New Couples: Ten Tips on Avoiding the Tax Auditor

As the May 1 personal tax filing deadline approaches, it’s appropriate to be reminded of the tax audit season that follows, especially for new couples. Filing errors in reporting marital status, and especially common-law relationships, could be the first big challenge when faced with a tax review. Advisors can help by discussing a few key tax definitions:

1. Definition of Common Law for Tax Purposes. For tax purposes, spouses and common-law partners are treated equally. A common-law partner is a person who is not the individual's spouse but one with whom you are living in a conjugal relationship, if that person:

• has been living with you for at least 12 continuous months,
• is the parent of your child by birth or adoption, or
• has custody and control of your child and that child is wholly dependent on that person for support.

2. Combine Net Income to Claim Refundable Tax Credits. As a common-law couple, individual tax returns must be filed, but net family income must be combined for purposes of refundable tax credits like the Canada Child Benefit, Goods and Services/Harmonized Sales Tax Credit and provincial credits. Failing to do this can a big problem on a subsequent tax audit, should refundable credits be inflated by claiming only one income source.

3. Spousal Credit Claims. Depending on the of net income for each person, one spouse may be able to claim the other for the Spousal Amount, if the couple was living together on December 31 of the tax year. The net income for the whole year is used even if the couple was married or living together late in the year. In the case of separations before year end, net income before the separation is used. In each case, the Spousal Amount is reduced dollar for dollar by the lower earner’s net income.

4. Other Non-Refundable Tax Credits and Claims. In addition, common-law couples can claim each other’s medical expenses (usually claimed on the return of the spouse with the lower net income for maximum benefit) and combine their charitable contributions to maximize that tax credit (it’s best to combine receipts so that they are over $200 for a better tax break). The Family Caregiver Amount (FCA) for minor children can be claimed by either spouse or split between them to maximize the use of the credit.

5. Tuition/Education/Textbook Credits. Up to $5000 of tuition, education and textbook credits can be transferred from the student to a supporting spouse if the supporting person can use the credits to reduce their taxes. Remember this is the last year to claim the education and textbook amounts.

6. Other Transferrable Amounts. The $2000 pension income amount, age amount, and disability amount may also be transferred to the spouse with the higher income, in addition to the tuition/education/textbook and FCA for children.

7. Spousal RRSP Contributions. If the couple expects to remain together, they may wish to start making spousal RRSP contributions to equalize deposits and, therefore, income in retirement. Money can be withdrawn on a tax-free basis from an RRSP under the Home Buyer’s Plan (HBP), so this might be a way for them to save for their first home on a tax-advantaged basis.

8. Attribution Rules that Affect Reporting of Investments. From an investment point of view, a common-law couple is treated the same way as a married couple. That is, if a transfer of capital from the higher earner to the lower results in the earning of interest, dividends or capital gains, that income is reported by the person who transferred of capital. These rules can only be avoided when an inter-spousal loan is drawn up and as long as the rules that apply to the loan are adhered to.

9. One Tax-Exempt Principal Residence. Common-law couples must be aware they can have only one tax-exempt principal residence per household (whereas singles can have one each).

10. Separation and Divorce. For tax purposes, a divorce or separation is defined as:

• Divorce: A legal dissolution of a marriage.
• Separation: For tax purposes, taxpayers are considered to be separated (and the rules regarding spouses and common-law partners are suspended) when they have been living separately for a period of at least 90 consecutive days. In other words, a couple need not be legally or formally separated for their tax status to change. Should you reconcile before the end of the 90-day period, you are considered not to have separated at all. And, if you are split at the end of the tax year and then reconcile within 60 days of the year end, your relationship is considered to be resumed for tax purposes.

Conjugal relationships can be complex for many reasons, including the tax system. It can be expensive to make mistakes in claiming the provisions above, particularly if net income is not calculated and claimed properly. To file an audit-proof return with access to all the credits and deductions you are entitled to, don’t hesitate to get help from a qualified DFA-Tax Services Specialist™.

More information on basic tax principles can be found in Evelyn Jacks' book Family Tax Essentials, a great gift to young adults setting out on an independent life, or the T1 Professional Tax Preparation Course – Basic Level.

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