1. Definition of “common law” for tax purposes. For tax purposes, spouses and common-law partners are treated equally. A
common-law partner is a person who is not the individual’s spouse but one
with whom you are living in a conjugal relationship, if that person:
* Has been living with you for at least 12 continuous months,
* Is the parent of your child by birth or adoption, or
* Has custody and control of your child and that child is wholly dependent
on that person for support.
2. Combine net income to claim refundable tax credits.
As a common-law couple, individual tax returns must be filed, but net
family income must be combined for purposes of refundable tax credits like
the Canada Child Benefit, Goods and Services/Harmonized Sales Tax Credit,
and provincial credits. Failing to do this can a big problem on a
subsequent tax audit, should refundable credits be inflated by claiming
only one income source.
3. Spousal credit claims.
Depending on net income for each person, one spouse may be able to claim
the other for the Spousal Amount if the couple was living together on
December 31 of the tax year. The net income for the whole year is used even
if the couple was married or living together late in the year. In the case
of separations before year end, net income before the separation is used.
In each case, the Spousal Amount is reduced dollar for dollar by the lower
earner’s net income.
4. Other non-refundable tax credits and claims.
In addition, common-law couples can claim each other’s medical expenses
(usually claimed on the return of the spouse with the lower net income for
maximum benefit) and combine their charitable contributions to maximize
that tax credit (it’s best to combine receipts so that they are over $200
for a better tax break). The Family Caregiver Amount (FCA) for minor
children can be claimed by either spouse or split between them to maximize
the use of the credit.
5. Tuition/education/textbook credits.
Up to $5,000 of tuition, education, and textbook credits can be transferred
from the student to a supporting spouse if the supporting person can use
the credits to reduce their taxes. Remember, this is the last year to claim
the education and textbook amounts.
6. Other transferrable amounts.
The $2,000 pension income amount, age amount, and disability amount may
also be transferred to the spouse with the higher income in addition to the
tuition/education/textbook and FCA for children.
Spousal RRSP contributions. If the couple expects to remain together, they may wish to start making
spousal RRSP contributions to equalize deposits and, therefore, income in
retirement. Money can be withdrawn on a tax-free basis from an RRSP under
the Home Buyer’s Plan (HBP), so this might be a way for them to save for
their first home on a tax-advantaged basis.
Attribution rules that affect reporting of investments. From an investment point of view, a common-law couple is treated the same
way as a married couple. That is, if a transfer of capital from the higher
earner to the lower results in the earning of interest, dividends, or
capital gains, that income is reported by the person who transferred of
capital. These rules can only be avoided when an inter-spousal loan is
drawn up and as long as the rules that apply to the loan are adhered to.
One tax-exempt principal residence. Common-law couples must be aware they can have only one tax-exempt
principal residence per household (whereas singles can have one each).
Separation and divorce. For tax purposes, a divorce or separation is defined as:
* Divorce: A legal dissolution of a marriage.
* Separation: For tax purposes, taxpayers are considered to be separated (and the rules
regarding spouses and common-law partners are suspended) when they have
been living separately for a period of at least 90 consecutive days. In
other words, a couple need not be legally or formally separated for their
tax status to change. Should you reconcile before the end of the 90-day
period, you are considered not to have separated at all. And if you are
split at the end of the tax year and then reconcile within 60 days of the
year end, your relationship is considered to be resumed for tax purposes.
Conjugal relationships can be complex for many reasons, including the tax
system. It can be expensive to make mistakes in claiming the provisions
above, particularly if net income is not calculated and claimed properly.
To file an audit-proof return with access to all the credits and deductions
you are entitled to, don’t hesitate to get help from a qualified
DFA-Tax Services Specialist™.
More information on basic tax principles can be found in
Family Tax Essentials, a great gift to young adults setting out on an independent life, or the
T1 Professional Tax Preparation Course – Basic
is the founder and President of Knowledge Bureau. This
originally appeared in the
Knowledge Bureau Report, © 2017 The Knowledge Bureau, Inc. Reprinted with permission. All
rights reserved. Follow Evelyn Jacks on Twitter
@EvelynJacks. Visit her blog at www.evelynjacks.com.
Her latest book,
Family Tax Essentials, is now available.
Notes and Disclaimer
©2017 by Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion
of the writer. No guarantee of investment performance is made or implied.
It is not intended to provide specific personalized advice including,
without limitation, investment, financial, legal, accounting or tax advice.