Taxation and filing tax returns can be confusing. You might even find it dull. And then, just when you get the hang of it, you get married or commit to a common-law relationship, and find yourself back at square one.
In this article, we’re going to talk about the tax benefits for married couples in Canada. We hope to provide the information you need so that you can dispel any doubts or uncertainties you may have well in advance of making your first tax return.
The Canada Revenue Agency (CRA) has in place certain rules that apply to Canadians who are married or are common-law spouses when they file their personal income tax returns.
For tax purposes, a spouse includes legally married people as well as people in de facto relationships if they have been living together for twelve months or more. If you are both parents of the same child, then the twelve-month requirement falls away and you can declare yourselves as spouses. The CRA definition of spouses includes same-sex couples – whether legally married or in a common-law relationship.
If you fall into any of these categories, then you have no choice but to declare the fact that you have a spouse when you file your tax return.
Canadian spouses do not file their personal income tax returns jointly, as is the case in other countries, including the United States. Each individual files their own tax return. On the tax return itself, the individual is bound by law to indicate their marital status and to state the name of their spouse.
Here’s the important part: Failure to indicate your correct marital status is tax fraud. In other words, if you are married or in a common-law relationship, you must declare this and the correct details pertaining to your spouse on your tax return.
Conversely, if you have received benefits to which you are not entitled because you filed an incorrect marital status, then you will have to pay that money back with penalty and interest. Remember that the CRA already has your true marital status on record. Their records reflect not only the deductions and credits you normally apply for but information from other sources that relate to you.
Even though you file separate tax returns, you still have to register your marriage or common-law relationship with the CRA. This is known as “filing as married”. You need to do this if you were in a common-law relationship or if you were married in the tax year for which you are submitting a return.
In the “Information about you” section of the tax return form, you need to note your marital status. You also have to provide information about your spouse’s name, social insurance number, employment status, and net income.
If you use the (free) tax preparation software, you might have an option to enter a “coupled tax return”. All this means is that you enter the information about your spouse and yourself together, but once you have completed your return, you have to file separately.
By filing a “coupled” return, the software generates two separate tax returns, but it maximizes your tax benefits as a couple. Note that you have to report whether your spouse claims credits such as GST/HST or CCB as well as any payments they owe. This would include repayments under the Lifelong Learning Plan (LLP), for example.
Using the TurboTax software will help you avoid the common errors couples make when filing returns as married or common-law. Be aware that if you file incorrectly, the CRA may reassess your returns. If, as a result of that assessment, you owe additional taxes, you might also have to pay interest and penalties on those amounts owing.
Many people stress out about their tax returns. But there really is no need to if you prepare yourself by learning about your options well in advance of the tax return deadline.
Filing taxes in Canada is almost a pleasure since the CRA website is clear and easy to read. And, of course, you have the added motivation of finding out just how many tax credits you are eligible for as a couple.
As a couple, you will definitely make significant tax savings by adopting a "benefits strategy" and taking advantage of the transfers you can make in each of the income categories and tax credit categories.
One essential thing to remember about taxes after getting married is that you can reduce the amount of tax you pay by having the spouse with the higher income maximize their deductions.
The CRA does not allow all deductions to be passed on to the spouse with the higher income. This is true regarding child care expenses. With certain exceptions only, it is usually the spouse with the lower income who has to claim the child care expenses.
Another way to lower the overall tax a couple pays involves transfers. One example would be where your spouse attended university but doesn’t need the entire tuition credit to lower their tax payable. In that case, it may be possible to claim part of this expense on your return.
Read the section on transferable tuition, and other amounts on the CRA website for more details.
Other potential transfers relate to disability, pension income, and age amounts. Searching for these terms on the CRA website will give you all the information you need, whether, for example, disability applies to you, your spouse, or your child. While on the subject of disability, yet not directly related to tax returns, it is wise to consider taking out long-term disability insurance, particularly if you have a dangerous job or a family history of chronic diseases.
