How becoming common-law or getting hitched changes tax-filing season

Source: The Canadian Press

As more Canadians enter common-law relationships, experts are encouraging young couples to educate themselves on the tax implications. 

“There are credits that you may be used to getting, if you're a single person,” said Stefanie Ricchio, a Toronto-based CPA. 

“There is a little element of surprise.”  

In 2021, more than one in five Canadian couples were common-law, meaning they lived together in an official, legal union without being legally married. 

That’s a 447 per cent growth in common-law couples since 40 years earlier, according to Statistics Canada, though married couples still make up the bulk of Canadian couples. 

It’s younger Canadians driving this trend, with almost eight in 10 coupled-up Canadians aged 20 to 24 living with a common-law partner. 

“It’s so much more common now,” Ricchio said, adding that she thinks young Canadians are moving in quicker than they might have in previous years in part because of the rising cost of living.

A couple is considered common-law after living together for 12 months, and by law must tell the CRA about the status change and file their individual taxes as common-law, said Gabriel Lalonde, a certified financial planner.  If you have a child together and live together, you become common-law, he added. 

For tax purposes, common-law and married are the same, said Jamin Monte, CPA. 

When you’re single, you’re considered a household for tax purposes. But when you partner up, tax-wise, you combine to become one household. That means any benefit based on your household income, such as the GST/HST credit or the Canada child benefit, may no longer be coming your way, or you’ll be getting a smaller amount, said Lalonde. 

Though you’ll lose some tax benefits when two incomes become one, you’ll also gain some perks, though many apply to the later stages of life, said Ricchio. 

For example, you can do pension income splitting, she said. As well, if one spouse earns significantly less, the other may be able to claim them as a dependent. 

Couples can also transfer certain credits between spouses, said Ricchio. 

Medical expenses can be allocated to the higher-income partner to help alleviate tax burdens, said Lalonde. 

In addition, there are other personal finance benefits not directly related to your income tax filing, Ricchio said, such as the general perk of being able to combine your expenses, as well as more borrowing ability for things like mortgages. 

Two people can use the First Time Home Buyers Plan on a home together if eligible, said Lalonde. There’s also the Lifelong Learning Plan, he said, which allows people to withdraw from their RRSPs to pay for training or education, either for themself or their spouse.

Twelve months goes by quickly, said Ricchio, and it’s not uncommon for someone to realize they’ve been filing as a singleton for a year or more when they were actually common-law. 

“That is a fraudulent return if you're misrepresenting your status,” said Monte. 

If that happens, it’s not difficult to change your status with the CRA, she said, and you can do it online, over the phone or by mailing in a form. 

But what might be harder is what comes next.

While you don’t need to re-file your taxes, the CRA will reassess both taxpayers’ filings for the years they were common-law, said Monte, and you should expect some kind of clawback. 

“You're likely to be receiving a bill from the CRA asking you to pay back for overpayments that were made to you,” said Ricchio, adding this could include penalties or interest. 

The CRA does have options for repayment plans, according to its website, but it can also take from your tax benefits or credits to help pay down any debt. If the debt is a significant burden on your finances, Ricchio noted the CRA also allows taxpayers to submit requests for relief, though it can take time to receive a decision so she recommends paying the debt if possible even if you’re applying for relief. 

It can be helpful to work with an accountant or financial planner every few years to make sure you’re not missing any possible benefits or transfers, said Lalonde, especially when you’re making a big life change such as changing your marital status. 

“When there's a big milestone, like getting married, you know, why not ... make sure that you're getting all these credits and donations that you're entitled to?”

Married or common-law partners still have to file individual tax returns, not a single return, said Lalonde — a common misconception he’s noticed among taxpayers. 

Another misconception is around income-splitting, said Monte. While you can do income-splitting with pension income, you can’t do it with employment income, she said. 

“There are always, of course, ways that you can be strategic with your tax filing,” she said. 

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