Public Policy Issues

Tax Policies that Affect Fathers and Families

This article, which examines tax policies affecting fathers and families, is a chapter in FIRA's Inventory of Policies and Policy Areas Influencing Father Involvement.

 

Preface:

An area of increasing interest among researchers and policy makers in recent years is the changing role of fathers and the explicit desire to support father involvement as a way to enhance children's health and well-being. Although scholarly interest in fatherhood emerged in the early 1970s and 80s, the bulk of studies and policy work on fatherhood is very recent - much of it dating from the mid-1990s onwards.

This article is a chapter in the recently released Inventory of Policies and Policy Areas Influencing Father Involvement which is a collaborative document which has benefited from the ideas and suggestions of others. It is supported by funding from the Social Sciences and Humanities Research Council (SSHRC - CURA). For a full copy of this document click on Inventoryof Policies and Policy Areas Affecting Father Involvement on the left hand side of this page.

Tax Policies that Affect Fathers and Families.  by Denise L. Whitehead and Donna M. Lero

Specific Issues and Policies

The Canadian tax system is a powerful social and economic tool that serves a number of purposes. While initially used as an instrument for raising revenues in a fair way to finance a broad range of collective goods and services, over time there has been an additional use for "tax expenditures", particularly to provide government subsidies and transfer payments to individuals to achieve social policy objectives (Law Commission of Canada, 2001).

As Lefebvre and Merrigan (2003) suggest, the support of children by government (through such means as tax policies and cash benefits) very much reflects whether children are viewed as a source of renewal of human capital for society, whose welfare is a "public good", rather than a strictly private concern or benefit to individual families. In recognizing the public benefit that accrues to society from investments that support children's development, they note that "equity considerations fall into two categories: those related to the ability of different families to pay taxes, and those related to assisting families to maintain some minimum level of well-being for each dependent child." The central crux, according to these authors, is the value that is accorded to children and the accompanying policies (such as income benefits, publicly funded child care, and income tax recognition for the costs associated with child rearing) that affect parents' abilities to provide for, and invest in their children's development. Tax measures are meant to enhance or partially compensate parents for their contributions to this effort.

The extent to which tax provisions allow for and support fathers' participation as earners and carers is not explicitly stated nor analyzed. In general, parents are viewed as potential or actual taxpayers with dependent children, irrespective of their gender. Tax policies do, however, reflect tacit assumptions about earner roles in two-parent families, encourage certain behaviours (such as saving for a child's education), and recognize the obligation to provide financial support for children among divorced parents. Tax policies are also instruments for income redistribution, providing low income families with certain credits and more generous income support through both the tax system and federal-provincial cost-shared programs such as social assistance and child care subsidies. Tax credits and deductions may also partially reimburse parents for the additional costs incurred in raising a child with a disability (or supporting dependent elderly or adult disabled family members). Tax policy continues to evolve to meet a variety of economic and social objectives.

The Income Tax Act confers tax advantages and disadvantages to individuals based on having a spousal/common law relationship and being parents and the extent to which earnings or business income is presumed to support dependent family members. Change in response to more inclusive ideas about what constitutes a family and how to apportion benefits (i.e., the extension of benefits to same-sex couples) is ongoing (see Bala & Jaremko Bromwich, 2002). Young (2000, chap. 4, p. 2), in quoting the Working Group of the Ontario Fair Tax Commission notes that "the concept of a couple as a life-long economic unit with joint income, wealth, and expenses may no longer be appropriate given changing family structures, increasing divorce rates, and falling marriage rates."

Understanding the complexities of how policies and programs are assessed and administered within Canadian tax law requires considerable expertise. Whether such policies encourage labour force attachment or discourage it; questions of horizontal versus vertical equity; and factors such as universality, administrative efficiency and equitable treatment need to be considered. Such issues include (see Vincent & Woolley, 2000 for discussion):
$ Tax treatment of children (i.e., exemptions for dependent children)
$ Determination and calculation of clawbacks to the Canada Child Tax Benefit
$ Recognition of the additional economic burden of being a singe parent
$ Income splitting mechanisms that permit contributions to RRSPs and other savings plans
$ Whether there should be a unique tax credit for stay-at-home parents
$ The tax treatment of child support payment and receipts
$ The treatment of childcare expenses to support parental employment and educational pursuits

Tax policies and issues can be analyzed and differ depending on whether 1) fathers are living with their spouse/partner and dealing with income in the context of a two-parent family; or 2) fathers are no longer in a spousal relationship, in which case income issues relate to the extent to which their income is used for the care and support of their children and possibly their ex-spouse (e.g., spousal support).

