The biggest events in life also have big tax implications.
Saying “I do” is among the biggest of life’s changes, and from a tax perspective it’s right up there with..well…death.
One common misunderstanding is that the Canada Revenue Agency distinguishes between marriages, common-law relationships and civil unions. It does not. Similarly, the CRA treats same-sex couples the same. For tax purposes, there is only single, married, common-law, separated or widowed.
Almost everyone starts their tax life filing as a single person, so there is little mystery there; it is also the simplest status in terms of paperwork. Here is a quick overview of the other conditions recognized by the CRA:
Living together: Once you have lived together for 12 continuous months, you are common-law in the eyes of the CRA. If you have children together, you are common-law as soon as you begin to cohabitate.
Married: You are married for tax purposes if you were joined in a recognized civil or religious ceremony in Canada or a different country.
Married, recently separated: Once married you never claim as single again. You file as separated.
Common-law, recently separated: Same as the above, with the requirement that you are separated for 90 days before the separation becomes official.
Married, separated, in a new relationship: It is possible to be separated but common-law with a new partner for tax purposes.
Widowed: If your spouse died, your status is widow or widower.
Your marital status is set on December 31st of the tax year, so being married, separated or common-law on the last day of the year determines what you enter on your tax form. The exception is common-law separated, as you need 90 days for that to be official.
Once you are married or become common-law partners, notify the CRA using the RC65 Marital Status Change Form. Spouses file their own returns but include their partner’s SIN and net income. Married persons do not pay more tax, although GST/HST and Canada Child Tax Benefits can be affected by your new household income.
Being married or common-law also allows you to take advantage of spousal RRSPs and pension income splitting tax measures.
If you become separated, inform the CRA using the same RC65 Form. GST/HST Credit and Child Tax Benefits will then be calculated solely on your income, so the payments will likely increase.
Single parents with custody of children may claim the amount for an eligible dependant, even if only separated for part of the year. This amount may be reduced if your child is earning income. You’re also entitled to claim the child amount for any children born in 1996 or later, regardless of their income.
And, finally, we do all die. It is best to prepare for this by creating a will. Dying without a will does not mean the government will swoop in and take everything, as some people believe, but dying intestate places an unneeded burden on family and loved ones.
Some factors to consider when creating a will include:
– have it prepared by a lawyer. This saves trouble later
– be specific and personal; gives details on special heirlooms or inheritances
– joint ownership is one of the simplest ways to transfer assets and avoid probate fees
– you may be able to lessen probate fees by naming beneficiaries on insurance policies
– gifting assets before your death is an option, although it will trigger capital gains
– if you are 65 or older, consider an alter ego trust to avoid probate fees. Property transferred to an alter ego trust will not trigger a capital gain.
Remember too that your estate must file a tax return the year you pass away.
Taxes are with us almost from birth, and the details change with almost every big life event. To help navigate these new circumstances, consider using an online program like H&R Block’s Tax Software (www.hrblock.ca), which will identify your tax situation and calculate deductions or credits as you go. Or if you would rather leave it to an expert, drop by an H&R Block office. A tax professional will even review your previous returns for free.
This list is compiled based on my discussions with a tax adviser at H&R Block Canada who has sponsored this blog post. The information provided here is a general list for information purposes. Taxes vary among people so always consult a tax professional for certainty. I invite you to visit hrbtaxtalk.ca to view tax queries posted by others or post your own question. Therefore, no responsibility for loss caused by any person acting or refraining from action as a result of the material contained in this bulletin can be accepted by H&R Block Canada, Inc. or Larkycanuck.com
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