically, it says, “Not included in the calculation of the receiving parent’s taxes are the federal Child Tax Benefit and the GST rebate for children. These are deemed to be the government’s contribution to children and not available as income to the receiving parent. The only difference in tax calculations between the two parents is the inclusion, in the calculations for the receiving parent, of the federal equivalent-to-spouse deduction and certain provincial tax reductions and credits.” The equivalent-to-spouse deduction is now called the amount for an eligible dependant.