With common-law relationships on the rise in Canada, here’s what you need to know about tax rules for filing your tax return as a common-law partnership.
The number of common-law relationships in Canada has grown substantially over the past 40 years, with nearly one-quarter of couples now living in common-law relationships. According to Statistics Canada, common-law relationships across Canada are most prevalent among young couples ages 20-24 (79%); in Nunavut (52%), Quebec (43%) and NWT (36%).
With common-law relationships on the rise, this article explores what you need to know about the tax rules for common-law partners and how they differ from those who file as single or married.
The Government of Canada defines common-law marriage as living in a conjugal relationship with a person who is not your married spouse. In addition, at least one of the following conditions applies:
Note that what’s defined as a common-law relationship varies from province to province, but for the purpose of this article, we’ll use the common-law definition listed under the federal Income Tax Act.
No; if you meet the definition of a common-law couple then the CRA considers you married for tax purposes. The key factors are: how long you’ve lived together and whether you have children together.
Canadians file their own individual tax returns. If you’re living with a partner and do not meet the CRA’s definition of common-law, simply continue to file your tax return as a single person. But if you meet the definition of common-law marriage, you must indicate your relationship status and information about your partner (name, Social Insurance Number, net income) on your tax return.
What are the pros and cons of filing taxes as common-law partners?
As with married couples, common-law partners will have access to certain tax benefits, credits and deductions by nature of their relationship status. That means that you’ll be permitted to:
Common-law partners may also transfer unused tax credits to their partner to reduce their household tax rate. These include post-secondary education credits, the Disability Tax Credit, the age credit (for those 65 years and older), and pension income amounts.
There are disadvantages to filing as common-law versus filing as a single person. The most obvious example is that CRA combines your family income to determine eligibility for benefits such as the GST/HST credit, the Canada Child Benefit, the eligible dependant credit and the Guaranteed Income Supplement and Allowance.
According to the federal definition of common-law marriage, you are still considered to be common-law even if you were separated for less than 90 days (within a period of 12 consecutive months) because of a breakdown in the relationship.
Only when you’ve been living apart for 90 days are you considered to be separated. Note that once the 90-day separation threshold has been reached, the “effective” date of your separated status begins the day you started living apart.
You should then notify the CRA of your relationship status through My Account for Individuals online. This may impact your benefits due or payments owed.
What are the risks of filing taxes as a single when you are in a common-law relationship?
Some Canadians may not realize they are considered to be living as common-law for tax reasons. And some common-law partners may lie about their relationship status to maintain certain benefits.
It’s against the law to lie on your income tax return, including about your relationship status. You run the risk of being reassessed and paying interest and penalties on unpaid taxes. You also risk being denied CPP and other pension survivor benefits.
Remember that the tax rules are the same for common-law partners and married couples. While there are pros and cons to filing taxes as a common-law couple versus filing as a single person, if you meet the definition of a common-law relationship in Canada you must disclose your relationship status and information about your partner when you file your tax return.
According to Statistics Canada, it’s 447% more common (pun intended!) to live in a common-law relationship today than it was in 1981. Indeed, you might be considered common-law by CRA and not even know it.
That’s why it’s important to understand how your relationship status affects your taxes. In Canada, if you meet the definition of common-law, you must disclose that on your tax return. You are also considered married for tax purposes, so file accordingly.
Your MD Advisor* can help you create a financial plan for you and your common-law partner that keeps you both moving forward.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.