Significance and Potential Influence on Fathers

Issues Arising in Two-parent Families: One issue that has been brought to the fore repeatedly for discussion revolves around the tax treatment of the individual as the basic unit for taxation rather than the family unit. It has been argued that because there are so many provisions that consider whether an individual has a conjugal relationship, the income tax system is really a hybrid individual/family unit system (see Law Commission of Canada, 2001, which argues for maintaining individual taxation on the basis of income one controls as opposed to income from which one may benefit). The second argument is that the current Canadian tax system is believed by some to discriminate against couples with a stay-at-home parent compared to dual-earner couples because of the progressive income tax rate structure. As noted in the Law Commission of Canada, the suggestion has been made that one earner making $100,000 will pay more tax than two earners making $50,000 each. While this argument has been rejected by some (e.g., Krashinsky & Cleveland, 1999) on the basis that non-taxation of household production is actually a tax advantage for stay-at-home parents and that two income earners have increased costs associated with their labour involvement (i.e., child care), there is a perception by some that this arrangement is a disadvantage to families that have a stay-at-home parent (see also Vincent & Woolley, 2000).

In all jurisdictions except Québec, it is the spouse with the lower income who claims child care expenses, up to a maximum of two thirds of her/his earnings or the set maximum that applies ($7,000 for children under 7 years of age and those with a disability, $4,000 for older children). This deduction is worth more to individuals with higher incomes, than to those who earn lower incomes. The reality for most families is that it is the mother's income that is lower than the father's income, even though child care facilitates the work and labour force attachment of both parents. The proposed Child Care Allowance i.e. of $1,200 for each child to 6 years of age will be taxed in the hands of the parent with lower income and will thus be of greatest value to couples with a stay-at-home parent or those with widely discrepant incomes. (Battle, Torjman & Mendelson, 2006)

Issues Arising from Separation and Divorce: Claire Young's (2000) suggestion, in response to the Supreme Court decision in Symes v. Canada [1993] 4 S.C.R. 695, wherein a female lawyer was refused the right to claim child care expenses as a business deduction, was a reflection on the failure of tax law to understand its unique implications for women. This may speak to the broader claim that tax policy has not always recognized the changing structure of families and its impact on children (i.e., for non-resident parents). A key issue for consideration, therefore, should be whether a particular policy not only reflects equality, but also equality in changing circumstances.

The following items relate to the rights of parents to deductions or payments where the parents no longer reside together:
$ Eligible Dependent Tax Credit: The eligible dependent credit is available for dependent children ($413 in Ontario and $1,088 federally). A separated taxpayer may not claim the deduction if child support is claimed as a deduction on their taxes; therefore, only the recipient of child support can claim this tax credit. For those paying child support pursuant to the Child Support Guidelines, 1997, the tax credit is not available to the payor of child support; only the recipient of child support can claim this credit.
$ Legal Fees: Taxpayers who are the payor-spouse cannot claim legal fees relating to: 1) custody of the children; 2) obtaining a divorce or negotiating a separation agreement; 3) establishing a right to spousal support after divorce, even if obtained; and 4) lump sum spousal support amounts (Cole & Partners, 2004). On the other hand, a recipient spouse, pursuant to a Canada Revenue Agency (CRA) Technical News Release (October 10, 2002 in Cole & Partners, 2004) can deduct legal fees incurred to: 1) obtain an order for child or spousal support; 2) enforce an existing order for child or spousal support; 3) vary an existing order for child or spousal support; or 4) defend a reduction of child or spousal support.
$ Canada Child Tax Benefit (CCTB): The child tax benefit has three components: 1) the Basic Benefit, 2) the National Child Benefit Supplement, and 3) the Child Disability Benefit. The payouts and their tax treatment are based on family income, the number of children under 18 and their ages, whether any expenses are claimed for the child care expense deduction, and provincial/territorial practices related to clawing back the NCB supplement or part of it from parents who receive social assistance. Based on net family income, it excludes sources of family income such as child support, thereby not providing a complete picture of the family's economic resources (Vincent & Woolley, 2000). Until June 2005 these benefits, as well as the child component of the Goods and Services Tax credit, were paid solely to the taxpayer who had primary responsibility for the care of the children, or divided between parents if there was more than one child, or the CCTB was paid to one parent and the GST credit to the other parent. As of July 2005, the above options are no longer available and those parents in a shared eligibility situation will have their eligibility to benefits rotated between them on a six-month on, six-month off basis, with the amount determined by each parent's own eligibility (Jollimore, 2005). The benefits received are not taxable. That the benefit eligibility should "follow the child" is an important motivator for the change as it allows the allocation of benefits to recognize the growing instances where more than one individual has care for the same child.
$ Child Care Expenses: Following separation, the higher income spouse may claim child care expenses that he or she has incurred. When the parties have been living separate and apart for an entire year, both parties can have potential claims for child care expenses incurred by each of them in respect of the same children. The CRA, however, will scrutinize the nature of the child care expenses to ensure that they do relate to the children and are incurred while the children are living with each respective parent.

