September 1999

Atlantic Provinces Child Support Guidelines Symposium

Income Tax Issues and Implications Of the Child Support Guidelines

by Blair A. Corkum, CFP, RFP, CA PricewaterhouseCoopers Charlottetown, PE

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The Child Support Guidelines were enacted in May 1997, giving rise to simultaneous changes to a number of income tax rules. In addition, parents were given reason to re-consider their child support arrangements. A decision to request a variation requires consideration of all the related cash flow effects, including all benefits being received that are based on income, such as the Canada Child Tax Benefit and the Goods and Services tax Credit, in addition to income taxes. Not only that, clients will ask many of the same questions about taxes and related issues that were visited when the original agreements or judgements were made, even though the rules may not have changed. Questions such as can I claim the Equivalent to Spouse credit, how much of my child care expenses are deductible, are my legal fees deductible, etc.? In many cases, the answers are straight forward, and the process of determining child support is simple; in others, it can be quite complicated. Interpretation of personal tax returns and business financial statements is not an aptitude possessed by every member of the legal profession and of court workers who are involved in this process. Ideally, in complex situations, a professional accountant with a thorough understanding of the Child Support Guidelines will be involved. Whether or not this is the case, a general understanding of income taxes and related issues is important when advising clients on matters that may have long-term cash flow effects. A discrepancy of$IO.OO per month for a newborn child will accumulate to over $2,000.00 by the time the child is 18 years of age. At an interest rate of 5%, to-day's value of that $10.00 per month is over $1,300. This means you need to invest $1,300 today in order to provide that parent with $10.00 per month for 18 years. In other words, if you err in your calculations by $10.00 per month, the cost of that error to your client is $1,300 today. The goal of this article is to review some of the more common questions raised by various professionals involved in assessing the income tax consequences of post-May 1997 child support arrangement. The rules discussed in this article apply equally to written separation agreements as well as court orders. Throughout this article, when I refer to agreements, court orders are included, unless otherwise specified. The following issues will be discussed: 1. What are the approximate tax brackets for individuals and how do they apply to income? 2. How did the introduction of the Child Support Guidelines effect taxation? 3. What should you consider before requesting a variation? 4. How does shared custody affect benefits and deductions? 5. Section 7 special expenses - which ones have tax consequences? 6. When are legal fees deductible? 7. What is the definition of "does not deal at arm's length"

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1. What are the approximate tax brackets for individual and how do they apply to

income? Tax rates vary by province, and the number of so called tax brackets will depend on the number of surtaxes and special rates applied in each province and territory. While Quebec has its own independent tax system, the remaining provinces and territories apply their tax rates to the basic federal tax calculation. Generally speaking, there are three main tax brackets, each with their own marginal tax rate, which can be approximated as follows for Atlantic Canada: Taxable Income

Normal Rate (on wages, support, pensions, interest, etc.)

Up to $30,000 $30,000 to $59,000 Over $59,000

27-29% 42-45% 49-53%

Rate applicable to full Capital Gains (same as nonnal rate applied to 75% of full gain)

20-22% 32-34% 37-40%

Canadian Dividends (rate applied to actual cash amount received) .

7-8% 26-27% 33-36%

These are approximate and will vary as federal and provincial budgets are enacted. This table shows that persons earning up to $30,000 will pay tax of 27-29% on that income, before personal credits. From $30,000 to $59,000, they will pay 42-45% on income eamed over $30,000, and so on. Even if they make over $30,000, they still pay only 27-29% on the first $30,000, and if making over $59,000, they will first pay the lower rates for income in both lower brackets. It is important to recognize that certain tax breaks are provided as deductions from income while others are given as direct credits against income taxes. For example, employment expenses, Registered Retirement Savings Plans, child care deductions and legal fees are deductions from income. These amounts will be deducted before the above rates are applied.

