Tax season is here. You’ve been collecting your T4 employee tax slip, your registered retirement savings plan statement and getting ready to file. Tax season isn’t just about gathering receipts and crossing your fingers for a refund, it’s a financial check-in for everyone from businesses, singles, married couples and common-law couples.
If you’ve been living together for at least 12 continuous months or share a child by birth or adoption, you are considered a common-law couple under Canadian tax law. Nearly one-quarter of Canadian couples are in a common-law relationship, according to a 2022 Statistics Canada report. This relationship comes with certain tax implications, including being eligible for income-based tax benefits. Getting ahead of these details now can save you stress and maybe some money come filing time.
“When we’re talking about eligibility for certain tax credits and deductions, we treat (common-law relationships) like we would a marriage,” says Stefanie Ricchio, a chartered professional and certified general accountant and CEO of SRBC. “And (they are) able to optimize charitable donations and medical expenses.”
The tax system doesn’t allow spouses or common-law partners to file joint tax returns. Each person must file their own tax return, indicating their marital status on the return via checkbox on the form. The CRA expects you to tell it when you change your relationship status, whether you’re married, divorced, widowed, single or in a common-law relationship.
There are plenty of tax benefits to being in a common-law relationship, but some of the bigger ones include the spousal tax credit, pension splitting and contributing to your partner’s RRSP.
If your or your common-law partner’s net income is less than your personal basic amount, which is income below $15,705 for 2024, you could be eligible for a spousal credit, and that will lower your taxes. A spousal credit is a non-refundable tax credit you can claim if you’ve supported your common-law partner.
Another benefit is pension splitting. If a common-law couple is eligible, they can split 50 per cent of their pension income. This means that one person isn’t paying a higher tax on the full amount. Instead, each partner will pay a lower tax rate since it’s split.
Common-law RRSPs is another benefit. The higher-earning partner can contribute to their partner’s RRSP. This lowers their tax liability while building a retirement plan for their partner. Where it gets tricky, says Ricchio, is you could lose certain benefits you had when you were single.
“If it is found out after the fact (that you’re in a common-law relationship), you could find yourself in a position where, if you were receiving GST or HST credit reduction, and other benefits like the Canada child benefit, all of these things might have to be paid back, and I’ve seen it happen to people.”
She says that those benefits are calculated based on your adjusted family net income. The GST/HST credit reduction is given by the CRA to families who have incomes between $54,704 for single people to up to $72,244 for a couple with four children. If your income exceeds this, you lose this benefit.
“Those are benefits that are calculated based upon your adjusted family net income and that’s a learning for a lot of people because July comes and everyone starts to get those benefit payments for the brand-new fiscal,” she says. “Then they’re wondering, why am I not getting it anymore?”
Another tax consideration is the principal residence exemption, says Peter Pearson, an adviser with Sun Life. The principal residence exemption allows you to sell your primary home without paying taxes on the increase in value between when you bought it and when you sell it.
“If you’re a couple, you can only claim a principal residence exemption on one property collectively between the two of you,” he says. That means one person can’t claim the principal residence exemption on your house while your partner claims it on theirs.
But what if you decide to not let the CRA know you’re a common-law couple so you can keep your benefits? It happens, says Ricchio. She says people will get notifications from the CRA, asking them to confirm their marital or living status.
“And all of a sudden, you’ll have to say, ‘Oh, I actually do live with my common-law partner,’ and you open up this can of worms,” she says. “The CRA can ask you to prove, via bill payment and household money management, how long you’ve lived somewhere. They will ask you if you have financial dependencies on one another.” The couple involved will then have to prove that they aren’t living together.
That can have long-term effects on other benefits that aren’t part of filing your yearly taxes, but are affected by your tax returns. Ricchio said that a man who previously claimed a $15,000 eligible dependant credit for his child lost the credit after moving in with his girlfriend. The credit was dependent on him being single.
Other long-term financial effects of living common-law include inheritance after one partner dies. Common-law partners usually don’t have an automatic right to property and assets after a relationship ends or when a partner dies. If there’s no will, meaning the partner dies intestate, Ontario’s guidelines dictate that blood relations such children, ex-spouses and parents will inherit instead of the surviving partner. Ricchio says a common-law couple should have current, up-to-date wills that clearly state beneficiaries.
When it comes to being in a relationship, “the tax benefits of being in a relationship versus being single are pretty minimal,” Pearson says. “The real advantage comes later, in retirement, when income splitting becomes an option. That’s when being in a relationship can have a significant impact on your taxes.”
