Cecily Zamora
Whether you file your taxes as single or common law depends on your marital status. In Canada, a common-law partnership is legally recognized as a relationship in which two individuals have been living together in a conjugal relationship for a continuous period of at least 12 months. If you are in a common-law relationship, you must file your taxes as such, and you may face penalties for filing as a single person. Filing taxes as a common-law couple has several advantages, including income splitting, combined deductions and credits, and increased benefits for children. However, there are also some disadvantages, such as shared liability for tax debts and the loss of certain credits.
| Characteristics | Values |
|---|---|
| Definition of common-law relationship | Living together in a conjugal relationship for 12 consecutive months or immediately if they have a child together |
| Common-law status change | Notify CRA by the end of the month following the month your status changed |
| Filing taxes as common-law | File individual tax returns and indicate common-law status |
| Advantages of filing as common-law | Income splitting, combining deductions and credits, increased benefits for the couple as a whole, combining medical expenses and donations, increased borrowing ability |
| Disadvantages of filing as common-law | Shared liability, loss of certain credits, complex financial situation, loss of certain benefits |
| Failing to indicate common-law status | Considered tax fraud, financial penalties, interest charges, criminal charges for fraud |
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What You'll Learn
Common-law relationship definition
In Canada, a common-law partnership is legally recognised as a relationship in which two individuals have lived together in a conjugal relationship for a continuous period of at least 12 months. However, the definition of a common-law relationship differs from province to province, as family law falls under provincial laws. For example, in BC, a couple must have lived together for two years to be considered common-law for family law purposes, but only one year for income tax law purposes.
In Canada, common-law partners do not file joint income tax returns; each individual files their own tax return and indicates their marital status and who they are married to/living with. If you are in a common-law relationship, you must file as common law and include your spouse's name, social insurance number (SIN), net income, and employment status.
There are advantages and disadvantages to filing taxes as common-law partners. Advantages include income splitting, combined deductions and credits, and increased benefits such as the Canada Child Benefit (CCB) and the goods and services tax/harmonized sales tax (GST/HST) credit. However, disadvantages include shared liability, loss of certain credits, and a more complex financial situation.
It is important to note that choosing to file taxes as a single individual when in a common-law relationship can lead to significant penalties and complications. These penalties can include financial penalties, interest charges, and even criminal charges for fraud.
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Benefits of filing as common-law
In Canada, a common-law partnership is legally recognized as a relationship in which two individuals have been living together in a conjugal relationship for a continuous period of at least 12 months. Since family law falls under provincial laws, the definition of what constitutes a common-law relationship varies across provinces.
Income Splitting
Income splitting is a significant advantage of filing taxes as common-law. This allows for a lower overall tax burden for the household, as income can be redistributed between partners to take advantage of lower tax brackets.
Eligibility for Certain Credits and Benefits
Filing taxes as common-law can make you eligible for various tax credits and benefits, such as medical benefits, charitable donations, and the Canada Child Benefit (CCB). These benefits are often calculated based on the combined income of both partners, potentially resulting in greater total benefits.
Pension Splitting
If eligible, common-law couples can split 50% of their pension income, resulting in a lower tax rate for each partner.
Common-Law RRSPs
The higher-earning partner in a common-law relationship can contribute to their partner's RRSP (Registered Retirement Savings Plan). This strategy lowers the couple's overall tax liability while building a retirement plan for the lower-earning partner.
Combined Expenses and Borrowing Ability
Common-law couples may benefit from combining their expenses and increasing their borrowing ability for things like mortgages. For instance, they may be eligible for the First Time Home Buyers Plan and the Lifelong Learning Plan, which allows for withdrawals from RRSPs to fund education.
It is important to carefully consider the advantages and disadvantages of filing taxes as common-law, as there may be complexities and trade-offs involved.
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Disadvantages of filing as common-law
While there are some benefits to filing taxes as common-law, there are also some disadvantages. Here are some key points to consider:
Shared Liability
When filing jointly, both partners become liable for any tax debts, interests, or penalties incurred. This means that if one partner has outstanding tax obligations, it could negatively impact the other partner's finances.
Loss of Certain Credits
While some tax credits and deductions may increase when filing jointly, others may decrease or become unavailable. Certain credits are designed specifically for single individuals and are not applicable to those in a relationship, whether common-law or married.
