For Better or For Worse...
Getting married or starting a common-law relationship can result in a number of income tax consequences - some advantageous, some not. It's a good idea to take these tax consequences into consideration when planning your future together.
Spouses and Common-Law Partners
The Income Tax Act treats spouses and common-law partners the same way. However, it is important to understand what the terms mean. A "spouse" is someone to whom you are legally married. The definition of a "common-law partner", on the other hand, depends on whether or not you have children:
- If you start cohabitating with someone who is the parent of your child, you are considered to be common-law partners from the time you move in together. A "parent", for this purpose, includes an adoptive parent (whether in law or in fact) as well as a natural parent.
- If there are no children involved, you only become common-law partners after you have lived together in a conjugal relationship for 12 continuous months. The 12-month period includes any period during which you were separated for less than 90 days because of a breakdown in your relationship.
Children
If you already have children, it will not normally be to your advantage tax-wise to get married or start living common-law. This is because you will no longer be entitled to claim the amount for an eligible dependant for one of your children once you are married or living common-law for an entire year. You may also see a reduction in your child tax benefit since the income of your spouse or common-law partner will now be taken into consideration in determining how much you are entitled to.
If you incur child care expenses, you should also be aware that they can only be claimed by the spouse or common-law partner with the lower net income. If one of you does not have any income, this will effectively nullify your claim. However, you will be entitled to claim the spouse or common-law partner amount if the income of your spouse or common-law partner is less than $9,600.
GST/HST Credit
The GST/HST credit is also based on family net income as opposed to individual net income. This means that if you're currently entitled to the GST/HST credit, you may see a reduction once you get married or start living common-law. Two people living separately can each earn up to approximately $32,000 and qualify for the full credit. However, if they were to get married or start living common-law, their credit would be eliminated.
Similar considerations apply to provincial tax credit programs, such as those offered by Ontario, Manitoba, British Columbia and Québec.
Registered Retirement Savings Plans
Fortunately, there are some tax advantages to getting married or living common-law. In particular, you will now be able to set up spousal RRSPs. This allows for substantial income-splitting opportunities if you and your spouse or common-law partner are taxed at different marginal rates.
It will also make things easier if one of you dies. If you die without a surviving spouse or a financially dependant child, the Fair Market Value (FMV) of your RRSPs or RRIFs are included in income on your final return. If the plan is substantial, this will mean that part or all of it will end up being taxed at your highest marginal rate. However, if you are married or living common-law, the plan can be transferred to the survivor without tax consequences.
Family Assets
If you give a capital property (for example, shares or mutual funds) to a non-related individual, you are deemed to have disposed of it for proceeds equal to its Fair Market Value (FMV). This will result in either a capital gain or loss on your tax return, depending on whether the FMV is greater or less than its cost to you. However, you may transfer assets to your spouse or common-law partner at their cost (unless you elect otherwise), with the result that any accrued gain is deferred until such time as the property is actually sold.
Unfortunately, you will also become subject to the attribution rules. This means that you will have to continue reporting the income from the transferred property even though you no longer own it. So you cannot split your income simply by transferring assets to your spouse or common-law partner. For this reason, most financial planners advise the lower-income spouse or common-law partner to make income-producing investments that are subject to income tax, while the income partner pays for the mortgage and household expenses.
You will also become subject to the rule allowing for only one property per family unit to be designated as a principal residence. Capital gains you realize on any other real estate you own will be subject to income tax. This means that if one of you owns a home while the other owns a cottage, you will have to decide which one would be best covered by the principal residence exemption.
