A couple we know are having some marriage problems. To improve their marriage, they talked about doing more things together, so they agreed that exercising would be good for them. “How’s that going?” I asked the wife. “Well, if jumping to conclusions, stretching the truth and running up bills can be called exercise, then everything is fine,” she said to me.
As if marriage isn’t hard enough, the taxman may not help. Last week, I shared some of the tax benefits of having a spouse. This week, I want to share some of the tax challenges. You may recall that both married spouses and common-law partners (CLPs) are treated the same under our tax law. Let me first make a few comments about who is a CLP.
Two individuals are CLPs if they have been living together in a conjugal relationship 12 continuous months or longer. What, exactly, is a conjugal relationship? The answer to this question matters, because it can affect which tax rules will apply to you. There is no shortage of folks who try to gain tax advantages by claiming to be CLPs – or not – as it suits their tax situation.
There are certain factors that have been established by the courts to be relevant in determining whether you’re a CLP. These factors get very personal, as you’ll see, but if the taxman has concerns about your status, a discussion about some of these factors with the taxman is a very real possibility.
Shelter: Do you live under the same roof? What are the sleeping arrangements? Does anyone else occupy the dwelling?
Personal behaviour: Do you have sexual relations? Do you maintain an attitude of fidelity to each other? Do you communicate on a personal level, eat together, assist each other during problems or illness, and buy gifts for each other on special occasions?
Services: What is your conduct in relation to preparation of meals, washing clothes, shopping, household maintenance and other domestic tasks?
Social: Do you participate together or separately in neighbourhood or community activities? What is your relationship and conduct with members of your respective families?
Societal: What is the attitude and conduct of the community toward each of you as a couple?
Economics: What are the financial arrangements between you regarding payment for the necessities of life (food, clothing, shelter, etc.)? What are the arrangements around the acquisition and ownership of property?
Children: What is your attitude and conduct regarding any children?
In reality, the above factors may be present in varying degrees. Not all of these need to be present for a relationship to be considered conjugal, and for you to be considered a CLP by the taxman.
If you’re a married spouse or a CLP, here are a few rules in our tax law that may leave you worse off from a tax perspective:
Principal residence exemption: Sorry, but there’s only one exemption allowed per family unit, which includes you, your spouse or CLP, or any unmarried children under age 18. Single adult folks are entitled to their own exemptions.
Private company rules: If you own a private company, having a spouse or CLP who also owns their own corporation could result in the companies being associated if either of you also owns 25 per cent or more of the other’s corporation. Associated corporations have to share the $500,000 small business limit normally available to reduce the tax rate on the first $500,000 of active business income. Further, if you receive dividends, interest or benefits from a corporation in which your spouse or CLP has a significant interest (more than 10 per cent) or is actively engaged, the income could be taxed at the highest rate under the “tax on split income” rules. Next, if you’re working for a business that your spouse or CLP controls, your earnings may not be insurable, which means you may not be able to make employment insurance claims. Finally, if your corporation does business with another corporation in which your spouse or CLP has an ownership interest, the earnings from the inter-corporate revenues may not be eligible for the small-business deduction.
Canada Child Benefit (CCB): This benefit is available to Canadian families with children, but is reduced by adjusted family net income, and so could be reduced if you have a spouse or CLP who earns income.
Child-care expenses: Generally, these expenses must be claimed on the tax return of the lower-income spouse or CLP, which can reduce the benefit of the deduction.
Home Buyer’s Plan: As a first-time home buyer, you may not qualify to make withdrawals from your registered retirement savings plan (RRSP) under the Home Buyer’s Plan if your spouse or CLP has owned a home, in which you lived, in the four preceding years.
Guaranteed Income Supplement (GIS): The benefit could be paid to you if your income is low. The GIS, however, is reduced by family income, and the benefit per person is less for couples than for a single person.
GST/HST credit: This credit is lower for spouses and CLPs combined than for two single individuals.
Social assistance payments: These assistance payments are included in the income of the higher income spouse, resulting in more tax, and could affect income-tested benefits.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at firstname.lastname@example.org.