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  • Tax Credits and Deductions/Section 7 Expenses

    Hi All,
    I'm hoping someone can provide guidance or point me to resources to help me figure out how to calculate section 7 expenses.

    Here are the facts:

    1) My ex and I recently separated in early March 2010.

    2) We have agreed to joint custody of our two children, ages 2 and 7; primary residency will be with their mother.

    3) Our gross incomes are 104K and 56K respectively. (I am the higher income earner.)

    We are unclear on how to calculate the amount of tax relief that should be taken into account when calculating section 7 expenses.

    Using the CRA's CCTB calculator, I estimated that my ex will likely be eligible for the CCTB of $217 per month starting next July. For the CCTB calculator, I calculated that she would have 9,000 of income deductions (RRSP/Government Pension Plan/Union Dues/35% of child care expenses).

    Do I also need to calculate the amount of tax relief that I will be receiving for the section 7 expenses, i.e. 65% of child care expenses.

    Is my ex entitled to tax relief with both lines 305 and 367? If so, does the CCTB calculator factor this into its calculations?

    Grateful in advance for your help!

  • #2
    Follow-up to Tax Credits and Deductions/Section 7 Expenses

    Hello,
    I've done a lot of browsing through this section of the forum to try to find answers to the questions I posted earlier.

    Based on what I've read in other threads of this forum, since the childrens' primary residence will be with their mother, I will not be entitled to claim any of the child-care expenses.

    If my STBX claims the full amount of child-care (11,000), plus applies the non-refundable child tax credit of 4178 (2 x 2089), she will get approximately 4053 in tax relief, which works out to 338 on a monthly basis . Because she is claiming the full amount of the child-care, her line 236 income will be lower than what I said earlier, resulting in a higher CCTB, 354 per month. I've also calculated that she will be entitled to a GST rebate that works out to 41 per month.

    In our case, the section 7 expenses include approximately 15,200 for day-care/day-camps and 5040 for both children's RESPs. I have agreed to pay for the RESPs directly.

    If she is going to be receiving tax relief of 338 + 354 + 41 on a monthly basis, do we subtract the annualized amount of (733 x 12 = 8796) from the total amount of section 7 expenses?

    Here is my estimate:

    Total Annual Special Expenses: 20,240
    Total Tax Relief: 8796
    Total Special Expenses: 11,444

    NCP Gross Income: 104,000
    CP Gross Income: 56,000
    NCP's Proportion of Total Income: 65%
    CP's Proportion of Total Income: 35%

    NCP's share of Special Expenses: (11,444 x .65) = 7438
    Less Real Cost Already Covered by NCP: 5040
    Annual Amount of Special Expenses: 2398
    Monthly: 200

    Thanks again in advance for your help!

    Comment


    • #3
      RESP would not normally be considered a section 7 expense, although if you both agree then you can do it that way.

      Normally, the RESP is just savings. What if the children don't go to school, etc? At age 18, if they are still in school full time, then costs would usually be split in three, one third to the child and a third to each parent. At this time, if you had been contributing to an RESP then that would cover your third. This is how most of the members on the board here have arranged things.

      If she is getting a refund for childcare/camps, then that amount is subtracted from the amount she actually paid. That is, if she paid 5,000, got 2,000 as a refund, then for your purposes you would credit her with having paid 3,000 in section 7 expenses. The way you are calculating seems off to me, but I will have to have another cup of tea and read it again.

      If you are paying for care directly, you probably won't be able to give her the receipts, they will be in your name, unless you can commit some under the table deal with the administrator. So you may issue her a separate cheque to cover section 7, and she receives the receipts.

      Without knowing anything about our schedule, if the children are with you during days you work, then you are paying for childcare to enable your employment, this is true even if they are not with you as principal residence. You can legally claim this child care even if they don't reside with you full time.

      Personally, we prefer to split the payments for all expenses, even for non-financial reasons. This means you both go into the daycare/camp, you both are registered as parents, you both speak with the admin, and you both sign the cheques and you are both involved as parents. At first my ex tried paying for everything herself, and it quickly turned into a control issue. This may not apply to you, but I mention it so you can think it over.

      I haven't gone over my taxes yet this year, I assume that the "non-refundable child tax credit" is this what the call "equivalent to spouse" now?

      Comment


      • #4
        Tax Credits and Deduction/Section 7 Expenses

        Hi Mess,

        Thank you for your feedback. It is greatly appreciated.

