There's going to be a wedding in our family. That's right, my sister will be tying the knot in August. When Laurie first announced her engagement, everyone in the family was excited – my mother especially. "I think you should have the rehearsal dinner someplace really palatial, with five courses and dancing afterwards; then breakfast the next morning for people from out of town – and I think you should hire that amazing band that your cousin had at her wedding a couple of years ago," my mother said.
My father saw where this was going and said, "I'll give you five thousand bucks to elope."
Turns out my sister can't be bribed. A wedding it will be. I told Jim, my sister's fiancé, that life will change big-time when he's married. "Jim, I know you don't realize it, but you and Laurie are using different names for her cat; you'll need to start paying more attention to stuff once you're married," I said. "And one more thing: You'll want to learn about the tax implications of getting married." I then shared with him a few tips. Here's a primer on the pros and cons of having a spouse under our tax law.
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The definition
First, you should know that you don't have to be legally married to have a "spouse" under our tax law – although marriage will do the trick. In fact, if you've been living with someone in a conjugal relationship for 12 months or more – same sex or not – then you'll be considered spouses for tax purposes. You can ignore the 12-month requirement if you're living together and you're both parents of the same child. If you meet these tests, you have no choice but to be considered spouses by the taxman.
The pros
Having a spouse does comes with benefits – such as the ability to receive breakfast in bed (although in my case this requires sleeping in the kitchen). But there are tax benefits as well, including:
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- Tax-free rollovers. When you pass away, you’ll be deemed to have sold virtually everything you own, which can give rise to taxes on capital gains. Leave those assets to your spouse and taxes will be deferred until your spouse dies, or sells the assets.
- Splitting pension income. If you receive eligible pension income, you can transfer up to one half of that income to your spouse. You’ll both be able to claim the pension credit and tax savings can be significant.
- Claiming a spousal credit. If your spouse has income below $11,635 in 2017 then you’ll benefit from claiming the spousal credit, which could save you as much as $1,745 in federal taxes.
- Transferring tax credits. If your income is too low to benefit from certain tax credits, it’s possible to transfer some to your spouse, including the age, pension, caregiver, disability, tuition (up to $5,000), education and textbook tax credits (the last two disappear after 2016).
- Minimizing RRIF withdrawals. You can minimize the taxable minimum withdrawals from your registered retirement income fund by basing your withdrawals on the age of the younger spouse.
- Transferring dividends. You can elect to transfer all your Canadian dividends to your lower income spouse if this will increase your spousal credit (see above). You could pay less tax as a couple.
- Using spousal RRSPs. You can split income in retirement and save tax dollars by contributing to a registered retirement savings plan for your spouse. In a perfect world, you and your spouse should have equal incomes in retirement. This idea can help.
The cons
Having a spouse can also come with tax drawbacks. Consider these:
- Paying your spouse’s taxes. If your spouse owes tax to the Canada Revenue Agency, you could be on the hook for all or part of those taxes if your spouse has ever given you money or other assets while being indebted to the taxman.
- One principal residence exemption. Before becoming spouses, each of you would have been entitled to your own principal residence exemption, which can enable you to sell your home tax-free. As spouses, you can only claim one residence together.
- Superficial losses can arise. If you sell an asset for a loss and purchase the same or identical asset in the 30 days following, or prior to, your sale, your loss can be denied. The rule will also apply if your spouse (or anyone affiliated with you) makes that repurchase.
- Reduced benefits. Certain benefits can be reduced when family income reaches a certain level. If you have a spouse, you might hit that income threshold sooner, causing loss of benefits, such as the GST/HST credit, and certain provincial credits.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and founder of WaterStreet Family Offices.