Differing property rights across jurisdictions and province’s recent legislative update are just some considerations
Yesterday was Spouses Day, a day when committed couples celebrate each other with acts of love, appreciation, and affection. It’s an equal-opportunity holiday, observed by both married couples and common-law partners; love, after all, should be simple and universal.
But when it comes to tax planning in Canada, being in a common-law relationship can be quite complicated, and it all starts with determining when it actually counts from a legal perspective.
“The definition of ‘common-law partners’ under the Income Tax Act is basically couples who’ve lived together in a conjugal relationship for at least 12 continuous months,” said Christine Van Cauwenberghe, Vice President, Tax & Estate Planning at IG Wealth. “It can be shorter if they’re raising a child together.”
Shared parenthood is just one of several factors that might be examined federally when determining common-law status. Cohabitation, whether a couple prepares meals together, and how much time they spend together in public as a couple can be considered important indicators; the perceptions of friends and family, along with evidence showing financial co-dependence, can also be crucial.
“The factors to determine common-law relationships are the same across the country, as well as the federal income tax factors,” Van Cauwenberghe said.
As Van Cauwenberghe observed, common-law partners may be under the assumption that with respect to filing their tax returns, whether or not they designate themselves as common-law is optional. In reality, they must file their taxes accurately and indicate their relationship clearly.
She noted that having common-law status comes with some benefits. Like married partners, common-law spouses can open and contribute to spousal RRSPs; they may be able to transfer certain personal tax credits back and forth, as well as transfer certain assets to each other without triggering capital gains. Older Canadians in common-law relationships would also appreciate the opportunity to start splitting pension income.
“There are also some potential negative implications,” Van Cauwenberghe said. “If one partner was claiming the eligible dependent credit in respect of a minor child that they were supporting, being in a common-law relationship will eliminate that eligibility. Also, instead of each having one principal residence exemption, they'll now have one principal residence exemption as a family unit. And their income will also be pooled when determining their eligibility for certain social assistance entitlements, such as guaranteed income supplement, GST credits, and child benefits.”
The financial-planning picture for common-law couples gets muddier once they consider provincial statutes with respect to property rights. She cited new legislation in Alberta that just took effect on January 1, which now allows people who have lived together in a “relationship of interdependence” continuously for at least three years to claim a share of family assets as married couples can.
“Just to contrast, in most of Eastern Canada, it doesn’t really matter how long you’ve lived together,” Van Cauwenberghe said. “You won’t necessarily have rights to property equivalent to a married couple at the time of separation or death.”
Those differences can have very real and devastating consequences for partners who are just doing tax planning in a silo. She pointed to the example of a couple who live in a province which does not grant common-law couples the ability to apply for a division of property. One high-income partner may want to deposit money in their partner’s spousal RRSP in an effort to reap tax benefits, only to have the plan backfire later.
“They may live in a province where they're not allowed to divide any assets,” Van Cauwenberghe explained. “When they separate, they may not ever get any part of that spousal RRSP because it's in the name of their spouse.”
Learn the disadvantages of the Spousal RRSP in this article.
The bottom line for common-law partners, she emphasized, is that they should have a clear understanding of what their legal rights may or may not be. Since rights and entitlements can differ between jurisdictions, couples that live or have property in different places should be especially careful and not take anything for granted.
“Having common-law status can definitely be a double-edged sword,” Van Cauwenberghe said. “Whatever tax consequences that would flow to a married couple will also flow to you, so it’s important for common-law spouses to see an advisor and make sure they have everything structured properly.”