You may claim an additional tax credit if your partner’s income falls below a certain threshold. You can also add your medical expenses together and apply the deduction to the tax return of the partner who can use it more to their advantage. You can also combine charitable donations, and claim all or part of the eligible amount.
When your marital status changes, so does your eligibility for deductions and benefits. One area affected would be if you each sold your own home to buy a single home together. It is likely that one of the sold properties will be immune from taxes. You will probably have to pay capital gains tax on the assets earned from one of the sales.
If the joint income of you and your spouse exceeds a certain level, you might lose benefits such as the GST/HST credit. Reaching that income threshold could also mean that you are no longer eligible for certain provincial credits, depending on where you live.
Such a thing as a "spousal tax credit" exists. If your spouse or common-law partner has a lower income than you, you might be eligible for this non-refundable tax credit. It has the net effect of reducing how much income tax you will have to pay.
Before the 2016 tax year, you may have been eligible for a non-refundable tax credit of up to $2,000 if you and your spouse or common-law partner had at least one child. Since then, this family tax cut has been eliminated, and the inherent benefits incorporated in the income splitting credit.
Eligible medical expenses are another area where spouses have a potential advantage. You can claim medical expenses for your spouse or common-law partner. If the spouse with the lower income claims all of the medical expenses, the tax credit will be bigger because the medical expenses tax credit is based on a percentage of that individual's income.
If you are retired, or of pensionable age, pension income splitting is a distinct possibility. This is another legitimate way to lower the amount of tax you have to pay.
If you and your spouse jointly elect to split your eligible pension income, you need to complete Form T1032 (Joint Election to Split Pension Income). The benefit is that you pay less tax overall.
Before you ever reach pensionable age, however, if you have filed as married, you are permitted to contribute to your spouse's RRSP (Registered Retirement Savings Plan). Any contributions you make to your spouse’s RRSP can be deducted from your taxable income.
This is to your advantage if you have a higher net income, which is taxed at a higher rate than that of your spouse. Note, though, that the contributions you make to your spouse’s RRSP reduce your own deduction limit. Also, note that the total amount you can deduct for contributions you make to your RRSP or that of your spouse cannot exceed your own deduction limit.
If you cannot contribute to your RRSP because of your age, you can still contribute to your spouse’s or common-law partner’s RRSP until the end of the year when your spouse or partner turns 71.
Since you will want to maintain your quality of life long after your turn 65, it is worth making careful calculations regarding your individual RRSP contributions, and how much you contribute to your spouse's RRSP.
Benefits due or payments owed may change if your marriage or relationship ends. If you receive the Canada Child Benefit, or GST/HST benefit payments, you should notify the CRA the month after your relationship ends.
If you separate, you only have to notify the CRA after 90 days of separation. Notification can be done via MyAccount by completing CRA Form RC65, Marital Status Change. Either that, or contact the CRA’s general inquiries by telephone to inform them of the change. Be sure that you understand what you need to do if your marital status does change so that you avoid penalties and the inevitable interest on those penalties that could result.
If you live apart for reasons other than the end of the relationship, you must still file as married. For example, if you live apart due to work, education, or medical reasons, the CRA considers you married.
Most people are surprised to learn that once you marry, you can never ever file again as single, even if you are divorced.
Learning as much as you can about tax benefits for married couples in Canada is worth it. Why pay more taxes than you have to? Not only that, by being aware of the tax implications of investments and the kinds of insurance policies you take out, you can make better decisions.
Such decisions help you save money and reduce your tax bill. The Canada Revenue Agency is keen to help you achieve this and it is worth making extensive use of the helpful information on their site.
Take good care of your tax returns, and you free up money that allows you to consider securing your family further by taking out life insurance. But it's not just life insurance that you need to consider. There is a whole range of insurance options for every situation, and Insurdinary can help you find the options that suit you best.
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