A Note on Taxes for Separated or Divorced Parents

Maximize tax benefits and credits available to parents

Anna Dunaeva DLegal Anna Dunaeva October 31, 2020

A Note on Tax Benefits for Separated or Divorced Parents

Child support and parenting arrangements often become tough questions on separation or divorce. Tax benefits and credits associated with child expenses is another complicating factor. They are closely related to financial support and custody and play an essential role in family budgets. Where former couples finalize their custody and financial support arrangements by way of a separation agreement, the issue of Eligible Dependant Credits, Child Care Deductions, Canada Child Benefits, and Child GST Credits are usually addressed by lawyers from the beginning. On other occasions, this source of cash flow is often overlooked. Let’s see how to maximize tax benefits and credits available to parents and what to keep in mind when you negotiate your parenting time and child support.  

Who Gets Eligible Dependant Credit?

Eligible Dependant Credit is available to the primary caregiver, meaning that the parent who is primary responsible for the care and upbringing of the child is entitled to receive it.

For parents with more than one child, the parent who has a child in their primary care, can claim Eligible Dependant Credit for that child. If parents share parenting time with the children more or less equally, each parent can claim one child.  Where parents have one child and share parenting time with the child equally, the party who receives child support for that child is entitled to claim the Eligible Dependant Credit for that child. If both parents pay and receive child support for the child, they must agree between them who will claim Eligible Dependant Credit.

 

Because only one Eligible Dependant Credit is allowed for each child, shared parenting arrangements are tricky and require a carefully drafted separation agreement or court order to confirm child support payments and the Eligible Dependant Credit recipient. Failure to address the Eligible Dependant Credit claims in the court order or a separation agreement gives rights to disputes and creates unpredictability. If both parents pay child support and a set-off payment from one to the other is made for convenience, the wording should be precise that both parents pay child support, and a mere set-off provision is not sufficient. If your arrangements switch to shared parenting at some point, make sure to create or revise your agreement with the other parent to address these changes. Claiming Eligible Dependant Credits without a formal agreement or court order in place can be tricky. Only one individual can claim the Eligible Dependant Credit for one child in the year. Also, one cannot claim the Eligible Dependant Credit in case of a new common-law relationship or marriage, or where one claims a spousal credit.

Can parents share Canada Child Benefit on separation or divorce?

Canada Child Benefit is available to the primary caregiver, meaning that the parent who is primarily responsible for the child’s care and upbringing is entitled to receive CCB under the general rule.

 

When both a female and a male parent live in the same home as the child, the female parent is usually considered to be the primary caregiver by default. However, suppose the male parent is the primary caregiver of the child. In that case, he should apply for CCB, and supporting documentation, such as a letter from the female parent, school or family doctor, can be required.

 

However, where parents have more or less equal time with the child, the parents share Canada Child Benefit based on their respective incomes.

Who claims children’s GST Credits on separation or divorce?

As with the Canada Child Benefit, GST credits for children are only available to the primary caregiver. So, the parent responsible for supervising the child’s daily activities and needs, taking care of the child’s medical needs, and arranging for child care shall claim the child’s GST credits. Where parents have shared custody, the parents share GST credits for the child based on their respective incomes.

 

Can I Claim Child Care Expense Deduction or medical expenses on separation or divorce?

Child care expenses include babysitter, after school, and daycare. Child Care Expense Deduction is only available to the primary caregiver. So, the parent responsible for supervising the child’s daily activities and needs, taking care of the child’s medical needs, and arranging child care shall claim the child care expenses. Where the other parent contributes to the child care expenses, he or she only contributes to the net cost of the total expense. In this scenario, the invoice shall be issued for the primary caregiver. The contributing parent then reimburses his or her proportionate net share to the primary caregiver.

 

Both parents can claim the maximum deduction if parents have shared custody if the expenses are necessary to enable the parent to work or attend school. Each parent can claim the expense net of the reimbursement from the second parent, and the other parent claims the amount of the reimbursement. In this case, the parent who incurred the expense should have an invoice in his or her name and issue receipts to the contributing parent of the reimbursement amount.

Similar rules apply to medical expenses. However, things get tricky where a parent remarries or enters into a new common law relationship. If the new partner of the parent is actually paying the expenses, that new partner may be entitled to deduct the child care expenses.

A detailed record-keeping of the child care expenses is warranted in either case to address reconciliation of basic child support and child support section 7 expenses and to avoid tax audits. A properly drafted separation agreement or court order usually requires the parents to exchange information about their financials and expenses on an annual basis and review and set-off the payments made during the year.

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