Can You Turn a Bad Situation Into Good Money?
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Are you going through a separation or divorce?
It is critical to negotiate certain income tax return items in your separation agreement.
The Eligible Dependent Amount was worth $3,747 in tax savings (refund) to an Alberta parent in 2019. The credit is available federally and, in most provinces, as well.
Single parents have the ability to claim ONE child as an eligible dependent (this credit used to be referred to as the Equivalent to Spouse Credit). The following is necessary for eligibility (subsection 118.5 of the Income Tax Act):
- Must be a single parent, (living separate and apart from co-parent), AND
- Child must be 18 years and under, or older if a disability, AND
- Child lives with parent part of the year, AND
- Parent is not making child support payments for child.
Therefore, parents who have the child(ren), part of the time and do not pay chid support can claim the eligible dependent amount. As well, parents who have primary care of the child(ren) can also claim this credit (this parent is usually receiving child support and therefore the non-primary parent usually cannot claim this credit).
If parents have shared custody, the child support guidelines set out a net monthly amount payable by the higher income earning parent to the other. It is based on the fact that each parent has a monthly child support obligation that determines a net amount. Separation agreements often set out that the higher income earner pays offset or net child support to the other.
When there is only one legal obligation to pay child support, the higher income parent, is denied the ability to claim the eligible dependent credit. This has frustrated these taxpayers for years. Numerous taxpayers have taken their dispute to the Tax Court of Canada. (There are some occasions where TCC cases have accepted this argument and permitted taxpayers caught in this situation to make the claim but they are few and far between).
What is the 2007 exception?
Ordinarily, you cannot claim the eligible dependent credit if you are the only child support payer. In 2007, subsection 118(5.1) was passed into law and allowed for the following:
- If both Parents are paying child support, AND
- There is a shared parenting arrangement, AND
- Both are living single, AND
- Each agree on who will claim which child, each can claim 1 child (assuming 2 or more children),
- Then each parent can claim 1 child.
Ensure that your agreement sets out that each parent pays monthly child support for the number of child(ren), that there is a shared parenting arrangement, and which child each of you will claim.
The Tax Court of Canada has set out that parents should actually go one step further and actually pay each other monthly to ensure the supporting documentation is available to ensure success.
Claiming a child can help a taxpayer save money; funds that can be used to help support the children.
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If you need help, please do not hesitate to reach out.
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