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Spouses must pay each other to get around tax law

Separating spouses who each want to claim dependent deductions on their tax returns may have to pay each other child support to get around outdated tax laws, says Toronto family lawyer Jennifer Samara Shuber.

In a recent Tax Court of Canada case, the judge upheld the Canada Revenue Agency’s disallowance of a man’s dependent deductions because he was the only one with a documentary record of paying support.  

As part of their amicable divorce, the pair used a computer software program to calculate what each party would owe the other using the Federal Child Support Guidelines. After offsetting various amounts, they agreed on a final single payment the father would make to his former wife.

But without actually making the offset payments to each other, there was no “comprehensive documentary evidentiary record” for the judge to go on. Instead, he was forced to conclude, reluctantly, that the father was the only spouse to pay a support amount under s. 118(5) of the Income Tax Act, a finding that disqualified him from making the deductions.   

Shubera lawyer in the family law practice group at Beard Winter LLP, tells AdvocateDaily.com that separating spouses can get around the problem by making payments to one another, effectively carrying out the offsets manually. That way, they will have a documentary record of both parties paying support.

“It’s completely counterintuitive for one party to send a cheque or e-transfer for $100 or whatever amount, and get one in return for $5. In fact, it’s ludicrous, but that’s the way the law is worded,” Shuber says. “Sometimes the law is an ass, and you end up jumping through hoops, and the judge recognizes it.”

In his judgment, the Tax Court judge urged the family law bar to take notice of the problem highlighted by the case.

“Regrettably, until this factual scenario is placed before the Court, sympathetic appellants, like [the father], shall have their appeals dismissed. That result will continue to be both unfortunate generally and purposively defeating of the child benefit programme specifically; dependent deductions for a second child shall remain legally unavailable to a unilateral support paying parent,” he wrote.

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