Who Benefited from the Deduction-Inclusion Regime for Taxing Child Support?

Posted: 19 Sep 2000

See all articles by Glenn Feltham

Glenn Feltham

University of Saskatchewan - Accounting

Alan Macnaughton

University of Waterloo - School of Accounting and Finance

Abstract

Prior to the 1996 federal budget, child support payments in Canada were deducted from the payer's income and included in the recipient's income. Because the payer's marginal tax rate was usually smaller than the recipient's, the government was providing a subsidy relative to a system without income inclusion and deduction.

This paper presents a theoretical and empirical analysis of the incidence of this subsidy ? that is, it examines the distribution of this subsidy between payers and recipients of child support. It is shown that the critical variable in assessing the distribution of the benefit is the rate used to gross-up the payments to take tax into account. Based on a sample of court cases from 1986 to 1995, courts generally attempted to gross-up by the recipient's marginal tax rate. However, this rate was systematically underestimated, and the actual gross-up was usually less than the additional taxes owing by the recipient on the child support amount. Recipients of child support not only failed to receive a share of the tax savings, but usually had even less after-tax money than in a system without tax recognition for child support. In other words, recipients of child support, who are usually women, were not advantaged by the deduction-inclusion system and were in fact disadvantaged in most cases.

JEL Classification: H34, K19

Suggested Citation

Feltham, Glenn and Macnaughton, Alan, Who Benefited from the Deduction-Inclusion Regime for Taxing Child Support?. Canadian Tax Journal, Vol. 48, Issue 6, 1999. Available at SSRN: https://ssrn.com/abstract=228803

Glenn Feltham (Contact Author)

University of Saskatchewan - Accounting ( email )

25 Campus Drive
Saskatoon, S7N 5A7, Saskatchewan
Canada
306-966-8402 (Phone)
306-966-2514 (Fax)

Alan Macnaughton

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada
613-996-8267 (Phone)
613-943-5597 (Fax)

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