When a child’s parents belong to separate households, one (or sometimes both) parent(s) often make child support payments to the other parent to provide for the care of the child. This article focuses on the tax impact of child support payments made pursuant to a court order or written agreement dated after April 30, 1997, which today represent the majority of such payments.
Child support payments made pursuant to a court order or written agreement dated after April 30, 1997 are generally not tax deductible for the payer, meaning that they do not reduce the taxable income, or tax payable, of the payer. Furthermore, these child support payments are not taxable in the hands of the recipient, meaning that they do not increase the taxable income, or tax payable, of the recipient. However, child support payments can have other tax implications, two of which are discussed below by our experienced Toronto tax lawyers.
Effect of Child Support on Spousal Support Deductibility
Spousal support payments, in contrast to child support, are tax deductible for the payer, and are taxable in the hands of the recipient if certain tests are met. (See our Canadian tax lawyer article on spousal support). However, spousal support is only deductible to the extent that total support payments exceed any required child support payments.
Effect of Child Support on Child Tax Credits
Parents are generally entitled to claim tax credits based upon the number of children they have. However, if a parent is paying child support payments with respect to a child, that parent is not entitled to a tax credit for that child. The exception to this rule is if both parents are paying child support to each other. This sometimes occurs when parents have joint custody and pay support to each other in different months. In that case, subsection 118(5.1) of the Income Tax Act applies, and neither parent is prevented from claiming a child tax credit by virtue of their paying child support.
In situations where both parents are eligible, the parents have to agree which one of them will claim the credit, as only one credit can be claimed per child. If both parents claim a credit for the child, neither parent will receive the credit.
Fred and Wilma separated on January 1, 2010, and Wilma has custody of their child. Pursuant to a court order, Fred pays Wilma $1,000 per month in child support, and $500 per month in spousal support, for a total of $1,500 per month in support payments.
Up to December 31, 2010, Fred pays all of the amounts required by the court order, namely $12,000 in child support and $6,000 in spousal support, or $18,000 in total support payments. Fred is entitled to deduct $6,000 for spousal support payments in 2010, and Wilma has to include $6,000 in her income. No deductions or inclusions are made for the $12,000 in child support payments.
In 2011, Fred only pays Wilma $14,000 in total support payments. The Income Tax Act deems the $14,000 in support payments to be broken down as follows:
$14,000 total support payments made -$12,000 child support payments for 2011 required by court order
$2,000 spousal support payment made For 2011, Fred can only deduct $2,000, and Wilma only includes $2,000 in her income.
Mike and Fay have joint custody of their son Bobby. Pursuant to a 2010 court order, Mike pays child support and spousal support payments to Fay. Fay can claim a tax credit for Bobby, but Mike cannot.
Mike and Fay have joint custody of their son Bobby. Pursuant to a 2010 written agreement, Mike pays spousal support payments to Fay, but does not pay child support. Either Fay or Mike is permitted to claim a tax credit for Bobby but not both.
Mike and Fay have joint custody of their son Bobby. Pursuant to a 2010 written agreement, Mike pays child support payments to Fay in some months, and Fay pays child support payments to Mike in other months. Either Fay or Mike is permitted to claim a tax credit for Bobby but not both.
Mike and Fay have joint custody of their son Bobby and their daughter Jenny. Pursuant to a 2010 written agreement, Mike pays child support payments to Fay for Bobby, and Fay pays child support payments to Mike for Jenny. Only Fay is permitted to claim a tax credit for Bobby, and only Mike is permitted to claim a tax credit for Jenny.
If you need tax help relating to child support payments, or if you pay or receive child support pursuant to a court order or written agreement dated prior to May 1, 1997, contact our tax law firm to arrange a consultation with one of our top Toronto tax lawyers.