We should be proud of the equality of our tax laws — especially in contrast with those in the U.S.
June 2016 marks Canada’s first ever Pride Month, which was officially launched on June 1 when Prime Minister Justin Trudeau raised a Pride flag on Parliament Hill to recognize Canadians who have worked to secure equal rights for lesbian, gay, bisexual and transgender individuals and to celebrate sexual and gender diversity.
Last month, the Liberal government introduced legislation (Bill C-16) to update the Canadian Human Rights Act and the Criminal Code that would make it illegal to discriminate on the basis of gender identity or expression.
The history of Pride Month and why June was chosen as a month of celebrations can be traced back to the 1969 Stonewall riots in Manhattan’s Greenwich Village, when members of the LGBT community held violent demonstrations against a police raid at the Stonewall Inn on June 28, 1969.
Yet surprisingly, nearly 50 years after the Stonewall riots, the U.S. continues to lag behind Canada when it comes to equal treatment for same sex couples under the tax laws.
Canada’s Income Tax Act was formally amended in 2001 to recognize same-sex common-law partners. Under our tax law, “common-law partners” are 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. As a result, common-law couples, including same-sex couples, are treated exactly the same under our tax law as spouses who are legally married.
Perhaps the greatest tax advantage of this treatment occurs when one partner in a marriage or common-law relationship passes away. The Tax Act allows all your property to be automatically “rolled over” to your surviving spouse or partner on a tax-deferred basis. This includes not only all your non-registered investments, like stocks, bonds and mutual funds, but also your RRSP or RRIF. By leaving all your assets to a spouse or partner upon death, you can avoid paying current capital gains tax on the deemed disposition of your assets at fair market value as of the date of death. In addition, you can defer taxes on the fair market value income inclusion of your RRSP or RRIF, which, absent a rollover, would be fully taxable as income on your final tax return.
The U.S., however, does not recognize same-sex common-law partners as equal under its tax laws. Take the recent case, decided last month, of a New Jersey man whose partner of 31 years passed away six days before their planned wedding.
The New Jersey Tax Court ruled that the couple wasn’t entitled to claim an estate tax deduction as a surviving spouse because the couple was neither married nor in a civil union. This cost the couple just over US$100,000 in New Jersey estate tax when the man died.
While the couple registered as a same-sex domestic partnership under New Jersey’s Domestic Partnership Act (DPA) back in 2004, that wasn’t enough to qualify the surviving partner to be treated as a spouse for estate tax purposes.
“Although the plaintiff and decedent were eligible to enter into either a civil union or a marriage as of the date of the decedent’s death, they did neither,” the judge wrote. “This court must apply the DPA as it is written, not as this court thinks it ought to be written, or as plaintiff would prefer it to be written.”
Although Canada doesn’t have an estate tax, the harsh tax treatment upon the death of one partner in a same-sex couple would never have occurred under Canadian tax laws, giving us another reason to celebrate this June.