Gavin Howe
In Canada, common-law couples are not allowed to file joint tax returns. Each individual must file their own tax return, indicating their marital status and providing details of their spouse or common-law partner. This includes the partner's name, social insurance number, net income, and employment status. Common-law partners must have lived together for at least 12 months or have a child together. While filing as common-law can provide benefits such as income splitting and combining medical expenses, there may also be disadvantages, including the loss of certain tax credits and deductions. Incorrect filing, such as failing to disclose a common-law partnership, can result in penalties and legal consequences. Therefore, it is essential for Canadians in common-law relationships to understand the tax implications and accurately report their marital status when filing their taxes.
| Characteristics | Values |
|---|---|
| Common-law definition | 2 people live together in a conjugal relationship for 12 months, or immediately if they have a child together |
| Common-law tax filing | Individuals must file taxes individually, but indicate their common-law status and their partner's income and social insurance number |
| Common-law benefits | Income splitting, combining charitable donations and medical expenses, transferring tax credits, combining expenses for greater borrowing ability |
| Common-law disadvantages | Loss of certain credits, such as the GST/HST credit, Canada Child Benefit, Guaranteed Income Supplement, and Working Income Tax Benefit |
| Failure to indicate common-law status | Considered tax fraud, with possible reassessment for unpaid taxes and penalties, and denial of benefits |
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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 been living together in a conjugal relationship for a continuous period of at least 12 months. Alternatively, if a couple has a child together, they are immediately considered to be in a common-law relationship. It is important to note that the definition of a common-law relationship differs from province to province, as family law falls under provincial laws.
When filing taxes, individuals in a common-law relationship must indicate their marital status and include their partner's income and social insurance number. While common-law partners file their taxes individually, there are specific considerations and implications to take into account. For example, filing as common-law may impact eligibility for certain tax credits and deductions, such as the GST/HST credit, Canada Child Benefit, and Guaranteed Income Supplement. Additionally, there may be benefits to filing as common-law, such as income splitting and combining medical expenses and charitable donations.
It is important to understand the advantages and disadvantages of filing taxes as a common-law partnership to ensure accurate and compliant tax filings. Incorrect filing, such as choosing to file as a single individual when in a common-law relationship, can lead to significant penalties and legal consequences. Therefore, it is recommended to seek advice from tax professionals or utilise resources provided by the Canada Revenue Agency (CRA).
To update your marital status with the CRA, you can use the "Change my marital status" service in your online account, select "Marital status" in the MyBenefits CRA or MyCRA mobile apps, call their hotline, or send a completed Form RC65. It is important to note that you must update your records by the end of the month following any changes to your marital status.
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Individual tax returns
In Canada, each individual must file their own tax return, regardless of their marital status or whether they are in a common-law relationship.
If you are in a common-law relationship, it is important to indicate this on your tax return. A common-law relationship is defined as when two people live together in a conjugal relationship for 12 months, or immediately if they have a child together. If you have lived together for less than 12 months, the Canada Revenue Agency (CRA) may still consider you common-law partners if you share a child or if one of you supports the other one's child.
When filing your tax return, you must include your partner's name, social insurance number (SIN), net income, and employment status. You should also report any credits or deductions your partner claims, such as the Canada Child Benefit (CCB) or the Goods and Services Tax/Harmonized Sales Tax (GST/HST) credit.
By filing as a common-law couple, you may benefit from combining charitable donations and medical expenses. However, there may also be disadvantages, such as no longer being eligible for certain tax credits, including the GST/HST credit, Canada Child Benefit, and the Working Income Tax Benefit.
It is important to update your relationship status with the CRA as soon as it changes to ensure your tax benefits and obligations are correctly calculated. If you fail to do so, there may be penalties, such as having to repay any benefits received that you were not entitled to due to your change in status.
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Loss of certain credits
When filing taxes in Canada, common-law partners must file their individual tax returns and indicate their common-law status. While there are advantages to this, such as income splitting and combining deductions and credits, there are also some disadvantages, including the loss of certain credits.
When filing as common-law, you may no longer be eligible for certain tax credits that are available to single individuals. These include the GST/HST credit, the Canada Child Benefit (CCB), the Guaranteed Income Supplement, and the Working Income Tax Benefit. A higher combined income may also reduce eligibility for certain income-tested benefits.
