Tax advantages & Disadvantages for Married or Common Law
By Mauricio Dreher
Differences in taxation
Several of my clients ask me about the differences in taxation between being Married or Common Law. Personally, you may think that both situations are very similar, but in the government and taxes subject, the advantages and disadvantages for you could be very different. See below:
1- Spouse (legally married)
This applies only to a person to whom you are legally married.
2- Common-law partner
This applies to a person who is not your spouse, with whom you are living in a conjugal relationship, and to whom at least one of the following situations applies. He or she:
a. has been living with you in a conjugal relationship, and this current relationship has lasted at least 12 continuous months;
Note: In this definition, 12 continuous months includes any period you were separated for less than 90 days because of a breakdown in the relationship.
b. is the parent of your child by birth or adoption; or
c. has custody and control of your child (or had custody and control immediately before the child turned 19 years of age) and your child is wholly dependent on that person for support.
Tax Advantages Enjoyed by Married Couples
Spousal Tax Credit
If one spouse had net income less than their basic personal amount in the taxation year, the excess may be transferred to their spouse.
Transfer/Optimization of Personal Tax Credits
Married couples can optimize the use of their personal tax credits by transferring or combining credits on their tax returns. Some credits that may be transferred include: the age credit; pension income credit; disability tax credit; and tuition credits.
Medical expense credits can be optimized by combining the couple’s eligible expenses and claiming them on one return. Medical expenses are reduced based on net income, so combining a couple’s expenses normally results in a greater tax benefit.
Spousal RRSP Contributions
One spouse may make contributions to the other’s RRSP. The contributor will receive a deduction as if they had contributed to their own plan. Generally, the higher income spouse will contribute to the lower income spouse’s RRSP, on the assumption that the lower income spouse will continue to have lower income upon the couple’s retirement. Taxes in retirement will be minimized by equalizing the spouses’ respective incomes.
Pension Income Splitting
Married couples can split up to 50% of their eligible pension income on their income tax returns. When each partner is in a different tax bracket, this reduces the couple’s taxes by allowing the higher-taxed spouse to shift some income to the lower-taxed spouse. This can also reduce exposure to Old Age Security repayment for higher income individuals.
Tax Disadvantages of Being Married
The attribution rules are complex, generally married couples cannot transfer investment income by transferring investment assets. Income and capital gains (or losses) on assets transferred attribute back to the spouse who transferred the asset.
Potential Loss of Benefits
Eligibility for certain benefits such as the Guaranteed Income Supplement, Canada Child Tax Benefit or the GST Credit are determined based on family net income for a married couple. If either spouse qualified for these benefits before they were married, they may be reduced or lost based on their family net income.
Loss of Principal Residence Exemption
The capital gain on the sale of a principal residence is tax exempt if the property is designated. If one spouse owned a home and the other owned a cottage, the capital gain on the sale of both properties could be exempt if they were not married. Once the couple is married, they will only be able to designate one home as their principal residence, and any capital gain on the sale of the other property is taxable.
Child Care Expenses
Where a married couple incurs tax-deductible child care expenses, the deduction must normally be claimed by the lower income spouse.