How the new CARE tax credit is dramatically changing childcare payors’ calculations
With tax season approaching there’s a new tax credit on the books that Ontario family lawyers need to stay on top of.
In April of 2019 the Ontario government launched the Childcare Access and Relief from Expenses (CARE) tax credit with the aim of offering a flexible break to childcare expense payors, especially for low and moderate-income families. The CARE credit provides more tax savings to families in addition to the existing Child Care Expense Deduction (CCED) as well as federal childcare tax relief. Its impact, according to one leading family lawyer, might be greater than anyone expected.
“What's happening in many cases is that the CARE credit increases the benefits and reduces the taxes of a party paying childcare, such that the tax savings and benefits end up being more than the actual cost of childcare – resulting in what we call a “surplus”,” Christine Montgomery, special projects consultant at DivorceMate explained. “This is happening in common cases, not fringe situations… I think it's a result that nobody foresaw, certainly not the people behind the Child Support Guidelines.”
As a leading support software provider for family lawyers, DivorceMate must keep abreast of every tweak and shift in childcare tax credits. The CARE credit represents more than just a tweak, and one that had to be factored into their Tools software.
Montgomery explained that because of the tax savings and benefits now available to parents incurring daycare, some of these parents might actually have to make a payment to the other side, essentially proportionately sharing the surplus of the daycare with the other parent. It becomes important to pay attention to the “brackets” in the Support Scenarios in the software, to see which party is required to make the Child Support (section 7) apportioning payment.
Montgomery and the DivorceMate team took this development to some judges, academics, and lawyers, who suggested that it may not always be advisable for the parent incurring the childcare expense to have to make a payment to the other parent; accordingly a new option was added into the calculator, eliminating the sharing of this surplus and instead requiring no payment to be made. By selecting the applicable checkbox in the Child Support Guidelines options in the software, users can choose to reduce any surplus to zero.
Montgomery stressed that the new option isn’t recommended in all cases. Rather, family lawyers and childcare expense payors can use the software as a tool to work out what option fits best in each specific case.
“It's really just an opportunity for someone to have a look at it and run the calculation both ways,” Montgomery said. “Ultimately, you’re going to pick the best position for your party and their situation, and advocate for your client on that basis.
“I don’t know how the courts are going to proceed, though; that’s sort of up in the air right now.”
Montgomery, herself a practicing family lawyer for close to a decade before joining DivorceMate, thinks family lawyers need to be getting their heads around the CARE credit now. The unprecedented benefit of the credit has caught a lot of practitioners by surprise. Montgomery thinks that this year family lawyers need to understand how the CARE credit works if they want to properly advise their clients and advance their clients’ positions.
Another important factor to consider, according to Montgomery, is the interplay between child support and spousal support. The way in which the parties decide to handle the surplus of the tax savings/benefits over the childcare expense (ie. sharing it or making no payment) will directly impact the spousal support payable. One calculation that Montgomery ran where the surplus from the new CARE credit was shared between the parties, left both parties in a lower cash position at the end of the day than when the option was selected and no payment made. That, she explained, is because of the connection between child support and spousal support pursuant to the Spousal Support Advisory Guidelines.
“Rather than focusing on what your clients pay or receive by way of child support or spousal support, what counsel should really be doing is focusing on the bottom line for the parties and looking at their net disposable income numbers,” Montgomery explained. “In other words, work towards the solution that maximizes the money available to the family as a whole at the end of the day.” Once there’s an understanding of the new credit, lawyers can bring that directly to the negotiating table. It’s up to family lawyers, from there, to determine what’s best for their clients.”