With Valentine’s Day coming up, you might be getting together with your partner, sharing a nice dinner, maybe a bottle of wine, and talking about your…taxes?
Understanding the implications of your relationship status on your tax obligations is crucial. If you’ve recently married, it’s a bit more obvious as to when your relationship status changed; however, for unmarried couples, it can be harder to know when your relationship will be recognized as common-law and why it matters. Knowing when and why to file taxes as a common-law couple is not just about compliance; it’s about making the most of your joint financial situation(s).
Let’s look at the intricacies of common-law tax filing, outlining the requirements, advantages, disadvantages, and strategies to maximize your benefits.
Recognizing common-law status
- The law, for tax purposes, defines common-law partners as two individuals who live together in a conjugal relationship and have lived together in a conjugal relationship for at least 12 consecutive months (including any period you voluntarily separated for less than 90 days);
- Parent a child by birth or adoption; or,
- Have a custody arrangement where one person has custody and control of the other’s child (or had custody and control immediately before the child turned 19 years of age), and the child is wholly dependent on them for support.
If you have been separated for 90 days due to a breakdown of the relationship, the effective date of your separated status is the day you started living apart. If the separation occurs after the filing of your tax return, and you continue to live separate for at least 90 days, you have to notify the CRA that your marital status has changed to “separated” by completing and submitting Form RC65. Visit the CRA’s page on Marital Status for more information on how separation impacts a common-law situation.
Identifying whether you fall into one of these arrangements is critical for tax purposes, as it dictates when couples must start filing their taxes together. Understanding this timeline is the first step in managing your tax obligations effectively.
The mechanics of common-law tax filing
Filing taxes as a common-law couple means you and your partner must both disclose your relationship status and your partner’s name, social insurance number, and net income (even if it’s zero) on each of your returns each year. This approach allows the CRA to assess your eligibility for various credits and benefits accurately, since it uses your household income to determine eligibility. It’s a process that requires transparency and coordination to ensure all information is accurate and complete.
Advantages of common-law tax filing
- Access to enhanced credits and benefits: Common-law status may unlock eligibility for certain tax credits and benefits not available to single filers. If eligible, these include the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) credit, the Canada Child Benefit, and the spousal amount tax credit, among others.
- Income splitting opportunities: Certain pension income splitting options are available to common-law couples, potentially lowering the overall tax burden by allocating income to the partner in a lower tax bracket.
- Pooling medical expenses: Common-law partners can combine their medical expenses to surpass the minimum threshold required for claiming these expenses on their tax return, maximizing their potential refund.
Navigating the challenges
However, common-law status isn’t without its complexities. For instance, you may encounter:
- Increased obligation for accuracy: The need for thorough and precise reporting of both partners’ incomes can complicate the filing process, especially if one partner has variable income sources.
- Impact on social benefits: Higher combined income may reduce eligibility for certain income-tested benefits and credits, such as the Guaranteed Income Supplement.
Understanding and navigating the tax implications of common-law status in Canada is a significant aspect of financial planning for couples. Whether you’re assessing your common-law status or seeking ways to optimize your tax position, a chartered professional accountant can help you leverage advantages and mitigate potential downsides to ensure your taxes are on track for 2024 and beyond.
Originally published on DMCL Chartered Professional Accountants.
Disclaimer: Tax rules can be complex. This article is not intended as tax advice, and you should not make tax decisions based solely on the information presented. You should seek the advice of a chartered professional accountant before implementing a tax plan or taking a tax filing position.
