When it comes to a family separating or divorcing it always has a profound effect on each family member. Emotions are high and understanding different aspects of a separation especially child support is one very important matter to understand. Let’s start with the term ‘set-off’. You and your lawyer need to know about the child support ‘set-off”.
Set-offs occur in separation agreements where both parents are obligated to pay each other child support, generally where there is shared custody and there are two or more children. One spouse usually pays less than the other based on their earnings and government guidelines, and rather than exchange cheques the difference in the support payments, is called the set off and the higher paying spouse will pay this net amount to the other spouse.
The agreement usually explains which child can be claimed by which parent, and if the parents are claiming as single they are allowed to claim the eligible dependent tax credit for the child. The problem is CRA will disallow the higher earner from claiming the eligible dependent amount as you cannot claim the deduction if you pay child support. A recent Tax Court ruling in Verones v The Queen, upheld CRA’s position.
Where there is an offset contemplated in the agreement, there should be no mention of payment from one spouse to the other, as CRA will deny the claim. Apparently CRA may accept the following wording in the agreement. “ For CONVENIENCE ONLY, the higher income earner being the ________ will pay the lower income earner being the ________, the differential in the two monthly child support amount rather than exchanging cheques for CONVENIENCE only” . The above was from a Wolters Kluwer 2015 course on Divorce and Taxes.
The eligible dependent tax credit can be claimed for the child up to the age of 18, and as a tax credit is worth about $2,200 in tax reductions so worth claiming. Of course this tax credit is only available if you file as single and will disappear once you enter into a new relationship and file as a couple.
After all has been said and done and reporting alimony and or child support on your tax return is something that MSH Accounting can assist you in. We Make Sense Of Your Numbers. Contact Mark at (613) 824-7368.