Failure to Cross Cheques and the Eligible Dependent Credit
I suspect many family law lawyers out there were hoping, just as we were, that Harder v. R, 2016 Carswell Nat 10378 (TCC) would not be taken too seriously or followed to the strict extent that Harder implied must be done. Unfortunately, the recent case of Huneault v. R, 2017 Carswell Nat 1896 (TCC) makes it patently clear that this issue is coming up frequently in the tax courts and that the court is consistently insisting upon the strict standard from Harder. Although some Judges, such as Justice Boyle in Huneault, might express some sympathy or reluctance, the reality is that the court has no choice given the current state of the Income Tax Act.
There is no issue where parties have a primary care arrangement. The issue is who can claim and receive child benefits and credits in a shared parenting arrangement.
For a long time, parents with shared parenting arrangements set-off support against each other and each claimed half the tax benefits for the children for whom they had shared custody, with no issues. That is, ordinarily only one party would pay support, for convenience purposes (often, based on a set-off calculation, taking into account both parties’ respective monthly obligations with the higher income earner simply paying the difference). At one point, many family law firms in Calgary appear to have altered their precedent orders and agreements to specifically say that the set-off was being paid “for convenience only”. And perhaps for a time, that was working or at least appeared to be working.
However, issues are now coming to light when a party in a shared parenting arrangement is the higher income earner paying the set-off and attempts to claim, in particular, the eligible dependent credit. In Harder and Huneault, we see the courts saying that where a Separation Agreement or order provides that only one party is obligated to pay child support (i.e. the higher income earner in a set-off scenario, and even if “for convenience only”), then only one parent (i.e. the party not writing a cheque) is entitled to claim the eligible dependent credit.
According to Harder and Huneault, the correct approach is (and apparently has been for quite some time) for each shared custody parent to actually pay the full table child support amount to the other parent, so that the full table support is going both ways. As per Harder and Huneault, this is the only way the eligible dependent credit can be legitimately claimable by both parents. The silliness of this requirement is obviated when you think of a simple example: i.e. if one parent’s table amount is $1,000.00 and the other’s $500, Harder and Huneault requires both amounts to change hands rather than party #1 simply paying the $500 difference to the other. In addition to being inconvenient and tedious, this requirement has other practical problems, such as the scenario where the lower income earner does not actually have sufficient funds to pay their table amount until they receive the table amount from the higher income earner. And I for one fail to see any possible public policy reason for this requirement.
Problems aside, we appear to be stuck with this requirement until such time as Parliament decides to make a change to legislation, and so if you find yourself in a shared parenting arrangement you would be well-advised to ensure your lawyer drafts your Separation Agreement and Divorce Judgment or other court order accordingly. Put simply: your legal documents should specifically provide for two cheques crossing hands, and you should be prepared to produce evidence of that actually happening each month.