I recently did a set of spending plans for a couple that is separated. They are trying to sort of the how they are going to share parenting arrangements going forward. Their individual financial situations depend on what they decide. Are they going to share parenting or is one parent going to be designated the Primary Caregiver?
In an ideal world, this couple would decide what is best for the children without thinking about how it will affect them financially, but often people let their financial situation drive their decisions rather than the other way around.
How do different parenting arrangements affect the individual parent’s financial situation?
These are the basic rules:
Primary Caregiver Situation
The primary caregiver, that is, the person that parents the children more than 60% of the time, receives child support from the other parent. The primary caregiver also gets all the tax credits related to the children.
Example 1:
Parent A is the primary caregiver of two and four year old child and earns $40,000 per year and Parent B earns $60,000 per year. Parent B pays Parent A $900 a month in child support.
How does this look after taxes are considered?
Parent A pays about $6,000 in taxes (including EI and CPP).
Parent A is therefore left with $40,000 less $6,000 plus $10,800 (child support – non taxable to Parent A) plus $2,880 (Universal Child Care Benefit) plus $4,000 (Canada Child Tax Credit) for a grand total of $51,380 (after tax) per year.
Parent B pays about $14,000 in taxes (including EI and CPP – Parent B does not get any credits related to the children)
Parent B is therefore left with $60,000 less $14,000 less $10,800 (child support) for a grand total of $35,200 after tax. That’s quite a difference from Parent A who started out with less.
As stated, Parent A is the primary caregiver of the children and so will therefore have much greater costs. That said, in the situation above, Parent B will also be on the hook for a greater percentage of certain child related expenses such as work related child care. In this case, if Parent A is earning $40,000 a year with a two and four year old, there must be child care. Parent B will pay 60% of the child care costs and Parent A will pay 40%. Parent A gets to claim the child care expense and Parent B does not.
Will Parent B understand that and give up almost $20,000 per year or will Parent B decide equal parenting would be a better situation?
Shared Parenting Situation
If the parents share parenting, then they use something called the offset method to calculate child support. Essentially, it works like this:
Example 2:
Parent A earns $50,000 and Parent B earns $50,000.
Parent A has to pay $760 to Parent B for child support and Parent B has to pay $760 to Parent A for child support. These two amounts offset each other and neither parent has to pay the other parent anything.
Example 3:
Parent A earns $40,000 and Parent B earns $60,000 (as above in example 1)
This time, Parent A pays a monthly amount of child support to Parent B of $600 and Parent B pays $900 to Parent A. Instead, Parent A and B offset the two amounts and Parent B simply pays Parent A $300 per month. These amounts are calculated based on the Federal Child Support Guidelines. Here is a handy calculator.
The child support guidelines are meant to equalize the standard of living of the children living in the two different households (where they are spending equal time). The calculation takes into account taxes as the recipient of the $300 receives the money tax free and the payer does not get a deduction. Now their respective incomes look like this:
Parent A – $40,000 less taxes of $6,000 (I wonder how accurate this calculator is, but it is cool and simple) or 14.7% plus $3,600 in child support plus $1,440 (Universal Child Care Benefit – in this situation it is shared with the other parent) plus $2,000 (Canada Child Tax Credit; again it is shared) for a grand total of $41,040 (after tax) per year.
Parent B – $60,000 less taxes of $11,500 or 19.15% (this is lower than in example 1 as this time parent B gets to claim one child as a dependent) less $3,600 in child support plus $1,440 (Universal Child Care Benefit; in this situation it is shared with the other parent) plus $2,000 (Canada Child Tax Credit; again it is shared) for a grand total of $48,340 (after tax) per year.
Parent A and B’s income are not completely equalized, but Parent B will end up paying more for things like medical and dental for the children as well as for extracurricular activities and other special expenses for the children. Parent B pays 60% of these expenses and Parent A pays 40%.
If I was Parent B and was only concerned with money I would choose example 3.
Did you just see what the child support guidelines did?
The guidelines encouraged both parents to step up and be equal caregivers to their children. Money talks.
In an ideal world, both parents would also step up and share the parenting responsibilities and not just the money.
Parents starting out on the shared parenting path will struggle at first. One parent was likely the primary caregiver when the couple was married. That is usually the way it works. Going forward they will have to learn strategies for dividing up the parenting that is fair.
The next financial situation this couple has to decide on is living arrangements. They are now moving to a two household situation with the same total amount of money as a family (aside for a little bit of extra money as a result of the Child Tax Credit).
I will leave that discussion to another blog post.
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