After taxable income is determined, basic federal taxes are then calculated. From this initial tax figure, certain items are provided as "non-refundable tax credits", including the Basic personal amount, the Spousal amount, Equivalent to spouse amount and Tuition and education amounts, in addition to others. These items are shown on the tax return at gross dollar amounts, which are then totaled and multiplied by 17% on to give a "Total non-refundable federal tax credits" figure. For example, a full year Canadian resident receives a Basic personal amount, which for 1999 is $6,794 (increasing in 2000 to $7,131). This figure, multiplied by the 17% is $1,155, which is deducted from basic federal tax. Eventually, after the provincial tax rate is applied, the combined effect is a reduction in taxes of approximately $1,900. A faster method to determine the approximate tax effect is to multiply the gross figures shown on the personal tax return by the lowest tax bracket rate (Le. 27-29% times $6,794 is about $1,900). It is important to differentiate between tax deductions and tax credits because the former

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provide more tax savings to high income taxpayers than to lower income individuals. Tax credits provide the same savings to all persons, regardless of tax bracket. In the area of child support, tax deductions to consider include pre-May 1997 child support payments and child care deductions. Tax credits include the Equivalent to Spouse credit, Tuition and Education credit and Medical expenses credit. It is worth noting here that family allowance, now called the Canada Child Tax Benefit, is not taxable. It is neither included in taxable income to determine taxes, nor Guideline income for determining support payments. On the other hand, no tax reductions are provided for children with the exception of the Equivalent to Spouse credit, which available for one child to certain single parents.

You should also be aware of the definitions of ''marginal'' versus "average" tax rates. The ''marginal'' tax rate is the rate charged on an incremental dollar of income. They are the rates noted above applicable to varying tax brackets, such as 27-29% on income the lowest bracket. The "average" rate would be lower, being the total tax amount divided by total income. The average rate would blend together the lower and higher rates, together with any tax credits available to the taxpayer. As an example, a single person earning $25,000 may pay $5,000 in taxes. On the next dollar earned, he or she will pay tax at the marginal rate of 28%. The average tax rate is 20%, being $5,000 divided by $25,000. Be careful when discussing taxes that you understand which rates are intended.

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2. How did the introduction ofthe Child Support Guidelines affect taxation? By now, most people realize that child support arrangements commencing on or after May I, 1997 will not be tax deductible in most cases. However, the implications are somewhat deeper than this. There are changes to reporting requirements, revisions to claims for the Equivalent to Spouse credit, considerations if existing agreements are modified, and restrictions on claiming arrears, to name a few. I will review the key issues. For child support arrangements prepared on or after May I, 1997, the child support amounts will neither be tax deductible to the payer nor taxable to the recipient. There was one possible exception to this rule which I will not discuss in this article because it does not apply to agreements signed after December 31, 1998. When comparing old agreements to new agreements, you will note that the Guideline amounts are lower than prior payments, if all other issues are the same. Prior amounts were determined by giving consideration to how much of the payment would be available in cash after taxes were paid by the recipient. This consideration is no longer a factor - the Table amounts are determined on an after-tax basis, and are lower because of this. What happens if you modifY an agreement or order that was in existence prior to May I, 1997? New tax rules will apply to these pre-existing agreements in three circumstances. a) The agreement states that the new rules will apply after a certain date.

Agreements drafted between the time that the introduction of the Guidelines were announced and May I, 1997 were permitted to operate under the new non-taxable/nondeductible rules effective May I, 1997 if stated in the agreement.

b) Form 1157 isfiledjointly by both parties Form 1157 is a joint election that can be filed with Revenue Canada stating that both parties to the agreement desire to have the new tax rules apply to a pre-existing arrangement. By filing this election, the payer will no longer receive a tax deduction, and the recipient will not pay taxes on the payment. The payments will remain the same, only the taxation changes.

c) The child support amount in the agreement is changed on or after May 1,1997. This area requires care because it may catch judges and advisors unaware. If the agreement is changed only for spousal support payments, and child support amounts are not affected, there will be no change to the taxation rules. If changes to the degree of custody are made, without invoking a requirement to do new calculations (such as under the shared custody rules) and the child support payment remains unchanged, there will still be no change to the tax treatment. However, if the actual child support payment is changed, the new rules will apply, and the payment will no longer be taxable or deductible. This could have unintended results. For example, assume a payment of $1,000.00 per month under the old rules gives the recipient cash after taxes of $730.00. If

