Law Times

Page 10 June 18, 2018 • Law Times www.lawtimesnews.com Tax law hurts former spouses who share parenting BY MICHAEL MCKIERNAN For Law Times F amily lawyers say Cana- da's outdated tax laws are penalizing former spous- es who enter shared par- enting arrangements for the care of their children. Section 118(5) of the federal Income Tax Act prevents a per- son from claiming the eligible dependent tax credit for a child for whom they are also paying support to a former spouse. An exception in s. 118(5.1) ne- gates the effect if the application of the provision would mean no- body receives the credit for the child, opening the way for both parents to claim credits in cases of shared custody where each owes support to the other. But John Schuman, a partner at Devry Smith Frank LLP, says the family law bar is still reeling from the Tax Court of Canada's 2016 judgment in Harder v. The Queen. In the case, Justice Ran- dall Bocock ruled the Canada Revenue Agency was entitled to disallow a father's claim for credits because he was the sole child support payor, as a result of an arrangement with his former spouse that he would only pay her the difference between the amounts they owed each other. "The whole concept of shared parenting is much more preva- lent in Canada than 20 years ago, when it was more common for one parent to be the custody par- ent and the other the access par- ent," says Schuman, who heads the Toronto firm's family law practice group. "There's a lot of sociological research that this is usually great for the kids, which is what we should be aiming for. "We long ago wandered down that path in family law, but ap- parently not in tax law," he adds. Before the Harder bombshell, Schuman says, thousands of separation agreements and court orders in cases involving shared custody were drawn up on the basis that, for the sake of conve- nience, higher-earning parents would pay a set-off amount to the lower-earning parent calculated using the DivorceMate software employed by the vast majority of family lawyers in practice. The assumption, which ap- peared to be backed by infor- mation on the CRA's website, was that the set-off approach would engage the exception in s. 118(5.1), but the Tax Court's ruling changed that, explains Schuman. "The interpretation simply doesn't make sense for either the government or for Canadian families," adds Lawrence Pinsky, chairman of the Canadian Bar Association's national family law section, who has written to the federal ministry of finance to express his concerns about the law as it stands. "It just adds an extra layer of aggravation and fighting over nothing," says Pinsky, a partner with Taylor McCaffrey LLP in Winnipeg. "We're not even talk- ing about changing the policy; it's more a case of altering the mechanics." In his letter, Pinsky suggests a simple fix would allow everyone to focus on other, more pressing priorities. "The CBA Section appreci- ates that the federal government is committed to supporting fam- ilies, including separated and di- vorced families. We believe that amending the ITA and creating interim policies and directives to facilitate the continuation of the set-off approach and sharing the eligible dependent credit would be a significant step towards demonstrating that support," the letter reads. "In our view, this is essential to ensure families avoid the need to renegotiate or re-litigate these issues, as well as the cost, stress and uncertainty inherent in those processes." Michael Harder, the father in the Tax Court decision, split from his wife in 2011, but the pair settled their divorce ami- cably, according to the ruling in the case. Harder agreed to pay his former wife a set-off amount, but he ran into trouble when the CRA denied his combined claim for $13,000 in non-refundable tax credits for the pair's two chil- dren on his 2012 tax return. In court, Harder asked the judge to take a more expansive approach to s. 118 of the Income Tax Act, considering that the agreement between the parents expressly declared that each had distinct child support obliga- tions to one another. Despite his sympathy for the father's predicament, Bocock said he had "no alternative but to dismiss" his appeal, ruling that without any documentary record of actual payment by the mother, he could only find that Harder was the sole support payor within the meaning of the provision. Bocock finished with a warn- ing to the practising family bar: FOCUS Includes lists of: • Federal and provincial judges • Federal courts • Ontario courts and services • Small claims courts • The Institute of Law Clerks of Ontario ONTARIO LAWYER'S PHONE BOOK 2018 Ontario Lawyer's Phone Book is your best connection to legal services in Ontario with more than 1,400 pages of essential legal references. More detail and a wider scope of legal contact information for Ontario: • Over 26,800 lawyers listed • Over 8,500 law firms and corporate offices listed • Fax and telephone numbers, e-mail addresses, office locations and postal codes Perfectbound Published December each year On subscription $85 One time purchase $88.50 L7798-7858 Multiple copy discounts available Plus applicable taxes and shipping & handling. (prices subject to change without notice) Your instant connection to ONTARIO'S LEGAL NETWORK Order your copy today. Visit www.store.thomsonreuters.ca or call 1-800-387-5164 for a 30-day, no risk evaluation Untitled-4 1 2018-06-12 10:31 AM Untitled-4 1 2018-02-20 2:51 PM John Schuman says the family law bar is still reeling from the Tax Court of Canada's judgment in Harder v. The Queen. Flexibility is not in the vocabulary of the Income Tax Act, but the CRA needs to look at its policy, because I don't think it reflects what should happen in this day and age when parents separate. Mimi Marrello See Federal, page 12

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