June 18, 2018|Written By Michael McKiernan

John Schuman says the family law bar is still reeling from the Tax Court of Canada’s judgment in Harder v. The Queen.

Family lawyers say Canada’s outdated tax laws are penalizing former spouses who enter shared parenting arrangements for the care of their children.

Section 118(5) of the federal Income Tax Act prevents a person 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) negates the effect if the application of the provision would mean nobody 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 Randall 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 prevalent in Canada than 20 years ago, when it was more common for one parent to be the custody parent and the other the access parent,” 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 apparently 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 convenience, 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 appeared to be backed by information 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 talking 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 appreciates that the federal government is committed to supporting families, including separated and divorced 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 amicably, 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 children 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 obligations 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 payorwithin the meaning of the provision.

Bocock finished with a warning to the practising family bar:

“The engagement of the combined effect of subsections 118(5) and 118(5.1), at a minimum, requires a comprehensive documentary and evidentiary record.

“If separating spouses, seeking joint custody, wish to avail themselves of a dependent deduction for both spouses in such situations, surely family law lawyers can deploy their usual flexible skills to ignore the set off provisions within the paradoxically named ‘Divorce Mate’ for a brief moment and mandate and effect actual periodic payments by both spouses to each other in cases of shared parenting of two or more children,” he wrote. “Surely cheques, or even their more modern replacement of recurring e-transfers, may evidence a clearly enumerated, reciprocal and mandatory support amount paid by each spouse to the other.

“Regrettably, until this factual scenario is placed before the Court, sympathetic appellants, like Mr. Harder, 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,” Bocock added.

But Mimi Marrello, a family lawyer with Ottawa law firm Low Murchison Radnoff LLP, says Bocock’s suggestion is unrealistic.

“If one former spouse is expected to pay $200 and the other is supposed to pay $400, I can guarantee that, at some point, someone will not pay,” she says, adding that the chance of default would skyrocket in cases where relationships have deteriorated between the parties over disputes potentially unrelated to support amounts.

And Marrello says she’s not sure the message has fully trickled down into the practising bar, noting that she recently co-chaired a family law conference at which a tax law expert explained the impact of the Harder decision.

“The gasps from the crowd suggested not all of them were aware,” she says.

Marrello says she’s not fond of broaching the subject with clients in shared parenting arrangements who want to keep payments to set-off amounts.

“They’re frustrated. They don’t understand why they can’t both claim credits without actually paying each other, and I can’t give them a good answer other than, ‘Because the CRA says so,’” she says. “I wish the CRA would sit down and have a discussion with us, because they’re just making our clients’ lives very difficult.”

“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,” Marrello adds.

Schuman says the federal government missed an opportunity to clear up the confusion as part of its recent overhaul of family laws.

The Department of Justice claims its recently introduced bill C-78 will strengthen and modernize family justice by amending the Divorce Act, the Family Order and Agreements Enforcement Assistance Act and the Garnishment, Attachment and PensonDiversion Act, but steers clear of the Income Tax Act altogether.

“These federal family law changes will not fix the problem, at least not with the current draft of the bill,” Schuman says.