Couple at home, cooking togehter
Shannon Lee Simmons is a financial planner in Toronto who works with millennials to get their finances on the right track.
So, you and your significant other have moved in together. You split the rent, share groceries and take turns walking the dog. Everything is going well and then all of a sudden, someone – maybe an accountant or parent – tells you that you need to file taxes together. Suddenly, you feel like a deer in headlights.
Many young Canadians who live together might not know that filing together is the taxman's way of letting you know that you and your partner are officially "going steady." If you've shared a home address for 12 straight months or have a child together, you are considered common law from a tax perspective and have to prepare your taxes together. (One thing to note is that even though you "file together," you still file your own individual return. Click here for Canada Revenue Agency's definition of marital status.)
You may have heard horror stories about joint tax filing, or perhaps have no idea where to start, but it's not all bad or tricky.
There are certainly pros to filing taxes with your love. The biggest bonus is that you get to share tax credits. Unlike a tax deduction, which lowers your income and saves you tax based on your income and marginal tax bracket, a tax credit helps to reduce the amount of tax you owe.
In Canada, federal personal tax credits are typically calculated as 15 per cent of qualifying amounts. If you had $100 of qualifying expenses, this would get you a $15 reduction in taxes otherwise owing. The more qualifying expenses you have, the larger the reduction in taxes. This happens regardless of your income level or marginal tax bracket.
Pooling together receipts can help your household reduce taxes because there are likely more qualifying expenses. It's important to stop thinking about your taxes as "my refund" and "your refund." Instead think of it as the "household refund" or the "household taxes owing."
Receipts that couples can combine or pool include charitable donations, public transit, medical expenses and tuition credits. I'll run through these below.
1.) Charitable Donations
The first $200 of charitable donations qualifies for a 15 per cent tax credit. Every dollar above $200 gets a 29-per-cent credit. If you donated $190 and your partner $100, the household dollar amount goes over $200 so that the additional $90 over $200 now reduces taxes owing by 29 per cent vs. 15 per cent. Alone: partner 1 reduces by $28.50 and partner two reduces taxes owing by $15 for a total of $43.50. Combining is a total tax reduction of $56.10. That's a household win.
2.) Transit passes
Do you and your significant other both take public transit? If you both have qualifying monthly passes, you can pool them together and the household gets a bigger return. That's a household win.
3) Medical Expenses
In order for anyone to qualify, total medical expenses have to add up to more than 3 per cent of your net income - or $2,208 - whichever is lower. Pooling is very helpful here since the lower-income spouse can claim the total household medial expenses and, therefore, more of them are likely to qualify. That's a household win.
4) School
Is your spouse in school? Sweet. Your student spouse can transfer up to $5,000 of unused tuition credits over to you (potentially the higher earning spouse) to help lower the household tax burden! That's a household win.
You may by now be wondering why people aren't always super pumped about filing together. That's because it's not all good news. The three cons are you may not qualify for the GST/HST rebate any more, your government student loan repayments may increase and breaking up will now involve paperwork.
1.) GST/HST rebate
The GST/HST rebate is a tax-free quarterly payment paid to individuals over 19 years of age and/or families to offset GST/HST paid throughout the year. In order to qualify, your individual or household net income must be under a certain threshold. To find out if you or your family net income would qualify, see here.
If either partner has been receiving this rebate as a "non married" individual, claiming together may render you ineligible to collect GST/HST rebate going forward since the household net income may have gone up as a "married" couple. It depends on how much income your partner makes. The more your partner makes, the more likely the household net income won't qualify.
In addition, only one partner can receive the credit. It doesn't matter who gets it, the amount of money is the same.
2) Government student loans
If you have recently finished school, you might still be making payments on a government student loan. Often the payment amount or interest-relief qualifications are based on gross monthly family income. If either partner has been on interest relief, you may no longer qualify, or your payment amount may go up.
3) Breaking up
Akwardville, population: you. Yes, you have to break up in person and then again on paper. This means you may have to talk to your ex to sort things out in the year you formally break up on your taxes.
You should notify the CRA when your martial status changes – either moving in together or moving out. Don't wait for tax season. You can do this by sending in an RC65 Form Change of Marital Status at any point throughout the year, or updating it online on CRA's My Account.
Logistics
As I mentioned before, in Canada people do not file joint tax returns. Instead, the returns are coupled together during preparation and filing. You just have to put your partner's name, social insurance number and their net income (line 236) on your personal tax return.
If you and your partner have been living together for a year and you don't file together, you may be in some trouble if you get caught. You will likely be reassessed, may owe some back taxes and even penalties or interest.
It might not be the sexiest thing you've ever done together, but trust me, tackling tax season as a couple could add up to a big financial household win.