Since 1993, common-law couples have been treated the
same as married couples for all purposes of the Income Tax Act. Certain tax advantages
previously enjoyed by common-law couples have been eliminated.
Common-law couples are no longer able to double-up
on basic personal credits and equivalent-to-married credits. Income from property
transferred to the spouse is taxed in the transferor’s hands, and their incomes are
combined to determine eligibility for GST credits and the child tax benefit.
On the positive side, common-law couples now qualify
for the married credit and are eligible to make spousal RRSP contributions and to transfer
property to each other without being taxed on capital gains.
For income tax purposes, a common-law relationship
is one where two individuals of the opposite sex are living together in a conjugal
relationship and have either done so for at least 12 months or are the parents of the same
child.
It’s important to know the rules on taxing
couples.
The child tax benefit and the GST credit are
calculated in relation to family income, while federal and provincial taxes are calculated
on an individual basis. Therefore, two couples with the same family income will obtain
identical child benefits and GST credits, but may have to pay different totals of federal
and provincial income taxes.
There can be an important difference in the tax
burden for couples depending on the distribution of that income between the spouses.
Let’s take the case of Ted and Jane Smith, who
live in Ontario. Ted has a taxable income of $14,000 and Jane has a taxable income of
$42,000 in 1998. Their neighbors, Bob and Mary Jones, have taxable incomes of $28,000
each. Both households have a total taxable income of $56,000.
Ted and Jane pay $12,302 in income taxes compared to
$10,620 for Bob and Mary. This difference of 15.8 per cent is caused solely by the uneven
distribution of income between Ted and Jane, which pushes part of Jane’s income into
a higher tax bracket. If one spouse earned all of the $56,000 family income, the
difference would be $3,967 or 37.4 per cent (including the married tax credit).
Surely, this is inappropriate for a system that is
supposed to levy tax based on the ability to pay.
Common-law couples are now subject to these same
imperfect rules. Taxing common-law and married couples in the same way is an important
step toward improving tax fairness, but it took 20 years to develop. Let’s hope the
next step, the removal of inconsistencies in the taxation of couples, will not take
another 20 years.
Your life insurance advisor can help you develop a
financial plan to deal effectively with the tax rules for couples