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the payment is increased to $1100.00, it will no longer be taxable. He or she will now have at least $1100.00 to spend, a cash flow increase of $370.00 resulting from a payment revision of$100.00. Was it the intent of the parties to increase the cash flow by this much? Was it their plan to remove the payer's tax deduction? If the custody of a child is changed, and the agreement is amended to add or delete a payment for that child, it is considered a change of amount for tax purposes. Assume, for example, the recipient has sole custody of one child and is receiving $500.00 per month for that child. Then, under new arrangements, the parent receives custody of a second child, plus a support payment for that child of $500.00 per month, with no change to the payment for the first child. The entire agreement falls under the new rules, making the full $1000.00 per month non-taxable. If this change was not planned, this situation would have significant cash flow implications to both parties (one favourable, one unfavourable). For income tax purposes, the new tax rules will apply pursuant to Section 56.1 (4)(b)(ii) of the Income Tax Act, which states that the amounts will no longer be deductible or taxable after the payment amount is changed. To quote, the Section says, ''where the agreement or order is varied after April 1997 to change the child support amounts payable to the recipient, the day on which the first payment of the varied amount is required to be made, ... " [will invoke the new rules.] If a judge suspends payments under a pre-existing agreement because of hardship to the payer, and the same payments commence after a time delay, do the new rules become effective? I suggest that a ruling from Revenue Canada would be appropriate if you are faced with this decision. A change to a pre-existing agreement to revise the amount of spousal support that does not affect the child support payment will not affect the taxability. If the amounts were previously taxable and deductible, they will continue to be so. However, support payments must be clearly differentiated between spousal and child amounts. Where agreements are not clear, payments will be deemed to be child support amounts, and the new tax rules will be invoked if a change has been made. This differentiation must also be clear with respect to payments made to third parties (such as mortgage payments, etc.) There has been one change effective May 1, 1997 with respect to spousal support, as well as child support. New reporting requirements dictate that new (or changed) arrangements must be registered with Revenue Canada. Form T1158 must be completed and filed with the tax return with a copy of the agreement or order in the year it is issued. This registration is required where: A pre-existing agreement containing both child and spousal support payments is changed; A pre-existing agreement states that the new rules will apply effective May 1, 1997; or A new agreement is made for spousal support.

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3. What should you consider before requesting a variation My intention is only to discuss the cash flow issues surrounding this topic, not the personal and non-financial considerations that may be equally or more important in many situations.

If a child support arrangement is implemented under the new rules, the recipient will no longer include child support payments in taxable income. As a result, the recipient's income for tax purposes will decrease. However, actual cash income will be higher because of the tax savings. The government pays certain benefits based on income reported for tax purposes. The most common of these include the GST(HST) credit and the Canada Child Tax Benefit. It is difficult to be precise about calculations to be done to evaluate these situations in an article such as this because of continuous changes by federal and provincial budgets. For example, the Canada Child Tax Benefit formula has seen frequent changes over the past few years and is scheduled to change in the near future again. I will attempt to provide some general guidance for the most common areas of concern using approximate figures. The chart in Appendix A is intended to provide a general guide to your approach. After identifying that you may have a situation at hand needing further research, you should consider seeking a professional accountant's help or use of appropriate computer software. Obviously, the most immediate effect will be the change to income taxes. The ''marginal'' tax rate referred to earlier in this article becomes a useful tool for this analysis. Under the new rules, the prior child support payment will no longer appear on either parent's tax return. The person's tax costs will change by the amount of the old support payment multiplied by the marginal tax rate. For example, assume the previous child support payment was $350 per month ($4,200 per year), the payer is in the middle marginal tax bracket at a rate of 43%, and the recipient is in the lowest bracket at 28%. The tax reduction to the recipient will be approximately $1,200 ($4,200 times 28%), and the increase to the payer will be 1,800 ($4,200 times 43%). Next, you must determine the change to the actual support payment. Assuming it is a sole custody situation with one child, and the payer's income is $50,000, the new child support amount based on the Tables will be about $450.00 per month ($5,400 per year). This will be an increase of $1 ,200 over the previous amount, representing a further benefit to the recipient and an additional cost to the payer. Without consideration of other issues, the payer is paying another $1,200 for support, and has lost a tax saving of$I,800. He or she is $3,000 worse off. The recipient has saved taxes of $1,200 and is receiving another $1,200 from the other parent, a combined benefit of $2,400. What happened to the difference of$600? This is the benefit to Revenue Canada because of the difference in tax rates. The above analysis is the most basic of calculations required. The next most common items

