2015-0570791E5 Eligible Dependent, Child Tax Credit, Child Care

Principal Issues: 1. Can a child support payor claim the amount for an eligible dependant or the child tax credit in a specific factual situation? 2. In a shared-custody arrangement, how is the child care expense deduction allocated between parents on the breakdown of a marriage?

Position: 1. The child support payor cannot claim either the amount for the eligible dependant or the child tax credit. 2. After the breakdown of the marriage, in a shared-custody arrangement, the child care expense deduction must give consideration to a number of factors.

Reasons: 1. Subsection 118(5) of the Act generally restricts claims for personal tax credits under subsection 118(1) of the act for support payors. 2. When there is a breakdown of the marriage, factors such as the existence of a supporting person, the shared-custody arrangement and the proportion of child care expense that each parent may be required to make influence the amount deductible for income tax purposes.

Author: Dubis, Robert
Section: 118(1)(b); 118(1)(b.1); 63

XXXXXXXXXX

                                                2015-057079
                                                Robert Dubis, CPA, CA

June 19, 2015

Dear XXXXXXXXXX:

We are replying to your correspondence of February 11, 2015, in which you asked for our views regarding the ability of individuals to claim the amount for an eligible dependant, the child tax credit and child care expenses when there is a breakdown of a marriage. Specifically you asked how paragraphs 118(1)(b), 118(1)(b.1) and section 63 of the Income Tax Act (the “Act”) apply subsequent to the breakdown of a marriage in a specific factual situation.

Based on the information provided, two married individuals, A and B, separated in XXXXXXXXXX, and started living separate and apart in XXXXXXXXXX. They have XXXXXXXXXX children under the age of XXXXXXXXXX and share custody of both children on an equal basis. A written separation agreement between the parents requires B to pay monthly child support to A. You refer to the required support amount as a “set-off” amount. In this respect, it appears that the reference to “set-off” for the purposes of calculating the child support payment suggests that the calculation gives consideration to the maintenance guidelines of your province. The written agreement also requires the parents to share in extra expenses such as childcare, medical and extracurricular activities on an equal basis. Both spouses contribute to a specific joint bank account set up for the purpose of funding the extra expenses.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

Amount for the Eligible Dependant and Child Tax Credit

Canada Revenue Agency’s (CRA) general views regarding the eligibility to claim personal tax credits in circumstances where support amounts are required to be made by an individual are explained in Income Tax Folio S1-F3-C3: Support Payments, available on the CRA website at www.cra-arc.gc.ca.

As noted in the discussion commencing at paragraph 3.74 of Folio S1-F3-C3, subsection 118(5) of the Act stipulates that an individual cannot claim a personal tax credit under subsection 118(1) of the Act for a particular person for a tax year if the individual is required to pay a support amount for that person to his or her current or former spouse or common-law partner. In situations where more than one individual is required to make support payments in respect of the same person for a tax year, subsection 118(5.1) of the Act ensures that one individual can still claim the eligible dependant and child tax credits under paragraphs 118(1)(b) and 118(1)(b.1) of the Act respectively. It is a question of fact as to whether a specific court order or written agreement imposes an obligation upon both parents; however, as explained in paragraph 3.76 of Folio S1-F3-C3, where child support is calculated with reference to a statutory scheme such as the Federal Child Support Guidelines, only the payer has a legal obligation to pay a support amount and the exception provided for in subsection 118(5.1) does not apply.

As a result, based on the information provided, it appears that B is the only individual required to pay a child support amount and by virtue of subsection 118(5) of the Act, B cannot claim either the amount for the eligible dependant or the child tax credit for either child.

However, assuming all other conditions of paragraph 118(1)(b) of the Act are met, A may claim an amount for the eligible dependent for one child. Additionally, A may claim the child tax credit for both children pursuant to subparagraph 118(1)(b.1)(ii) of the Act.

Child Care Expenses

The CRA’s general views regarding child care expenses can be found in Income Tax Folio S1-F3-C1: Child Care Expense Deduction.

While all requirements of section 63 of the Act must be met for any claim for child care expenses, in circumstances where there is a breakdown of the marriage and two spouses or common-law partners commence living separate and apart during the year, particular issues merit consideration in determining the amount that each spouse may claim for the child care expense deduction. These include:

*     whether either spouse has a “supporting person” for the year of marriage breakdown and subsequent tax years

*     living arrangements at the time the child care expenses are incurred.

Supporting Person

Generally, when spouses reside together, both spouses have a “supporting person” as defined in subsection 63(3) of the Act and any child care expenses must be claimed by the spouse with the lower income. Specific exceptions to the general restriction are discussed in paragraph 1.30 of Folio S1-F3-C1.

As explained in paragraph 1.10 of Folio S1-F3-C1, a “supporting person” of an eligible child of a taxpayer for a tax year is defined in subsection 63(3) of the Act to mean an individual who resided with the taxpayer at any time during the year and at any time within 60 days after the end of the year and who is:

*     the child’s parent (paragraph 252(2)(a) provides an extended meaning of parent for the purposes of the Act);

*     the taxpayer’s spouse or common-law partner; or

*     any other individual who was able to claim a tax credit under section 118 for the child for the year.

In making a determination of whether there is a supporting person, both the tax year and the first 60 days of the subsequent tax year must be considered. If the spouses do not reconcile and do not reside together again within 60 days after the end of the year, then for the purposes of subsection 63(1) of the Act, neither spouse has a supporting person for the year of marriage breakdown (assuming that another supporting individual does not exist). As a result, for the purposes of subparagraph 63(1)(e)(ii) of the Act, both spouses calculate their “annual child care expense amount” independently of the other spouse for the entire tax year.

However, where spouses reside with each other at any time during the year and reconcile, such that they commence residing together for any duration within the 60 day period after the end of the year, there is a supporting person for the year of marriage breakdown. In this circumstance, both the higher and lower income parent may be able to deduct child care expenses for the year in which the taxpayer and supporting person were separated. Paragraph 1.43 of Folio S1-F3-C1 outlines the methodology for determining the amount deductible by the higher income parent.

Child care Expenses

To be deductible under subsection 63(1) of the Act, all “child care expense” amounts must be incurred at the time the parent resided with the child and only to the extent that they were paid by that parent to enable the parent to engage in the activities listed in paragraph (a) of the definition of “child care expense” in subsection 63(3) of the Act. See paragraph 1.9 of Folio S1-F3-C1 for more discussion of these activities.

The requirement that the parent reside with the child at the time the expenses are incurred is specifically provided for in paragraph (a) of the definition of “child care expense.” In our view, the words “resided with” require that the child be physically resident with the parent (i.e., in the parent’s custody) at the time that such parent incurs the child care expenses. Accordingly, the percentage of child care expenses that either parent may be entitled to claim should generally correspond with the time that the children resided with the parent, provided that parent in fact paid the child care expenses amount and the other requirements of section 63 of the Act have been met.

Providing the requirements of the Act are met, the use of a joint bank account for making payments in respect of child care services is acceptable; however, each parent must retain documentation to support their claim for child care expenses.

We trust our comments will be of assistance.

Yours truly,

Pamela Burnley, CPA, CA
Manager, Tax Credits and Ministerial Issues
Business and Employment Division
Income Tax Rulings Directorate

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