Gaps, Critical Questions and Concerns

An overall concern is whether tax policies are sufficiently attuned to the needs and resources of parents raising children and equitable across a variety of circumstances. Research that comprehensively examines the effect of tax policies on the labour force participation and family involvement of fathers is critical. For example: To what extent do current policies disadvantage couples in which both parents have relatively equal earnings (perhaps as a deliberate way to more equitably share parenting roles), compared to couples in which one parent earns substantially more? On the whole, are self-employed parents advantaged or disadvantaged by current policies?

The Dependent Child Tax Credit is generally only available to the child support recipient, not the payor. This may not fully account for the shared responsibility of both parents to provide for the child. As Cole & Partners suggest, there is an argument to be made for those parents with joint custody if they can demonstrate that the children were wholly dependent.

The deductibility of legal fees by a recipient of child support, but not by a payor, raises questions about whether such treatment is fair, particularly when the application or motion to reduce child or spousal support may have been successful and therefore warranted. Concerns about not wanting a party to frivolously use the courts is one aspect of social and tax policy to consider, but a question arises as to whether or not this puts fathers in an unfair position when the legal outcome is in their favour. Legal aid is often not available to fathers, who must then fund such actions themselves. This raises concerns if the lack of a deduction undermines their legitimate attempts for custody and access to their children.

The CRA provides that child care expenses may be shared between separated parents and deducted for the time that the children are living with the respective parent. A concern arises with the flexibility of child care centres to accommodate shifting needs. A parent may be required to pay full-time or continuing fees in order to hold a spot for a child who may be present only part of the week or be gone for a month during the summer to visit the other parent for instance, who may also incur child care expenses during the access time. A concern also arises as to whether the actual cost of child care is fully considered given the complexities of parents sharing time with a child. Also, the current ceiling of $7,000 per child is low and does not reflect the real costs of child care incurred by many parents (see Young, 2000).

Key References

Bala, N. & Jaremko Bromwich, R. (2002). Context and inclusivity in Canada's evolving definition of the family. International Journal of Law, Policy and the Family, 16, 145-180.
Battle, K., Torjman, S. & Mendelson, M. (2006) More Than a Name Change: The Universal Child Care Benefit. Available from Caledon Institute Web site: http://www.caledoninst.org
Cole & Partners, Chartered Business Valuators. (2004). The tax principles of family law. Available from
The Law Society of Upper Canada Web site: http://www.lsuc.ca
Jollimore, E. (2005, December). Shared custody: Child tax benefit/GST credit changes. Canadian Family Law Matters, 297, 4.
Krashinsky, M. & Cleveland, G. (1999, December). Tax fairness for one-earner and two-earner families: An examination of the issues. Available from Canadian Policy Research Networks Web site: http://www.cprn.org
Law Commission of Canada. (2001). Beyond conjugality: Recognizing and supporting close personal adult relationships. Retrieved March 27, 2006, from http://www.lcc.gc.ca/research_project/cpra-en.asp
Lefebvre, P. & Merrigan, P. (2003). Assessing family policy in Canada: A new deal for families and children. Choices, 9 (5). Available from the Institute for Research on Public Policy Web site: http://www.irpp.org
Vincent, C. & Woolley, F. (2000). Taxing Canadian families: What's fair, what's not. Choices, 6 (5). Available from the Institute for Research on Public Policy Web site: http://www.irpp.org
Young, C.F.L. (2000). Women, tax and social programs: The gendered impact of funding social programs through the tax system. Available from the Status of Women Canada Web site:
http://www.swc-cfc.gc.ca