        I have suggested to my STBX that we use a third-party expert who is well-versed on CRA's policies regarding the treatment of day-care expenses (and other section 7 expenses) for couples who have separated. I have proposed that the expert come to our next session with the mediator, this way we get the same information at the same time.

        With regards to RESP, my STBX and I both feel that we should continue to contribute and the proportional formula provided by the section 7 worksheet seems fair to me. She has also proposed that since I was "in charge" of arranging the RESPs in the first place, I might as well continue managing the investments within the accounts. Therefore, I will continue to make the full monthly contribution and take off what she would have contributed from the combined table amount/section 7 support that I would remit her.

        I hear what you're saying with regards to how it should be considered legitimate if both parents need day-care to allow them to work outside the home I'm still not clear on whether CRA allows both parents to claim day-care expenses. When reviewing form T-778, however, it is clear how CRA will treat the dual claim.

        I will continue my research and let you know my findings.

        Cheers,
        New

        Comment


        • #5
          You can clear that up quickly by calling the CRA help line.

          We have 50/50, we both claim the expenses we paid, only one of us may claim the equivalent to spouse but each claim child care expenses. We have not had any problems with this.

          According to the CRA definitions, an eligible child is "You or your spouse or common-law partner's child", it does not require that the child reside with full-time or as primary residence.

          Comment


          • #6
            I'm going to call CRA tomorrow to try to get some guidance. Did your separation agreement with your ex specify how you would deal with child-care expenses? I assume CRA needs a copy of the separation agreement that specifies how child-care should be treated?

            In my case, I'll only have the kids about 25% of the time; would I only be entitled to claim 25% of the expenses or would I be able to claim the amount that I pay directly to the day-care on both of our behalf, e.g. 65%?

            Comment


            • #7
              You don't file your agreement or court order with CRA. In some cases they may want to see confirmation of custody, especially if each parent is claiming something different.

              Since you're phoning CRA anyway, they'll tell you all of this.

              Child care expenses are section 7 and by law they are split according to income. What you want written into the agreement is how you split and negotiate them.

              For example, next year you come across child care that is half the price. Your ex wants to keep them in the same care. How do you decide? Things will come up that you have to decide on. Will you each pay directly or will you give your ex a cheque each month or will pay at the end of the year a lump sum? You have to decide this and should have it written in.

              My ex is horrible at budgeting, I had written into the agreement that we would discuss and agree in writing (via email) a kid's budget during August of each year. This would cover everything from back to school clothes and supplies (usually the biggest outlay of the year), the monthly child care (for us it is now after school care), the cost of sports and activities (piano lessons, swimming) and coverage during school shut downs like Christmas and March break.

              Summer camps you sign up for and pay usually March or April, so this gets included in the budget. We do an estimated total and then work out who pays for what. I prefer we alternate months, as I said if only one party pays, the daycare or whatever starts perceiving that parent as the primary parent, which we want to avoid.

              Comment


              • #8
                Originally posted by New2thisforum View Post
                If my STBX claims the full amount of child-care (11,000), plus applies the non-refundable child tax credit of 4178 (2 x 2089), she will get approximately 4053 in tax relief, which works out to 338 on a monthly basis . Because she is claiming the full amount of the child-care, her line 236 income will be lower than what I said earlier, resulting in a higher CCTB, 354 per month. I've also calculated that she will be entitled to a GST rebate that works out to 41 per month.
                Your rational is mostly sound, but I think you have a couple of the numbers wrong. The GST rebate is paid quarterly not monthly. Also you should look at the change in the monthly CTB payment as a result of claiming day care. I suspect that the $354/mth you quote above is the total/mth she will be getting.

                Originally posted by New2thisforum View Post
                In our case, the section 7 expenses include approximately 15,200 for day-care/day-camps and 5040 for both children's RESPs. I have agreed to pay for the RESPs directly.
                If the RESP's are held jointly with your ex, then your numbers make sense. You should include a clause in your agreement about how the RESP's will be returned to each of you if the kids don't go to school (i.e proportionately to your respective contributions). If they are held individually by you, then I think they should stay right out of the equation and you would use them to pay your share of expenses down the road if/when the kids go to school.

                Comment


                • #9
                  Thanks Mess and Dadtotheend for your feedback.

                  To calculate the GST rebate, I took the quarterly amount generated by the CRA website, annualized it and then divided by 12. I used her projected line 236 income to derive the CCTB and GST numbers. If she claims all of the day-care, she gets more CCTB and GST relief. On the other hand, if I'm able to claim my share of the day-care, her CCTB and GST will go down, but my tax relief will increase.

