Clarifying the difference between child support and sharing expenses
What is section 7 of the Child Support Guidelines? Is it merely a sharing of expenses, as it is so often described in orders and agreements? Or is it a component of child support as defined by the Federal Child Support Guidelines and the various provincial and territorial counterparts? What is the difference and why should it matter?
The presumptive rule in section 3(1)(a) and 3(1)(b) of the federal legislation, with the same or similar wording in the provincial and territorial legislation, define the amount of a child support order as:
a) the amount set out in the applicable table... and
b) the amount, if any, determined under section 7 [emphasis added].
It is clear that the Child Support Guidelines define the result of a section 7 calculation as “child support” and intend that the application of that section be treated as such. What is misunderstood is the difference between a calculation of child support based on a sharing of expenses and simply sharing those expenses between the parties. Such confusion is reflected in orders and agreements that do not distinguish between words that describe sharing certain child related expenses and words that describe a child support amount based on a sharing of certain child related expenses. This is similar to the same nuance of language that is lost when Guideline income is described as “Line 150” but that is a topic for a different article (check out “Let's Talk About Why Line 150 is not Guideline Income” for more information). The misuse and abuse of language is common today and family law is by no means immune to this trend; a trend driven by a desire to simplify out of existence that which is complex. But families are complicated -and fair and equitable child support calculations should recognize this.
To a certain extent, the section 7 misconception is promoted by tools used by those in family law. Unfortunately, some readily available software does not even display the section 7 result as part of their child support disclosure. They only show it as part of the disclosure in the details related to the spousal support range when doing calculations based on the “Spousal Support Advisory Guidelines.” The ChildView® software, however, has always clearly displayed the result of a section 7 calculation as a component of child support and recognized the distinction between child support and simply sharing expenses.
So what is the purpose of section 7 of the Guidelines? Remember that the base table amount of child support per section 3(1)(a) is focused solely on the payor of child support and a concept of that person’s ability to pay. Section 7 is one of the sections in the Guidelines that may adjust this base amount of child support to meet the needs of the children where the table amount falls short.
There are six categories of expenses listed in section 7 of the Guidelines and of those only one may be the basis for a tax deduction in a personal tax filing and the rest may, or may not, be the basis for a personal tax credit. The wording of the court order or agreement will affect how the Canada Revenue Agency (CRA) will understand the payment.
Orders and agreements that talk about “sharing” the children’s expenses in some manner need to be clear. “Sharing” the expenses how? Is each party to pay “their proportionate share” to the third party provider or is party A paying the full expense to the third party while party B is paying “their proportionate share” to party A? In the latter case, is the payment described simply as party B paying their “proportionate share” or is the payment described as party B paying child support based on their “proportionate share”? If party B is simply paying their “proportionate share” of the expense then party A is considered to be reimbursed for the initial outlay. The Income Tax Act (ITA) treats the payment of child support very differently than the reimbursement of an expense. Reimbursed amounts cannot be claimed as part of a tax deduction or credit unless (in most circumstances) the reimbursed amount is reported as income. To blur the two concepts of child support and reimbursements is to defeat the legislation that moved child support payments outside the realm of the tax system’s income and deduction rules to begin with.
There is nothing intrinsic about the payment of child care expenses, medical expenses, donations, post secondary costs, or extracurricular activities for children that make them “section 7” expenses. The payment of these expenses only become part of section 7 if the intention is to calculate an amount of child support based on these costs. Further, in creating a child support amount through section 7, these expenses don’t sit in a pool whereby each party is allocated a share. The expense is initially paid to a third entity by one of the parties and the tax and benefit effects of the expense are dependent on the situation of that individual.
When calculated correctly per the direction in section 7(3), the child support that party B is to pay has already been reduced by any tax and benefits savings that party A may receive by being able to claim the original expense for tax purposes. When party B’s payment is identified simply as a “sharing of expenses” rather than child support, party A’s tax and (possibly) government benefits savings will change and an impossibly circular calculation is created. To do such a calculation you have to know how much party B is going to pay to party A in order to calculate how much party B should pay to party A.
As an example, party A pays child care expenses to a third party provider and meets all the complex criteria to claim these expenses on their personal tax return within the limitations set up under the ITA. If party B pays section 7 child support to party A based on party B’s proportionate share of those expenses, party A’s tax filing is not affected and party A’s tax deduction and possible resulting increase in the Canada Child Benefit and related provincial and territorial programs will not be jeopardized. However, if party B simply pays party A for their proportionate share of those expenses then party A must reduce their tax claim by that amount, resulting in higher taxes and possibly reduced government benefits. Simply calling the expense “section 7” doesn’t make it so.
For more insight on this and other child support calculation issues, sign up for ChildView®’s online workshops. Details may be found in the “Workshops” section of this website.