The Tax Costs of Shacking Up
While most economic studies of getting married or living in a common law relationship emphasize the cost saving benefits of such a union, from shared rent or utilities to being able to buy groceries in bulk, when it comes to income tax benefits, shacking up can be a costly affair.
That’s because many of our income-tested government benefits, including the GST / HST credit, the Canada Child Tax Benefit and the National Child Benefit Supplement are based on “family income” which includes income of both spouses or partners. Thus the importance of answering that seemingly innocuous question on page one of the personal tax return, “Tick the box that applies to your marital status on December 31.”
What many young couples may not realize is that under Canadian tax law, one of the marital status choices, “common-law partners,” is defined as two people, regardless of sex, who cohabit in a conjugal relationship and have done so for a continuous period of at least one year. In other words, two adults who are “living together” in a relationship of some permanence, even if just twelve months, must report themselves as living common-law.
This can prove to be costly since under the Income Tax Act, common-law couples are treated exactly the same as spouses who are legally married. As a result, two people living together who are not legally married are often tempted to continue filing as “single” taxpayers to avoid losing certain government benefits they may have otherwise been entitled to had they continued to live separately.
In fact, each year there are cases which end up in Tax Court in which the judge’s role is to decide whether two persons were, in fact, living in a “conjugal relationship” in a particular year since the amount of benefits they are otherwise entitled to will vary based on their reported incomes. And you thought the government has no role in the bedrooms of the nation?
So how, in fact, does the Canada Revenue Agency go about determining whether two people are indeed living in a “conjugal relationship?”
Over the years, a body of precedential case law has arisen that has settled on a series of seven factors as originally established in a 1980 Ontario case, which was subsequently endorsed by the Supreme Court of Canada.
The seven factors often indicative of a conjugal relationship were determined to be: shared shelter, sexual and personal behaviour, whether one partner performs services on behalf of the other, participation in social activities together, societal perception, economic support and the couple’s attitude towards any children they have together.
A 2001 case involved a couple claiming to have been separated but who were still living in the same house for the sake of the children. If they were indeed separated for tax purposes, they would have been entitled to higher levels of tax credits and government benefits.
In this case, one of the factors examined by the court was the frequency of sexual relations. According to the court transcript, “Sexual relations continued between the two of them, although the evidence is contrary about the frequency. The husband admitted to four times in 1998 to 2000 while (the wife) said that they had sexual intercourse regularly in the period of question.”
While the judge didn’t comment on whether or not three or four times in a year was considered “regularly,” he felt that “such activity casts some doubt on both the separation of the spouses and the breakdown of the marriage…The more prudent course in these circumstances would be complete abstinence, at least as between the spouses.”
He concluded that the couple was not living separate and apart and that the marriage had not broken down, although, in his words “it was unquestionably fragile.”