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of concern are the Canada Child Tax Benefit and the GSTIHST credit, which both vary depending on income. Annual GSTIHST credits for fully qualifying parents typically approximate about $200 per adult and slightly over $100 per child. The Canada Child Tax Benefit can be material, being up to $1,800 per child commencing in July 1999. The exact changes to these amounts require somewhat complex calculations, because they are affected in varying ways by the age and number of children, the level of family income, the province of residence and the amount of child care costs claimed for tax purposes. A rough approach is as follows. Keep in mind that these rules are complex, and constantly changing, so you should obtain the current data before completing your calculations. Based on 1999 expected rates, if combined net income for the parent (and any new spouse) is under $20,921 before and after the change, there will be no effect on GSTIHST credits or the Canada Child Tax Benefit. If income is over $20,921, then: The Canada Child Tax Benefit comprises two components, the basic Child Tax Benefit and a National Child Benefit Supplement. For one child commencing July 1999, these are $85 and $65 per month, respectively. The basic benefit is reduced at a rate of5% offamily income in excess of$27,750 (2.5% if there is only one child). The Supplement will be completely eliminated when income reaches $27,750. These thresholds of$27,750 will be increased to $29,590 in July 2000. GSTIHST credits will be reduced by 5% of income in excess of$25,921 until it is eliminated completely. While I shall not discuss the calculations here, other financial concerns may arise in limited situations. Any amount received that is based on income must be considered. These could include the Old Age Security, Guaranteed Income Supplement, Veterans Allowance, Employment Insurance (repayable over certain income levels) and social assistance. Also, certain tax credits are based on income, such as the age credit for individuals age 65 or older. In addition, there may be issues to consider based solely on issues specific to one province, such as a provincially enhanced Child Tax Benefit and rental tax credits.

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4. How does shared custody affect benefits and deductions? Under the Guidelines, the concept of shared custody has provided a number of challenges to the judicial system in reaching satisfactory support amounts. There are also tax issues. Who is entitled to the Canada Child Tax Benefit, the GSTIHST credit, the Equivalent to Spouse credit, child care deductions, etc.? I will review administrative interpretations by Revenue Canada as they now exist, which, as usual, are always subject to amendment. With respect to the Canada Child Tax Benefit, Revenue Canada will issue cheques as a g r e / upon by the parents. Either parent may receive full year benefits for a single child in shared custody. Where there are multiple children, the payments for one or more children can be allocated to either parent for the full year. In addition, the parents may agree that each person will collect the Benefit for 6 months of the year. Where the parents do not agree, and both attempt to claim the Benefit, Revenue Canada will make a determination based on data collected from each parent about the custody arrangement. In effect, they will determine a "primary care giver", who will then receive the full benefit. If there is "equal joint custody", the payments will be split six months to each parent. For the GSTIHST credit, Revenue Canada again expects the parents to reach an agreement. Ifboth parents claim the credit, the parents will be invited to resolve the discrepancy once it is identified by Revenue Canada. If the parents are unable to reach a decision, neither parent will receive the credit. It is important to remember how the Canada Child Tax Benefit and the GSTIHST credit is determined when reaching an agreement on entitlement. The person with the lowest income will receive the most money. Where the higher income parent claims the benefits, either for a full or part year, less cash will be received in total. It would be gainful on a combined basis for the parents to agree that the lower income parent would claim these benefits. Maybe this issue can be discussed when the topic of sharing special expenses arises? The Equivalent to Spouse credit may only be claimed by the recipient of child support under the new tax rules. If a person is obligated to make support payments for a child, he or she cannot claim the Equivalent to Spouse credit for that child. Therefore, where there is a split custody situation, the payer should still be eligible for the claim. There is a question about the rules in a shared custody arrangement. Revenue Canada has indicated that they may not allow either parent to claim the credit depending on the wording of the agreement. Single parents who are paying child support are still allowed to claim the Equivalent to Spouse credit for children who are not covered by that agreement. Children of another relationship who were age 18 or younger during the year may be eligible. If the parent has remarried or entered a common-law relationship, they are ineligible for any Equivalent to Spouse credit. Also, only one person may claim the credit for a particular child in the year and the claim cannot be shared by parents.

