moved:
That, in the opinion of this House, the government should amend the Income Tax Act so that child support payments are no longer considered taxable income for their recipients.
Madam Speaker, I am very pleased to stand in the House this evening to speak to the following motion:
That, in the opinion of this House, the government should amend the Income Tax Act so that child support payments are no longer considered taxable income for their recipients.
This motion holds a great deal of interest throughout the country.
In 1942 Canada introduced a taxation policy on child support payments which allowed the payers to deduct the full amount of the payment from their income while the recipients must include the full amount in their income calculations. The policy has been criticized as discriminatory to women because it places an unfair tax burden on the custodial parent, usually the mother. Evidence shows in theory and in practice that this criticism is valid. This situation can be partially explained by historical changes, more specifically in patterns of the lives of men and women in Canada over the last 50 years.
When the policy was introduced in the 1940s it was designed to provide relief to the taxpayer burdened with both a wartime increase in taxes and the obligation of spousal and child support. The father was typically the only income earner and therefore the sole taxpayer in the separated family. It was logical at that time that tax relief be awarded to him. It was assumed the mother would still pay no tax.
Today, most single mothers have earned income and pay taxes on this income whether or not they receive support. What are the changes that have occurred in our society since this tax policy was implemented in the 1940s? First there have been demographic changes. The phenomenon of lone parenthood affects many more people today than in the past. Due to divorce and remarriage, lone parenthood is not always a lifetime, permanent situation. Rather is a phase of life of varying duration experienced by many parents. While lone parenthood itself may not be a permanent situation, the consequences have a lasting impact on women and children, particularly where the period of lone parenthood is lengthy and income is subsequently inadequate.
As well, the practical support networks of extended family and community which usually provided financial and other forms of support have shrunk due to urban development and increased mobility.
Second, there has been a number of social changes. Today violence against women is being recognized as a societal problem that takes many forms and influences many aspects of women's daily life.
When negotiating a separation or divorce agreement many women are left in a very vulnerable position. Often they simply wish to get out of their relationship and to get on with their lives. This often creates pressure to capitulate to inequitable settlements in order to end confrontation and avoid long drawn out custody battles. Returning to court later to seek a variance of child support is usually economically prohibitive for women and can carry many of the same dangers as the initial negotiation.
The report by the Royal Commission on the Status of Women in 1970 was the first study to examine the economic and social disadvantage of women in Canada. Since then many other studies have overwhelmingly identified and described the feminization of poverty and its direct relationship to the unpaid work involved in raising children and other tasks related to human maintenance.
Third, policy changes over the years have had a significant impact on the situation of women, families with children and in particular lone parent families. There has been decreasing support for families with children through the tax transfer system over the past two decades. The value of deductions and credits for children as a proportion of income has been steadily reduced. The reduction of the number of tax brackets from 10 to 3 today has also had an impact on families and on the tax treatment of child support.
Often after a divorce it is very difficult to find work with adequate pay to meet the needs of the children in the household. Therefore, mothers are forced to rely on social assistance. Social assistance policies in Canada however are not designed to take into consideration child support. Dollar for dollar of child support payments are deducted from the mother's social assistance cheques leaving her in a disadvantaged position of having little money for her children.
Fourth, there have been a number of economic changes in our society which impact on the taxation of child support. Perhaps the most significant change is the steady increase in the number of women, including those with children, participating in the labour force. However, they are still paid at the lower end of the pay scale.
After divorce family resources are often inadequate to continue to meet children's needs, yet it is the single mother who continues to be solely or primarily responsible for the financial needs of children because of the extremely high rate of default and child support awards.
The evidence is overwhelming. Given the number of changes that have occurred over the last 50 years it is paramount that we revisit the 1940s policy of the tax treatment of child support payments. We must ask ourselves if this policy is still, or for that matter, whether it has ever met its original goal of providing tax relief to the tax burden and encourage the payment of child support.
The rationale that the deduction for child support payers automatically requires inclusion as income by the recipient does not hold water. While they were married the father's support of the children was not income to the mother. While they were married the father's support of the children was not deductible. Likewise, now that they are divorced the custodial mother does not get to deduct what she spends on the children. The parents have now gone their separate ways. Why should the father's support of his children now become taxable income to the mother?
Child support payments were not income to the custodial mother prior to the 1940s because they did not fit the income tax concept of income. The Oxford Dictionary defines income as money received during a certain period as wages or salary. Child support in the custodial mother's hands is not new wealth from the production of labour or capital. It is simply the father's payment for his share of his children's expenses.
The most important rationale for the reduction-inclusion treatment is that it will encourage higher support payments by shifting income from a higher tax paying parent to a lower tax paying parent. This is expected to cause a surplus tax saving available to increase child support payments.
The policy expects that the father's tax savings will always be greater than the mother's tax liability. Because of this the non-custodial parent should be able to pay the custodial parent's increased taxes through what is commonly referred to as a tax gross-up added to the child support payment. Then the policy assumes there will still be an additional surplus tax saving which can also be used to increase child support.
However, as we all know, theory and reality do not always produce the same end results and this is definitely the case with the deduction-inclusion policy.
First, although the father's tax saving may be greater than the mother's tax liability, neither the Income Tax Act or family law legislation requires the father to pay the mother increased tax liability. The report of the federal-provincial-territorial family law committee of May 1992 entitled "The Financial Implications of Child Support Guidelines" noted that while tax consequences should be an element of every child support determination, there is evidence to suggest that these calculations are not routinely made. If the father does not use his tax savings to pay the mother's tax liability, the consequences are very serious.
Let us use another example. A support order has determined that the father's fair share of the children's expense is $10,000 for the year. Under family law principles, this determination is based on both parents sharing the cost of raising the children. The mother is also independently contributing to the children's support.
