Shared Custody Parenting: Income Tax Issues.
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Since the introduction of the Federal Child Support Guidelines (FCSG) in 1997, custody arrangements have affected child support obligations for Canadian parents. The greatest flexibility applies to "shared custody" situations. Under the FCSG, a child is in shared custody where each parent "exercises a right of access to, or has physical custody of" the child at least 40% of the time over the course of a year.
Sharing the Income Tax Benefits
As is often the case, the Income Tax Act (ITA) was slow to catch up with developments in the child support rules. Before July 2011, only one parent could receive benefits such as the Canada Child Tax Benefit (now the Canada Child Benefit), the Universal Child Care Benefit (now repealed) and additional credits for children under programs such as the GST/HST credit.
In some cases, CRA permitted parents in shared custody arrangements to alternate which of them would receive these benefits over the course of the year. In other cases, the parents agreed on which of them would claim these benefits. As many were, and are, income-tested, directing all benefits to the lower-income parent often resulted in the family receiving significantly greater total benefits for a child.
Effective July 2011, the ITA caught up. It provided that each "shared-custody parent" would be entitled to 50% of the child-related benefits they would have been eligible for had the child been in their sole custody. However, the ITA did not adopt the FCSG definition of "shared custody". Instead the ITA required that:
* the parents "reside with the qualified dependant on an equal or near-equal basis", and
* each parent "primarily fulfil the responsibility for the care and upbringing of the qualified dependant when residing with the qualified dependant".
Typically, the "qualified dependant" is a child, but the term can also apply to other dependants.
The issue here is what "equal or near-equal basis" means.
Canada Revenue Agency
The Canada Revenue Agency (CRA) interpreted the term "equal or near-equal" consistently with the FCSG, although their publications did not refer to percentages. One example provided was a child residing with one parent three days a week and the other four days a week (so about 43% and 57%). Many people assumed that the same 40% minimum time applied for these purposes, and that basis seemed to be adopted in some Tax Court cases. No Tax Court decision accepted a percentage less than 40% as meeting the requirements for...
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