In the year of separation, no Equivalent to Spouse credit may be claimed if a Spousal Credit is claimed (which is available if the income of the spouse was less than a specified amount before separation). If no Spousal Credit is claimed, the parent has a choice of claiming the

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amount of any deductible spousal and child support paid, or the Equivalent to Spouse credit, but not both. In addition, only one spouse may claim the Equivalent to Spouse credit in the year of separation, so an agreement between the parents on this item will be required if it is an issue.

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5. Section 7 special expenses - which ones have tax consequences? Section 7 special expenses are determined after taking into account any subsidies, benefits or income tax deductions or credits relating to the expense. If a special expense is a tax deduction or a tax credit, it will reduce that person's income taxes. If an outlay of $ 100.00 reduces the parent's taxes by $25.00, then what is the real cost to the parent? It is only $75.00, and logically this is the amount that shonld be shared by the other parent.

If a person pays a Section 7 expense, he or she may receive higher benefits from another source. Typical benefits or subsidies will include the GST (HST) Credit and the Canada Child Tax Benefit. Assume we have an outlay of$100.00 that is tax deductible as a child care expense. In such a situation, the taxpayer's taxes may decline by $25.00 from the tax deduction. In addition, the parent's GST (HST) credit may increase by $5.00 because his or her net income is lower by the amount of the child care costs. (GSTIHST credits are based on net income for tax purposes.) The real cost to the person is $70.00, being $100.00 minus the tax savings and minus the increase in the credit. Any benefit received that is based on income must be considered. These can also include the Old Age Security, Guaranteed Income Supplement, Employment Insurance, social assistance, provincial child tax benefits and other benefits. Of the six specific types of special expenses, only four have tax or subsidy concerns. Child care expenses, health insurance premiums, medical costs, and post-secondary education costs will be affected. No tax deductions are available for primary or secondary education costs, extracurricnlar activities or post-secondary expenses other than tuition.

a) Chlld Care costs Child care costs are a "tax deductible" expense, subject to various limits and qualifications. The definition of qualifying costs will not be reviewed in this article. In the year of separation, special rules will apply, which I will not discuss here. On an ongoing basis, child care deductions can be claimed by the parent having custody and who pays the expenses. This is important. Only a person having custody and making the payments can claim the tax deduction. If a parent pays for child care costs, but does not have custody, he or she will receive no deduction. In a shared custody situation, both parents may claim the expenses that they pay since they both have custody. Child care costs are a tax deduction, not a credit. This means that higher income people will receive more tax savings than lower income taxpayers. To determine the amount, multiply the marginal tax rate by the deductible portion of the child care costs. When child care costs are claimed, the parent's net income is reduced. This may increase the GSTIHST credit and increase the Canada Child Tax Benefit available to the parent, if these items are applicable. As a result, the real cash flow cost of a child care expense is

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the actual payment, reduced by the tax savings and also reduced by the rise in the GSTIHST credit and the Canada Child Tax Benefit. There may also be other amounts affected by your client's change in income; be sure to review his or her particular circumstance to ensure you identifY all of them. I suggest an annual review of documentation surrounding the deductibility of child care costs and the calculation of the Canada Child Tax Benefit if you are involved in these issues on a regular basis. (When calculating the cash flow effect of the child care costs on the Canada Child Tax Benefit, you should recognize that a portion of the Basic Benefit is reduced when child care expenses are claimed.) Consider contacting a professional accountant or using up to date computer software programs to ensure your calculations are accurate.

