January 9, 2018 | Blog
From tax expert Gerry Vittoratos
Much has been written about taxation and its incidence on common-law spouses. This article will delve into certain considerations to look into when it comes to common-law spouses, and pitfalls to avoid in certain specific cases.
Definition of a Common-Law Spouse as per the Income Tax Act
Paragraph 248(1) of the ITA defines “common-law partner” as a “person who cohabits at that time in a conjugal relationship with the taxpayer and […] has so cohabited throughout the 12-month period that ends at that time”. Remember that the 12-month test is not based on the calendar year; your spouse becomes your common-law partner after 12 continuous months, regardless of the month. The 12-month test does not have to be met if the both spouses become parents of a child; in that case, the common-law date would be the birth date of the child.
The expression “cohabits at that time in a conjugal relationship” is used in the definition of the common-law partner. What does that mean exactly? Do the spouses have to live together to be considered as common law? As with any tax question, the answer is: it depends! As per the technical interpretation 2006-0198341E5 (French only), the facts of each case will determine whether individuals are indeed in a “conjugal relationship”. It is not necessary that they live together under one roof to be considered in a “conjugal relationship”.
As per Lavoie v. The Queen (99 D.T.C. 3546), some of the criteria to consider when determining a “conjugal relationship” are
- Shelter (does the couple live together and what are their sleeping arrangements?)
- Personal behaviour (sexual relations, fidelity, feelings, etc.)
- Services (preparation of meals, household maintenance)
- Social (do they participate in community events together?)
- Societal (how do friends and family perceive the couple?)
- Support (what is the economic relationship between the couple?)
- Children (what is the attitude and conduct of the parties concerning the children?)
When dealing with common-law partners, there are important considerations to factor, especially when it comes to credits and benefits.
Spousal and Eligible Dependant Amounts
Your clients can claim the spousal amount for the year they meet the rules mentioned above. However, the spousal amount must be reduced by the spouse’s net income for the entire year (which includes income earned before the common-law date). For those clients bringing children into the relationship, it could be more advantageous to claim the eligible dependant amount. In fact, in the year of marital status change, they have the choice of claiming the eligible dependant amount for the child they bring into the new relationship because they meet the criteria of “at any point in the year” as indicated in ITA 118(1).
Canada Child Benefit
In the year of the status change (couple officially becomes common law), the income used to determine the benefits your clients receive will be based on the combined income of the couple as of the month following the month of the status change. For example, if your clients officially become common law as of June, the calculation will be based on their combined income as of July. It is crucially important to inform your clients of this administrative rule, and to advise them to file an RC65 form by the end of the month following the status change in order to avoid nasty reassessments later on.
Common Law vs Income Tax Law in Estate Planning
It is also important to understand common law (Civil code for Quebec) rules when it comes to common-law couple. In income tax law, as seen above, a common-law couple is recognized after the 12-month period. In Common Law, the rules are different depending on the province. For example, in Newfoundland, Nova Scotia, Saskatchewan and B.C., the conjugal relationship period is 24 months. In Alberta, Manitoba, Ontario, P.E.I. and New Brunswick, the period is 36 months. In Quebec, a common-law union is not recognized in the Civil code. These thresholds can also change depending on whether the couple has a child. These differences between income tax law and Common Law (Civil code in Quebec) can a profound effect on estate planning for your client.
Moreover, the rights of common-law spouses can vary greatly depending on the province. In Alberta and in B.C., common-law spouses have equal footing with married spouses. In these provinces, a surviving spouse with no will would be entitled to a share of the estate of their deceased spouse. In other provinces, such as Ontario and Quebec, if no will was made by the deceased spouse, the surviving spouse is not entitled to any property. These rules have to be part of any serious discussions you have with your clients concerning estate planning. tax season.
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