Married couples face unique decisions about how to file their taxes. Unlike in other countries, spouses or common-law partners can’t file a joint tax return in Canada. Instead, everyone must file their own return, but they must report their marital status and include specific details about their spouse.
Understanding the benefits and drawbacks of filing as a married couple can help you maximize your tax advantages and avoid potential pitfalls.
Keep reading if you’d like to peruse the Accountants-BC Ltd. guide to coupled tax returns. Here, you’ll find helpful answers and an informative breakdown of the average married couple’s tax situation.
What You Need to Know About Marital Status and Taxes
Did you recently get married or discover that you and your partner qualify as common-law? If so, you must report this status on your tax return.
This includes providing information about your spouse, such as:
- Their name
- Social insurance number (SIN)
- Net income
- Employment status
Why are you expected to provide this information? The Canada Revenue Agency (CRA) uses this information to calculate benefits and credits that depend on family income, such as the GST/HST credit or the Canada Child Benefit (CCB).
Common-Law Partnerships: What Qualifies?
To be considered common-law partners in the eyes of the CRA, you must live together in a conjugal relationship for at least 12 consecutive months. However, if you have a child together by birth or adoption, or if one of you supports the other’s child, you’re considered common-law partners immediately.
Accurate Reporting: It’s Important!
Failing to accurately report your marital status can lead to significant consequences, including being required to repay benefits with penalties and interest. While you might not be penalized for making one simple mistake, you’ll likely face repercussions if you repeatedly fail to report your marital status.
The Many Advantages of Filing as a Married Couple
One of the main benefits of being married or in a common-law relationship is the ability to combine certain deductions and credits.
What Are Tax Deductions and Tax Credits?
Tax deductions and credits are mechanisms that reduce the amount of tax you owe or lower your taxable income. By combining these with your spouse, you can often save more money on your taxes.
Transferable Credits and Deductions
Married couples can benefit from transferring certain credits and deductions between spouses. For example, if your spouse has attended university and doesn’t need their entire tuition credit, you can claim part of this credit on your return. Other potential transfers include the disability amount, the pension income amount, and the age amount. If your spouse’s income is below a certain threshold, you may also be able to claim an additional tax credit.
Income Splitting and Pension Transfers
You and your spouse likely don’t both have the same annual income. When there’s an income disparity between you and your spouse, income splitting and pension transfers can be a great help.
If one spouse has eligible pension income, you can elect to split this income. This allows the higher-income spouse to transfer a portion of their pension income to the lower-income spouse, reducing the overall tax burden.
Another advantage is that under certain circumstances, any capital gains taxes owed when a large asset (such as a house) is sold could be split between you and your spouse. This can help reduce the tax burden on one party.
Registered Retirement Savings Plan (RRSP) Contributions
Contributing to your spouse’s RRSP can also be advantageous. If you have a higher net income, contributions to your spouse’s RRSP can be deducted from your taxable income, potentially lowering your tax rate. However, this does reduce your own RRSP deduction limit, so it’s important to consider the overall impact on your retirement planning.
Drawbacks of Tax Filing as a Married Couple: Changes in Eligibility for Deductions and Benefits
One significant drawback of filing as a married couple is the change in eligibility for certain deductions and benefits.
Combining Incomes, Reducing Returns
When both spouses’ incomes are combined, the total family income may push you into a higher income bracket, resulting in lower benefit payments. More often than not, combining incomes reduces the amount you receive back.
Child Care Expenses
While there are many benefits to combining incomes, the CRA has specific rules regarding who can claim certain deductions.
Childcare expenses must generally be claimed by the spouse with the lower income, with few exceptions. This can limit the ability to fully maximize deductions if the lower-income spouse can’t claim all the expenses incurred.
Potential for Tax Preparation Errors and Penalties
Filing taxes as a married couple can be complex. There are many boxes to check, forms to fill out, and pieces of information to provide. With all of this comes great potential for penalties. Mistakes in reporting your marital status or incorrectly claiming deductions and credits can lead to reassessment by the CRA, resulting in additional taxes owed, interest, and penalties. Remember to keep track of expenses and financial developments throughout each year.
When Do You Notify the CRA of Separation?
If you and your spouse separate, you must notify the CRA after 90 days of separation. This can impact benefits like the CCB and GST/HST credits. Thankfully, notifying the CRA isn’t difficult. You can notify the CRA through MyAccount by completing CRA Form RC65, Marital Status Change, or by contacting the CRA directly.
Learn More About Marital Tax Planning Today
Filing taxes as a married couple in Canada involves understanding the benefits and potential drawbacks. You can maximize your tax advantages by combining certain deductions and credits, utilizing income splitting, and accurately reporting your marital status.
However, it’s important to be aware of the complexities and potential for errors. Using tax software can be helpful, but the best thing you can do is consult a tax professional. As many have come to learn, there’s no one better suited to serve you than the tax planning professionals at Accountants-BC Ltd.
Call us at (604) 683-2341 to learn more about marital tax planning.