Complexities in the Event of a Breakup
In the event of a breakup, there are additional tax implications to navigate. To be considered officially separated by the Canada Revenue Agency (CRA), you and your partner need to be apart for at least 90 days. When filing a tax return for the year of separation, you must still account for your ex-partner's income up to the date of separation, which can add complexity to your tax situation.
Increased Risk of Audit or Reassessment
Filing as common-law can potentially increase the risk of a tax audit or reassessment. This is because the CRA may view relationships and dependency as an area of concern, triggering additional scrutiny.
Compliance Requirements
When filing as common-law, you must disclose your relationship status and provide information about your partner, including their name, social insurance number, and net income. This adds an extra layer of complexity and compliance requirements compared to filing as a single individual.
It is important to carefully consider the advantages and disadvantages of filing as common-law and seek professional guidance to ensure compliance with tax regulations.
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Penalties for filing as single when common-law
In Canada, if you are in a common-law relationship, you must file your taxes as such. A common-law relationship is defined as when two people live together in a conjugal relationship for 12 months or more, or if they have a child together.
If you file as "single" when you are in a common-law relationship, this is considered tax fraud and can lead to serious consequences, including financial penalties, interest on unpaid taxes, and even criminal charges. The Canada Revenue Agency (CRA) may impose significant fines for filing false or misleading tax returns. You may also be required to repay any overclaimed benefits or credits, with interest. In addition, the CRA may reassess your tax return, resulting in owing additional taxes.
The exact effects of filing as single when common-law depend on the area, but in general, you may face penalties for underpayment. Interest will be added to any taxes that are not paid, and you may have to pay more fines if you are found to have lied about your filing status. Furthermore, the IRS or local tax officials may conduct a tax audit, leading to additional costs and legal trouble.
To avoid these penalties, it is important to accurately declare your relationship status on your tax return. If you are uncertain about your legal standing, it is recommended to consult a qualified tax professional for guidance.
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How to change your filing status
In Canada, a common-law partnership is legally recognised as a relationship in which two individuals have been living together in a conjugal relationship for a continuous period of at least 12 months. However, the definition of a common-law relationship differs from province to province. For example, in BC, the threshold is two years unless a couple has a child together.
If you are in a common-law relationship, you must file as common law. Failing to indicate the correct marital status is considered tax fraud and can lead to significant penalties and complications with the Canada Revenue Agency (CRA).
If you are married or in a common-law relationship, you must note your status in the "information about you" section of your tax return. You will include information about your spouse, such as their name, social insurance number, net income, and employment status.
To change your filing status, you must first determine which tax filing status you are eligible for. You can change your tax filing status each year as long as you satisfy its specific eligibility requirements.
If you discover that you qualify for a different filing status than you ordinarily claim, you can amend your tax return for a better tax outcome if no more than three years have passed since the original tax filing deadline. For example, if you filed as a single taxpayer last year, but now realise you qualified for Head of Household, you need to make the change on an IRS Form 1040-X. You can also amend a return to change from Married Filing Separately to Married Filing Jointly, but not vice versa unless done prior to the original filing deadline without extensions.
To amend your return, you will need to submit Form 1040-X to the IRS. Form 1040-X will ask for the old and new calculations, as well as the difference between the two. You can prepare Form 1040-X using an online program, but you will have to print and mail it. The IRS does not allow you to e-file Form 1040-X. You should allow the IRS 8 to 12 weeks to process your amended return, but in some cases, processing could take up to 16 weeks.
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Frequently asked questions
When filing as single, you are considered a household for tax purposes. When filing as common law, you and your partner combine to become one household. This means that any benefit based on your household income may be reduced or lost.
Filing taxes as common law can offer income splitting and other benefits. Common-law spouses can combine medical expenses and donations and may receive larger combined tax savings than when filing as single individuals.
When filing as common law, both partners become equally liable for any tax debts, interest, or penalties incurred. If one partner has an outstanding tax obligation, it could affect the other partner's finances. Additionally, while some tax credits and deductions increase when filing as common law, others may decrease or become unavailable.
In Canada, a common-law partnership is legally recognized as a relationship in which two individuals have been living together in a conjugal relationship for a continuous period of at least 12 months. If you have a child together and live together, you are also considered common law.
