Letoria v. R., 2015 TCC 221
This case addresses the importance of careful wording of support orders and agreements so as to avoid inadvertently losing entitlement to tax credits for the child amount and eligible dependent amount under sections 118(1)(b) and 118(1)(b.1) of the Income Tax Act.
Mr. Letoria was separated throughout the year of 2013 and maintained shared custody of his two children wherein one child primarily resided with each parent. The child support arrangements between the parties were set out in a Court Order.
Wording of the Child Support Order
The Order governing child support was worded so as to make clear that both spouses would owe child support to each other and the set off amount would be paid by Mr. Letoria. The Order reflected the amounts that each spouse would owe the other, however only Mr. Letoria was obligated to pay child support under the Order.,
Denial of Tax Credit by the Minister of National Revenue
When filing his 2013 Income Tax Return, Mr. Letoria claimed the tax credit amount for eligible dependents and the child amount under sections under sections 118(1)(b) and 118(1)(b.1) respectively of the Income Tax Act. The Minister of National Revenue denied both amounts.
Mr. Letoria appealed the decision of the Minister of National Revenue to the Tax Court of Canada.
Tax Court Decision
Mr. Letoria's appeal was denied as the court found that he was not entitled to the eligible dependent amount or the child amount because only he was required to pay support pursuant to the child support Order.
Entitlement to Child and Dependent Tax Credits Under the Income Tax Act
The Court reviewed the relevant tax law provisions and the wording of the Order. The Order in this case set out the amounts of child support attributable to each spouse under the Child Support Guidelines and stated the set-off amount that Mr. Letoria was required to pay. However, in doing so, the Order merely explained how the set-off amount was arrived at and did not create any obligation for Mr. Letoria's former spouse to pay support. Justice Miller quoted a previous decision, which stated that "the set-off concept does not translate the parents' respective obligation to contribute to child rearing into a "support payment" as defined in the Act".
Justice Miller explained that the tax credit amounts under subsection 118(1) are only available if subsection 118(5) is made inoperative because subsection 118(5) serves to exclude support payors from receiving the tax credits. Subsection 118(5) can be rendered inoperative by subsection 118 (5.1) where both parents are obligated to pay support to each other.
Since the Order only required Mr. Letoria to pay support, it did not render subsection 118(5) inoperative and Mr. Letoria was not entitled to claim the tax credit.
Importance of Obtaining Tax Law Advice in Family Law Matters
Justice Miller expressed frustration with the fact that, but for the drafting of the child support Order, Mr. Letoria should have been entitled to the tax credits he sought. Justice Miller explained that the same shared custody arrangement would have resulted in the opposite outcome had the Order been drafted with an eye to the relevant tax law provisions.
This case truly emphasizes the interplay between tax law and family law and importance of seeking the appropriate legal advice when forming agreements or consenting to court Orders. Justice Miller voiced the opinion that the tax law provisions are in need of clarification, but that family law agreements and orders are too often drafted without adequate understanding of the relevant tax law provisions . In this case, Mr. Letoria might have been wise to consult a tax law lawyer in addition to a family law lawyer regarding his child support Order.