Additionally, you will only be able to claim one exemption from capital gains on your primary residence. Provincial tax credits may also be affected by your marital status.
It is important to note that the definition of a common-law relationship may vary across different provinces in Canada, so be sure to check the specific regulations in your province.
Other Considerations
When filing as common-law, you must include information about your spouse, such as their name, social insurance number (SIN), net income, and employment status. You will also need to report any credits they claim, such as the CCB or GST/HST, and any payments they owe.
It is crucial to understand the tax implications of your relationship status and seek professional advice if needed. Incorrect filing can lead to significant penalties and even legal consequences.
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Tax fraud implications
In Canada, common-law partners are required to file their taxes individually, indicating their marital status and including their partner's income and social insurance number. While this can offer benefits such as income splitting, there are also disadvantages, including the loss of certain credits and deductions. Choosing not to file as a common-law partner when your relationship meets the government's definition can lead to significant penalties and complications with the CRA.
If you knowingly provide false information on your tax return, you may be found guilty of tax fraud. Examples of this include filing a false tax return, destroying financial records, or falsely claiming to live in a certain province. Tax fraud is considered a serious offence in Canada, with penalties reaching up to 200% of the amount defrauded and up to 14 years in prison. The CRA's Criminal Investigations Program investigates significant cases of tax fraud and can refer cases to the PPSC for prosecution. During the prosecution stage, the Crown must prove that the taxpayer wilfully contravened Canadian tax laws to secure a conviction. While tax cheats in Canada are rarely jailed, those convicted of tax fraud may face court-ordered fines and/or imprisonment.
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Benefits and repayment plans
There are several benefits to filing as a common-law couple in Canada, but it is important to note that there are also some drawbacks that could negatively impact your tax return.
One of the biggest benefits of filing as a common-law is the ability to transfer unused tax credits from one partner to another. For instance, if one spouse has no taxable income, the other spouse can transfer any tax credits they do not use to them, including the Disability Tax Credit, any pension income payment amounts, age credit for those over 65, and post-secondary education credits. This can result in lower overall taxes and increased benefits for the couple.
Another advantage is the ability to combine credits and expenses. Couples can pool certain expenses, such as charitable donations and medical expenses, and have one spouse claim the total, achieving significant savings. Similarly, if one spouse has eligible pension income, they can split the pension income, which may lead to a lower bottom line for the couple.
Additionally, filing as a common-law couple can help lower the total household tax bill by shifting income into a lower tax bracket. For example, if one spouse has a significantly lower income, the other spouse can gain tax credits by claiming them as a dependent.
However, it is important to note that filing as a common-law couple can also reduce eligibility for certain benefits and credits that are based on individual income rather than household income. This includes the GST/HST credit, the Canada Child Benefit (CCB), the Working Income Tax Benefit, and the eligible dependant credit.
Failing to report your common-law status properly can have both financial and legal consequences. If the CRA notices an issue, you may face reassessments of past tax returns and be required to repay any benefits received that you were not entitled to, along with interest charges and penalties. Therefore, it is important to accurately report your marital status when filing your tax return, even if you do not feel like you are living common-law.
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Frequently asked questions
A common-law relationship in Canada is when two individuals have been living together in a conjugal relationship for a continuous period of at least 12 months. Alternatively, if the couple has a child together, they immediately become a common-law relationship.
In Canada, each individual must file their own tax return. On these returns, you must indicate your marital status and include your partner's name, social insurance number, net income, and employment status.
One benefit is income splitting, where each individual may be able to pay a lower tax rate by reducing their individual incomes. Another benefit is the ability to combine charitable donations and medical expenses.
You may no longer be eligible for certain tax credits, including the GST/HST credit, Canada Child Benefit, Guaranteed Income Supplement, and Working Income Tax Benefit. You will also only be able to claim one exemption from capital gains on your primary residence.
If you are in a common-law relationship and do not indicate this on your tax return, you may be found guilty of tax fraud. This can result in consequences such as being reassessed for unpaid taxes (including interest and penalties) or being denied CPP benefits or other pension or survivor benefits in the future.