b) Health insurance premiums and medical costs. Health insurance premiums and medical costs are grouped for tax purposes as medical expenses for income tax purposes. Medical costs to be claimed for tax purposes must be in excess of the lower of3% of the taxpayer's net income or over a specified threshold, which is currently $1,614. Net income for this purpose is line 236 on the personal tax return, which is after tax deductions such as Registered Retirement Savings Plans, child care costs and employment expenses. Ifa person has medical expenses of$2,000.00, how much can be claimed? If the person has net income of $40,000.00, $800.00 can be claimed because the 3% threshold is $1,200.00. If the net income is $53,800 or higher, only $386 can be claimed because the $1,614 amount will be lowest of both thresholds. This excess amount is a tax credit, and so all taxpayers receive the same rate of savings regardless of income level. (As an exception to the rule discussed here, health insurance premiums paid by self-employed individuals may be classified as business expenses, making them tax deductions instead of credits.) If you apply the lowest marginal tax rate of 27 - 28% to the amount of medical plus medical insurance premiums, you will have the approximate tax savings available. There will be no change to the Canada Child Tax Benefit or other "income tested" benefits because the medical tax credits does not effect income. c) Post-secondary education For Section 7, adjustments to the child support payment may be made for post-secondary "expenses". These expenses may include tuition, student union fees, books, room and board, travel, etc. For tax purposes, only the tuition portion can be claimed, plus an "education credit" of $200 for each month of full-time attendance and $60 per month for part-time attendance. Only certain institutions and programs meeting specified requirements qualifY for these credits. Within certain restrictions, the tuition and related education credit may be transferred to a spouse, parent or grandparent (but to only one person per year) at the option of the child, or it may be carried forward for future use by the child.

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When considering tax effects for child support purposes, you must determine if the program qualifies, the amount of the tuition fees and the education credit for attendance, and how much will be transferred to the parent's tax return. (At present, a maximum of $5,000 per year less the amount used by the child may be transferred. The child must use enough to offset his or her income before transferring any amount.) This item is a tax credit, and so all taxpayers receive the same rate of savings regardless of income level. If you apply the lowest marginal tax rate of27 - 28% to the qualifying amount, you will have the approximate tax savings available. There will be no change to "income-tested" benefits such as the Canada Child Tax Benefit. In recent years, the government has been enhancing benefits related to education, and a regular review of these rules is encouraged for this reason, in addition to the normal changes made to the tax system.

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6. When are legal fees deductible? The deductibility oflegal fees has long been a question of concern by clients, lawyers and tax preparers. Generally, Revenue Canada only allows deductions for fees paid by a taxpayer related to generating taxable income. This excludes fees paid to obtain a judgement under the Divorce Act, or related to acquisition of a capital property settlement. However, the rules have been relaxed with respect to non-taxable child support payments. Recently, there has been clarification of these rules provided by Revenue Canada and they can be summarized as follows: Fees relating to custody of the children Fees to obtain a divorce Fees to establish a right to spousal support under the Divorce Act Fees to increase spousal support under the Divorce Act Fees to establish a right to spousal support under provincial law Fees to increase spousal support under provincial law Fees to establish a right to child support under the Divorce Act or under provincial legislation Fees to increase child support under the Divorce Act or under provincial legislation Fees to enforce an existing court order or agreement to colIect arrears of spousal or child support Fees to resist the payer's attempt to reduce child or spousal support payments Fees to obtain, enforce or collect payment of a lump sum amount in lieu of support Fees by the payer to resist the recipient's attempt to increase child or spousal support

Not deductible Not deductible Not deductible Not deductible Deductible Deductible Deductible Deductible Deductible Deductible Not deductible Not deductible

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7. What is the defInition of "does not deal at arm's length"? Child support legislation refers to the terminology "does not deal at ann's length" in several areas when discussing financial information to be provided by the parties, and in the adjustments to be made to determine Guideline income. For example, Section 21(1)(ii) provides for "a statement showing the breakdown of all salaries, wages, management fees, or other payments or benefits paid to, or on behalf of, persons or corporations with whom the spouse does not deal at ann's length". The definition of terms in Section 15 - 21 of the Guidelines are the same as in the Income Tax Act [per Guideline Section 2(2)]. "Not at ann's length" and "related" have the same meaning, and include the following:

a) Individuals connected by blood relationship, marriage or adoption. • Blood relationship includes a child or other direct line descendent (e.g., a grandchild), or brother or sister. A cousin, niece, nephew, aunt or uncle are not normally included. However, the definition may include a person of whom the taxpayer is a natural parent, as well as a person who is wholly dependent on the individual for support and is under the individual's custody and control, in law or in fact (or, ifnot now, was so inunediately before such person reached the age of 19). Not included are a foster child in respect of whom the foster parents receive support payments from an agency responsible for the child's care. However, a step-child, an adopted child, a son-in-law or daughter-in-law and a step son-in-law or a step daughter-in-law are related. • Two persons are connected by marriage if one person is the spouse of the other person or is a brother-in-law or sister-in-law. This connection exists even after death of the spouse. Since 1993, spouse includes a common law spouse. A common law spouse is basically defined as a person of the opposite sex who cohabits with the individual in a conjugal relationship and either -

•

has done so for a full 12 month time period, or the couple has a natural or adopted child.

Adoption means legal adoption in law or in fact and may be an adopted child, grandchild, parent, etc. of the other person.

b) A member of a related group that controls the corporation, plus any person related to these persons or corporations. These definitions of relationships are defined in Section 251 of the Income Tax Act and related Interpretation Bulletins (Interpretation Bulletins IT-419 and IT-513 in particular). You will also note that unrelated persons may be deemed to be dealing with each other at ann's length based on the facts of a given situation.

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With such an extensive list included in this definition, you will want to be sure you obtain the appropriate interpretation. Without proper disclosures, a deliberate reduction in Guideline income by allocations of income to related parties may go unchallenged.

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APPENDIX A Worksheet: Will a Variation be Beneficial? .

Recipient

Payer

Enter: Taxable income now Enter: Marginal tax rate now Enter: Child support now - per year Deduct: Income tax effects Equals: Net amount received or paid now

(X)

Enter: Income for Guideline purposes Enter: Table amount for support Calculate: Annual amount (multiply by 12) (A) Enter: Change in HST/GST payment per yr., if any, resulting from exclusion of child support from income (decrease to a payer, increase to the recipient) (B) Enter: Change in Canada Child Tax Benefit per year, if any (decrease to a payer, increase to the recipient) (C) Enter: Other changes, if any (Social assistance, Guaranteed Income Supplement, etc.) (D) Calculate for recipient: Net amount received plus changes in other benefits A+B+C +or-D =y Calculate for payer: Net amount paid plus/minus changes A-B-C + or - D = Y Calculate: Annual difference Answer: Are they better off'? (Yes /No)

x-V

N/A N/A

an!lwro~n!g~lnI~onn~!a!tlo!n.~~~11!~~~!!I~~!~:~!!!!

Attach II you ara yournotpenonallabel allachlng alabel, print Correct your name and addraaa below. hara.

First name and Initial

Last name Apt. or Unij No.

Address

I Cijy

Province or territory

Postal code I I I I

Goods and services tax I Harmonized sales tax (GSTIHST) credit application Are you applying for the GST/HST credit? (see the guide for details) ••••••••••••••••••••••••••••••••••••••••••••••• Yes If yes, enter the number of children under age 19 on December 31, 1998 (H applicable) ••••••••••••••••••••••••••••••••

0

1

No

0

U--.l

If yes, enter your spouse's net Income from line 236 of your spouse's ratum (If applicable) •••••••••••••••••••••••••••••• _ _ _ _ _-'-_

As a Canadian resident, you have to report your Income from all sources both Inside and outside Canada.

Please answer the following question Old you own or hold foralgn property at any time In 1998 with a total cost of mora than CAN$I00.000? (read the 'Foreign Income' section In the guide for details) •••••••••••••••••••••••••••••••••••••••••••••••••••• IiIiIYes If yes, attach a completed Form T1135. If you had certain dealings with a non-rasldent trust or corporation In 1998, see the 'Foreign Income' section In the guide.

