. Are We Living Together? 

Head in the stars, feet off the ground - love is a beautiful thing! 

It is indeed, but love also has some pretty banal earthly aspects that need to be looked into before that love becomes a living arrangement. Any two people contemplating marriage or merely living together for the long term should be aware that each type of relationship carries legal and tax implications. So, before getting too financially involved, the parties should pull together their respective financial information and meet with their lawyers and chartered accountants to discuss the implications of what they are contemplating.  

Marriage, Common Law and the CRA 

But how are these relationships defined in law? The term spouse has been reserved for a legally married couple; determining when two individuals are considered to be living together as common-law partners is a bit more complex.

For tax purposes the individuals in a common-law partnership (same or opposite sex) must have:

•  lived together in a conjugal relationship for at least 12 consecutive months

•  had a birth child together or adopted a child

•  a child wholly dependent upon one of the individuals in the relationship and the other individual must have custody and control of the child. 

Once married or determined to be common-law partners the Canada Revenue Agency does not differentiate for income tax purposes. 

Partners in either type of relationship will see changes in many deductions and tax credits to which they were accustomed as single tax filers. Some changes are beneficial while others appear to penalize those whom love has brought together. Some common changes that each partner should review for their possible impact on the individual and the family unit are as follows: 

Partners in both types of relationship may now make RRSP contributions to the other partner's RRSP. The result is a reduction in the contributor's taxable income and a consequent reduction in tax liability while the recipient is permitted to build a tax deferred RRSP nest egg. Couples should be aware of the rules concerning ownership of the plan and withdrawal from the plan before contributing to their partner's RRSP.

Individuals earning less than $25,000 per annum are recipients of GST rebates approximating $250 per annum. Once it is determined that individual taxpayers are married or in a common-law relationship, the GST calculation becomes based upon the combined income of the two partners; the GST benefit attributable to two "unmarried" individuals each earning $25,000 is greater than the GST attributable to a "married" couple with combined earnings of $50,000.  

There are tax credits, including age credit, disability and tuition (to name but a few) that are transferrable to a spouse or common-law partner if one individual in the relationship cannot use them.  

Many employers provide a $10,000 tax-free death benefit payment to the surviving spouse, partner, or child of the deceased employee. If two friends living together do not meet any one of the conditions that define a common law partnership, the tax-free benefit may not be paid.

Medical expenses: are deductible once the aggregate of the expenses exceeds the lesser of 3% of net income or $1,962. Those couples who meet the married or common-law criteria can transfer medical expenses to each other to attain an overall benefit. Similarly, donations made by individuals within a relationship can be transferred to the tax return of the other taxpayer if tax benefits accrue. 

When an individual dies: the value of an RRSP and capital gains deemed realized upon death are taxed in the year of death. If the amount is large, it can create a hefty tax bill when added to any other income earned during the year of death. If the deceased is married or a common-law partner, RRSP amounts are transferred to the survivor's RRSP tax free. Capital items can, depending upon the decision made by the spouse or common-law partner, be transferred to the survivor without tax consequences. 

Principal residence may be a pressing issue: Whether married or in a partnership the Tax Act allows for only one principal residence. This means that, if each partner possessed a residence at the time of union, one residence will be subjected to tax on capital gain at the time of sale. This does not imply that one of the units should be sold just because of the union, but it does suggest that individuals should consider the tax implications of holding a second residence including a cottage.  

A single parent who marries or enters into a common-law relationship will lose the equivalent-to-spouse credit of $10,100 for the 2009 taxation year. Further, if the single parent enters into a relationship, does not earn income, and circumstances permit the payment of child care by the major breadwinner, the child care payments will not give rise to a tax deduction for the individual paying tax on earnings because such payments must be deducted by the lower income "spouse".  

For older individuals entering into a new relationship, the ability to split pension income with a partner who earns less can provide significant tax savings not permitted if the individuals were just friends. 

Dispel Those Urban Myths