Filing Taxes as a Common Law Spouse in Canada
Common law marriages, also known as adult interdependent partnerships, carry some benefits. They offer the same marriage benefits such as healthcare and hospitalization benefits, immigration benefits, access to records, inheritance rights, and the same division of property and potential spousal support rights that a traditionally married couples receive.
They also get a fair number of tax deductions and exemptions. These are worth enough that the CRA requires you to file changes to your marital status on a separate form. You should be reporting that you have entered a common law partnership. If you leave it, you must report the separation.
What makes you common law for tax purposes?
What makes you common law for the purposes of most benefits is cohabitating with someone with whom you are in a romantic relationship. The period of time that it takes to be recognized as common law do vary from province to province. Some allow you or require you to register the partnership, others don’t.
Federal taxes set a uniform guideline. For tax purposes, a common law spouse is one who has been living with you for at least 12 continuous months, including any period in which you were separated for less than 90 days, or is the parent of your child by birth or adoption, or has majority parenting time rights and decision-making responsibility and thus your child depends on that person for support.
How should you file your tax return?
You should file separately, but indicate you’re in a common law relationship. You include your partner’s name, social insurance number, and net income on your return, even if that income is zero. The CRA will compare the same returns from the same address.
Your total household benefit will be used to determine your eligibility for certain tax credits. For example, you may be eligible for the $5000 home buyer’s tax credit. If you supported your partner financially, you may be able to claim your provincial and federal spouse tax credit.
You can notify the CRA of changes in the following ways:
- Using MyAccount
- Calling 1-800-387-1193
- Sending in Form RC65
Keep in mind that if you were not in a common law relationship by December 31st of the year you are filing for then you would still file single that year, then transition to filing as part of a common law couple next year.
See also: Filing Taxes When Separated. Spouses who separate cannot claim mortgage interest or property taxes separately. They also may not deduct them as individual expenses. They can, however, split medical expenses with a joint account. They can also use the “Married Filing Separately” option to make sure that they are only responsible for their own tax return and liabilities.
What is the penalty for filing single when common law in Canada?
At best, you could trigger an audit, and the CRA could send you a big adjustment bill. Those tax credits and deductions add up. You can even transfer tax credits you can’t use to your partner, such as the disability tax credit or the age credit.
There are some benefits that single people get that common law partners do not, such as the GST/HST credit because your household income is now too high. Some you can lose depending on how the taxes are filed, such as dependent credit, as only one of you may claim the child.
In addition to being reassessed, you may have to pay additional interest and penalties. You may be denied CPP benefits, or other pension survivor benefits, if it is determined that you filed your tax return fraudulently. You may even face criminal charges.
What happens when you separate?
When you’re separated you file the status with the CRA. Once you have a formal separation agreement in place you will begin filing as a single person again. If you have not formally separated then you may have to wait a whole year before the CRA will see you as single.
Consult With an Accountant
If you are entering or leaving a common law partnership it may be best to consult with an accountant before you file your taxes.
This can keep you from misunderstanding something on the form or being accused of fraud for making an honest mistake. It will also let you maximize credits and refunds that may be available to you while helping you minimize penalties.
In addition, certain separation agreements could generate new tax liabilities or deductions. For example, if you receive spousal support you must claim it as income. If you pay spousal support you can claim it as a deduction.
Consult With a Full-Service Law Firm
Entering a common law partnership is really entering a business relationship, and taxes aren’t the only part of your income that will be effected.
We encourage you to come to us for a cohabitation agreement that will protect your interests in the event that the relationship comes to an end. In addition, we encourage you to come to us to get help with a formal separation agreement when the time comes.
Because we are a full service law firm, we can help steer you away from major tax troubles. We can also help you with other aspects of your case, such as taking steps to protect your business or your intellectual property. We have a solid grounding in business law, real estate law, and tax law that might touch on your case.
We’re well versed in the tax consequences of dividing up retirement accounts, investment accounts, real property, and stocks as well. We work hard to help you retain the value of your assets while retaining as much after-tax income as possible.
We’ve helped hundreds of clients just like you navigate the major issues caused by family law issues.
We help clients in British Columbia, Alberta, Saskatchewan, and Manitoba.