0

1

2

(

(

'----

Child Support Presentation Presented by Blair A. Corkum, PricewaterhouseCoopers

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Tax Brackets and their Application

Approximate Atlantic Canada Personal Tax Rates I axaDle Income

NORnal Rate

Up to $30,000

27-29%

IW---')

30,000 to 59,000

42-45%

over $59,000

49~3%

Two Possible Effects

.... Spousal support, Child Care, Legal fees .... Tax effects vary by marginal tax mte .... High income person saves more • Tax Credits .... Equivalent to Spouse, Medical, Tuition .... Same tax effect for everyone - 27-29% .... Multiply base level by the lowest tax mte

Child Support Presentation Presented by Blair A. Corkum, PricewaterhouseCoopers

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1997 Tax Changes

Child Support Effective May 1 1997 • For new agreements: • No longer taxable to recipient • hence, the lower table amoWlts • No longer deductible to payer

Child Support Effective May 1 1997 • New tax rules apply to pre-existing agreements if: •

the agreement states that the new rules will apply after a certain date

• the agreement is changed, or • Election Tll57 jointly filed

Child Support Presentation Presented by Blair A. Corkum, PricewaterhouseCoopers

5-7

Other Situations • additional agreement for another child! • changes to custody but not the payment. • changes to spousal support but not child. Agreement change must relate to child support amount

Child vs. Spousal Support • No change to Spousal rules .... still taxable and deductible • Unless specified in the agreement, amounts are deemed to be child support, including third party payments

Arrears & Tax Deductions

• No deduction for any support until .... child support WIder new rules is fully paid for current and prior years

Child Support Presentation Presented by Blair A. Corkum, PricewaterhouseCoopers

8-10

Spousal Support Registration new spousal agreements • Prior agreements with both child & spousal payments that: • are changed • state new rules will apply

• Fonn Tll58 - for SPOUSAL support ... Attach a copy of agreement/court order

VARIATIONS For Better or Worse?

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Should You Apply for a Variation after May 1/97? • As recipient, compare ... What you now have left after taxes TO: • Guideline Support per new tables plus • HST credit & Child Benefit increase • and any other similar changes

• Payer will lose deduction, and may lose some HST credit/Child/other benefits

--------------------------( Child Support Presentation Presented by Blair A. Corkum. PricewaterhouseCoopers

11-13

Shared Custody Tax Issues

Shared Custody Child Tax Benefit • As agreed by parents• 6 months to one, then other, or • allocate children to each parent

• If parents not agreeable • - Revenue Cda will determine "primary

care giver"

• Income based - plan accordingly .... up to about $1,800 per child

Shared Custody HST/GST Credit (p1aD .head·lt is baled ou.l.ceme ofparnt)

• • • •

Parents must agree on who will claim If no agreement, no credit will be paid Consider who will receive most about $105 per child, +or - adjustments

Child Support Presenlation Presented by Blair A. Corkum, PricewaterhouseCoopers

14-16

Child Care Deductions (Review the nlel tilth year)

• In year of separation .tiro. fonnula • After separation .tiro. nonna1 rules for qualification .tiro. cannot be claimed without custody

• even if taxpayer actually pays expenses .tiro. shared custody - as paid by each per rules

Equivalent to Spousal Credit Full Year of Separation • Only available to recipient of support for a child • Payer is eligible to claim for children not covered by support payments • Not available ifliving common law • Only one Credit per "household" • Shared custody is questionable

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Section 7 Special Expenses When must you consider tax issues?

Child Support Presentation Presented by Blair A. Corkum. PricewaterhouseCoopers

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Special Expenses - "Net of subsidies and benefits" • Tax Credits • 27-28% tax saving; no effect on income ",Medical • Tax credit in excess of the lower of 3% of net income or $1,614) • Includes health insurance premiums '" Post-secondary education - if transferred • Tuition fees plus education credit

Special Expenses - "Net of subsidies and benefits" • Tax Deductible Amounts: '" Qualifying child care expenses • Reduces taxes at marginal rate of taxpayer's tax bracket • May effect Child Tax Benefit, GSTIHST credit, or other income tested beoefits

Deductible Legal Fees Arrears I Increases • Refer to Table in handout materials • Fees by recipient to establish, collect arrears or change Child Support are deductible • Fees related to Custody are not deductible • Fees paid by payer are not deductible

Child Support Presentation Presented by Blair A. Corkum, PricewaterhouseCoopers

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