Divorced parents can claim dependent tax credits on a child if the conditions normally required to claim these credits are met. However, subsection 118(5) of the Income Tax Act specifically prohibits the parent legally required to pay support to claim dependent tax credits on a child. Sometimes, this rule can lead to the unfair situation where both parents aren’t allowed to claim the tax credits; subsection 118(5.1), however, says 118(5) should be disregarded if both parents have to pay support and that, in such a situation, one parent should be allowed to claim the tax credits.

In theory, the way these two subsections work together is straightforward. If only one parent must pay child support, then that parent isn’t allowed to claim dependent tax credits; only the other parent is allowed to do so. If both parents have to pay child support, then the rule 118(5) under the Income Tax Act stating the parent paying support isn’t allowed to claim the tax credits doesn’t apply; this allows at least one parent to claim the tax credits.

In practice, however, certain support payment arrangements can make it difficult to determine if only one or both parents are required to make support payments.

How should these rules apply if there’s a support payment arrangement requiring both parents to make payments and if payments are offset?

CASE A: Court-ordered Set-offs

In this case, the taxpayer was required by a court order to pay child support to his former spouse. The amount was calculated by setting off the amount he was required to contribute to his children’s needs against the amount his former spouse was required to contribute. Therefore, in this case, the taxpayer was the only one ordered by the court to pay support. The taxpayer argued that both he and his former spouse paid child support to each other, and that the set-off of their obligations was simply a means of avoiding the unnecessary exchange of cheques between them. Therefore, he said, subsection 118(5.1) applied and he could claim the dependent tax credits.

Ultimately, the court rejected his argument and held that subsection 118(5.1) shouldn’t apply in cases where support obligations are set off by the court. The court found that the taxpayer in this instance was the only one required by the order to pay a “support amount” as defined by subsection 56.1(4) of the Income Tax Act, and that his former spouse’s contribution didn’t fall within that definition (i.e., there was no court order or written agreement requiring her to make child support payments to him).

CASE B: Set-off Through Family Law Mechanism

The taxpayer in Case B specifically argued that the set-off mechanism of his case was different from that in Case A, where the set-off was done by the court. In this instance, the taxpayer argued that the set-off mechanism in his case had resulted in independent obligations for each parent because the set-off wasn’t done by the court. He supported his argument by stating that the court used different sections of the Support Guidelines (part of the Family Law system) in his case and Case A.

Furthermore, he stated that his case was settled based on both parents being ordered to make support payments. Also, a set-off of these separate obligations couldn’t have disallowed him from claiming dependent tax credits under subsection 118(5.1) because there’s no requirement in that subsection that each parent make a payment to the other by physical exchange of funds.

The court rejected the taxpayer’s argument, and ruled that subsection 118(5.1) shouldn’t have applied to allow the taxpayer to claim dependent tax credits.

Although different sections (and the different set-off mechanisms that result) of the Support Guidelines were used in Case A and Case B, the court saw no materially different end results. In each case, only one parent was required to make support payments (one ordered by the court and the other through the family law system). However, this result can’t be relied upon to conclude that the court would rule the same way for different support arrangements, resulting in one parent making support payments. The facts of each individual case must be considered separately.