Conjugal relations can be taxing
The taxman apparently has it in for Cupid.
Under the Income Tax Act, your status -- single, legally married or living common law -- could make a significant difference in the amount of tax you ultimately pay.
For tax purposes, common-law partners, defined as two people who cohabit in a "conjugal relationship" for at least 12 months, are treated the same as legally married couples.
But there are some negative aspects associated with being a couple for tax purposes. Unlike in the United States, where couples can choose to file a joint tax return, in Canada each spouse or partner must file his or her own tax return. On that return, each partner must clearly indicate his or her marital status on page one.
Judging by the number of tax cases surrounding marital status, it seems to be very tempting for couples who are living together in a common-law relationship to continue filing their tax returns each year as "single," primarily to avoid losing certain government benefits where the amounts are based on the combined income of both partners. Popular examples are the GST/HST credit, the Child Tax Benefit or the Guaranteed Income Supplement.
Another problem facing couples is the income attribution rules, which generally block attempts to shift income from a higher-income partner to a lower-income partner by attributing the income back to the higher-income partner. For couples, this blocks most attempts to split income and capital gains.
One way to get around the attribution rules and legally split income or gains with your spouse is when one partner makes a loan to the other for investment purposes. As long as interest is charged on the loan at a rate at least equal to the CRA's prescribed interest rate at the time the loan was made (currently at a historic low of 2%), the attribution rules will not apply. The interest, however, must be paid within 30 days of the year's end.
Another tax strategy for couples is to have the higher-income partner pay all the household expenses, thus preserving the lower-income partner's income for investing. Any returns on such investments would then be taxed in the hands of the lower-income partner.
Finally, since 1982, couples only have access to one principal residence deduction between them. This means that the gain on the sale of one principal residence is exempt from tax. Married or common-law couples who have more than one residence, such as a cottage or cabin, may face capital gains tax on the other property, which paves the road for more complex tax planning.