This $10,000 child support award should be grossed up by about $2,600 to reflect the mother's increased federal and provincial taxes. The grossed-up award then to the father should be $12,600 for the year. The father can pay the extra $2,600 because he has a tax savings from the deduction. The custodial mother needs the extra $2,600 to cover her tax increase from having to include the support in her income.
Let us consider what will happen if the gross-up is not added to the award. The mother still must pay the $2,600 in taxes. She will now be left with only $7,400 from the father's support payment. There will be a shortfall from the original $10,000 that the judge has awarded her. The onus for this shortfall is on the custodial mother and this causes hardship for the children. The father, on the other hand, still gets the benefit of the full tax savings.
A further flaw in the deduction-inclusion policy is the use of tax bracket differentials to deliver overall tax savings. This perspective is examined in great detail in a report entitled "Child Support Policy: Income Tax Treatment and Child Support Guidelines" by Ellen Zweibel and Richard Shillington.
Zweibel and Shillington note that there is an overall tax saving only when the non-custodial father's tax savings on support exceed the custodial mother's liability on support. The Zweibel and Shillington report found that a tax saving only occurs in 51 per cent of the cases and no saving occurs in 49 per cent. Furthermore, when a saving was realized, that saving was minimal.
The study revealed another troubling effect of the deduction-inclusion provisions. So far in this discussion we have been assuming that the non-custodial parent's tax savings will be greater than the custodial parent's tax liability thus creating a surplus tax saving. What happens if this is not the case?
If the mother's increased tax liability is greater than the father's tax savings, the system works against the separated family. The father can no longer pay the mother's increased tax liability from his tax savings.
In the Zweibel and Shillington report, 20 per cent of the cases fell into this category. Not only did the system fail to produce the possibility of a higher award, the system actually worked against them to decrease their already scarce resources.
The final rationale holds that the savings that occurs through the deduction-inclusion gross-up policy is supposed to benefit the children by generating further revenues for their support. Again reality must step in. Even when the saving is realized, the money sits in the hands of the father parent and there is nothing to say that he will forward that money to his ex-wife for the children.
This policy ignores that child support is a very contentious issue and that non-custodial fathers seeking to minimize their
payments may not readily agree to either a gross-up or to a further sharing of any tax saving above the gross-up.
This is not just a tax issue but one of wider social injustice which affects the well-being of Canada's children and subsequently Canada's future. Article 2 of the United Nations Declaration on the Rights of the Child states:
The child shall enjoy special protection and shall be given opportunities and facilities, by law and other means, to enable him or her to develop physically, mentally, morally, spiritually, and socially in a healthy and normal manner and in conditions of freedom and dignity. In the enactment of laws for this purpose the best interest of the child shall be the paramount consideration.
It is our children who now bear the immediate consequences because the current system is not providing the effects it was intended to produce. If the current policy is not changed it is the children who will go on paying the consequences every day, not just in some cases and not by accident, but deliberately by our failure to redesign an outdated tax mechanism.
The causes of child poverty have been linked to family breakdown, at least in part, in many areas of the world including Canada. Average family incomes for single parent families headed by women are significantly lower than those of two parent families. When parents separate the cause of maintaining two households will mean that at least some members of the family will suffer from reduced income.
Unfortunately the predominant pattern is that women, who are the vast majority of custodial parents, and their children experience a marked decrease in standard of living while men who no longer live with their families experience an improvement in their material circumstances.
The Divorce Act sets out to maintain a similar standard of living for both parents after separation or divorce. Yet the standard of living for custodial parents and their children tends to decline as much as 73 per cent, whereas the non-custodial parents rises as much as 42 per cent.
When a father makes a child support payment he is transferring money he has earned toward the care and maintenance of his children. There is no difference between a parent living with their spouse and providing them with grocery money, paying for piano lessons or shoe laces than there is for a parent living separate from the their spouse or a parent of their children and making the same financial contribution.
There is no similar tax exemption for married persons or persons living common law whereby one or both of the spouses provides financially for the family. If the children were living with anyone other than the parent and those caretakers were receiving financial support, they would not be obliged to claim it as personal income and be taxed accordingly and that is happening in this country all the time.
I have demonstrated to the House this evening the failings of the Income Tax Act on child support payments. I will run through six predominant areas.
First, I have demonstrated how Canadian society has changed demographically, socially, politically and economically. The deduction-inclusion policy on child support payments has been in existence since 1942. It is time that it be revisited and revamped to fit today's Canada.
Second, the taxation principle which holds that where a deduction has been claimed there must be an inclusion is false, absolutely false.
Third, tax subsidies from the deduction-inclusion principle only exist in some cases and it is often very minimal. Furthermore, there is no provision to ensure that where a savings exists that money is forwarded to the children to improve their standard of living.
Fourth, history has demonstrated that the availability of a tax deduction for the non-custodial parent has not proven to be an incentive for the support payer to make payments in full and on time. I believe that was one of the reasons that they instituted that in the first place.
Fifth, the standard of living for custodial parents and their children tends to decline while the non-custodial parents tends to rise. Taxing support payments works contrary to any efforts to raise these households out of poverty.
Finally, child support payments should be seen for what they are, a continuation of the non-custodial parent's obligation to the raising of their children.
Canada's tax policy taxes child support payments, unlike what we see in the United States, Australia, Britain, Sweden and in many other countries. While the average child support order covers less than half the minimum cost of raising a child, the government deems it fair to take up to one-third or more of support payments that are meant to feed and cloth children. It is time that we as legislators in the House of Commons, in the Parliament of Canada stood up and put a stop to this and bring justice and fairness into our tax system, particularly as it relates to the future of our children.