Family law stipulates that big-ticket items such as summer camps, extracurricular activities and health-related needs be shared between co-parents in proportion to their incomes.matimix/Getty Images
When couples with children separate, how they arrange to share child-related expenses can seem straightforward on paper, but be messy in real life.
Big-ticket items such as summer camps, extracurricular activities and health-related needs are called “extraordinary” expenses, or under the Federal Child Support Guidelines, Section 7 expenses.
Family law stipulates that these be shared between co-parents in proportion to their incomes. Despite this simplicity, Section 7 expenses can cause a lot of friction between co-parents.
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Like other aspects of family law, Section 7 expense rules don’t account for all of the factors that can determine whether the arrangement will work for both parents. In some cases, it can be difficult – or impossible – for a parent to pay their portion.
Sara McCullough is a Kitchener, Ont.-based certified financial planner and certified divorce financial analyst who works with couples who are separating. She says parents need to make sure the financial agreement is affordable before they sign it.
“The Section 7 split is designed legally,” she says. “It isn’t designed for real life. It doesn’t always work in the wild.”
Problems can arise when there is an income disparity between parents. The lower-earning parent may not have the cash flow to pay for the types of extraordinary expenses that the higher-income parent wants to spend money on. Ms. McCullough notes one parent can pull the other parent out of their affordability zone by incurring these higher costs.
Let’s look at an example. Parent A earns $150,000 a year and Parent B earns $90,000. If they have shared custody of two children and live in Ontario, Parent A will pay Parent B an estimated $9,100 in child support a year. After deducting income tax on their employment income (child support payments are not taxable income), Parent A has $15,200 a year more to spend than Parent B.
On paper this seems reasonable, but it does not account for differences in expenses. For instance, if Parent B stayed in the family home while Parent A is renting an apartment, Parent B could face additional costs such as mortgage payments, home insurance, property taxes, repairs and maintenance. These costs, plus adding money to long-term savings, can leave Parent B with little leftover for extraordinary expenses.
Since the Section 7 rule looks at income and not expenses, the proportional split might not work in practice.
Things get even trickier when the higher-income parent wants to spend more on a child-related expense than the lower-income parent. For example, one parent might want the child to go to an expensive summer camp or to participate in high-level hockey, competitive dance or horseback riding.
Parents need to agree ahead of time on these expenses, but that’s not always easy. While a Section 7 expense is defined as something that is “necessary and reasonable,” this is very much open to interpretation.
It’s tough to predict what issues you will face as co-parents when you are drafting a separation agreement, so you can’t plan for every contingency. But a parenting plan – which is a different document – can include all kinds of non-financial arrangements, such as outlining a process to deal with disagreements, and what to do if one parent does not have the cash flow to pay their portion of a child-related expense.
Before signing a separation agreement or parenting plan, each parent should look at the hard numbers. This means preparing a cash flow statement that includes income from all sources, and post-separation expenses.
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Be as accurate as possible – don’t gloss over things like maintenance costs related to a house, replacing an aging car and other inevitable expenses. With this information in hand, you can explore ways to deal with Section 7 expense disagreements. This might mean including a clause in the parenting plan that says you will negotiate or use a mediator if you disagree, and another option is setting limits on what expenses both parents will agree to.
Ms. McCullough has negotiated these issues with co-parents. In one instance, Parent A wanted to sign their child up for an expensive activity, but Parent B could not afford their portion. This was a hard conversation for both parents since they each had evidence to support their point of view.
They eventually compromised: They would use the standard-level cost of the activity as the base, and Parent B would pay their portion based on that amount, while Parent A would cover the rest.
Of course, there has to be a desire to work together, says Ms. McCullough. “Parents have to be willing to negotiate. I can only do this because they let me.”
Anita Bruinsma is a Toronto-based certified financial planner at Clarity Personal Finance.