                  I hear what you're saying regarding alternating months for paying the day-care or summer camp. Do you have any suggestions for wording regarding the sharing and claiming of child-care expenses?

                  I also appreciated your advice regarding the RESPs. Although we hope our kids will aspire for a post-secondary education, it will save us a lot of future hassles if we have something in our agreement now that outlines how the RESPs would be divided if the kids decided not to go that route.

                  Comment


                  • #10
                    Re sharing and claiming expenses, generally you're going to have to limit to claiming what you actually paid. So your option is to either both of you pay and both claim some expense, or one of you pays the other, and the other claims all the expense.

                    I think you are better off staying flexible if you are both amicable. You are paying a lot of daycare right now, that will drop as they get older, then you will gradually see more expense for sports and rec activities (which may not all be deductable). So your numbers are really going to change wildly as the years go by. If you stay flexible you can change things year to year depending on your tax situation.

                    Non-section 7 expenses, which can be small amounts like $100 per month for sports or piano lessons or whatever, would come out of regular child support. Larger sums, "extraordinary" amounts that would tax the family budget, should be agreed on between you and these are section 7 expenses and should be split proportionate to income. You are going to have a lot of grey expenses that could go either way as they get older, and you will get into a lot of debates.

                    Our agreement is written so that we go over the budget and decide what activities we pay for in Aug, and we have a workable budget for the year. This gives us flexability to decide year to year who should pay how much of what, and we can adjust for optimum tax relief that way.

                    If we can't agree or don't stay amicable, we have written in that we go to a pre-selected mediator that we have both already agreed on.

                    Comment


                    • #11
                      Thanks again for your feedback and suggestions.

                      Comment


                      • #12
                        Originally posted by New2thisforum View Post
                        To calculate the GST rebate, I took the quarterly amount generated by the CRA website, annualized it and then divided by 12. I used her projected line 236 income to derive the CCTB and GST numbers. If she claims all of the day-care, she gets more CCTB and GST relief. On the other hand, if I'm able to claim my share of the day-care, her CCTB and GST will go down, but my tax relief will increase.
                        I think you are getting credit for all the GST and CTB benefits the way you describe it. You should only get credit for the incremental GST and CTB that arises from the child care claim. In other words, subtract the GST and CTB benefits before child care expenses are included in the return from the GST and CTB benefits after child care expenses are included.

                        Section 7 expenses are to be shared proportionately net of any related tax credits. Unless I'm interpreting you incorrectly, you are proposing to share the expenses proportionately net of all GST and CTB benefits.

                        Comment


                        • #13
                          I spoke with CRA and they confirmed how I would claim my proportion of day-care expenses. I am still a bit puzzled over what constitutes "tax relief" for the purposes of section 7. If my ex and I hadn't separated, she would not be entitled to claim the equivalent to spouse tax credit, nor would she have been eligible to claim the children.

                          With regards to calculating the incremental increase in CCTB and GST, are you saying that the CCTB and GST amounts in total should not be factored as tax relief either?

                          Comment


                          • #14
                            I called Justice Canada's Family Law information service (1-888-373-2222) to get answers to my questions. I also contacted a para-legal at a nearby family lawyer's office. Both told me that since my STBX and I are sharing the child-care tax benefits, we do not need take any tax relief into account to arrive at a "net amount" for day-care.

                            Comment


                            • #15
                              Originally posted by New2thisforum View Post
                              I spoke with CRA and they confirmed how I would claim my proportion of day-care expenses. I am still a bit puzzled over what constitutes "tax relief" for the purposes of section 7. If my ex and I hadn't separated, she would not be entitled to claim the equivalent to spouse tax credit, nor would she have been eligible to claim the children.
                              That's right, the equivalent to spouse credit is available to single parents. She has primary residence, she gets the credit, along with the GST and CTB benefits. As you probably know, it would be different for the GST and CTB if you were in a shared parenting arrangment.

                              Originally posted by New2thisforum View Post
                              With regards to calculating the incremental increase in CCTB and GST, are you saying that the CCTB and GST amounts in total should not be factored as tax relief either?
                              Yes, that's right. The section 7 expenses are shared proportionately net of any related tax relief. The CTB and GST benefits are tested with respect to line 236 (net income) on the tax return. They don't arise from child care claims, they arise from one's income level.

                              But they do increase due to child care claims. You have to look at the incremental CTB and GST arising from the child care claim.

                              Comment

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