How Marriage and Common-Law Affects Your Finance

How Marriage and Common-Law Affects Your Finance

How Marriage and Common-Law Affects Your Finance

There are many memorable and defining events that shape our lives. For many, finding a partner to spend our future with is one of these life changing events. The path of marriage and common-law can bring lots of happiness, but also places us into a new and often unknown financial situation.

This new financial reality can have large implications, but can be used to your advantage with some knowledge and planning.

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So What is Common-Law?

Common-law can be difficult to define and to complicate things, it’s defined differently throughout Canada. However, the CRA’s definition of common-law is the one to use when you do your taxes. KPMG summarizes it as being, “treated as spouses if they are two people who “Cohabit in a conjugal relationship”, where either they have had a child together, or they have cohabited for at least 12 continuous months at the time the determination is made.”

So, your deemed to be common-law if you have a conjugal relationship and either i) live together for 12 months, or ii) have a child together.

The Savings Benefits!

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When you’re married/common-law, you are still each individually taxed according to your income; however, you are able to transfer tax credits and in some cases, even shift income to your partner.

If used properly, you can potentially save thousands of dollars over time.

1) Transferring of the Basic Personal Amount

Spouses can transfer their “basic personal amount” to each other. So, if one spouse earns under $11,474 (2106) a year, they can transfer a portion to reduce their spouse’s income. The transferable portion is the difference between $11,474 and their reported income.

For example, spouse 1 earns $5,000 in 2016 and spouse 2 earns $75,000. Spouse 1 is able to transfer $6,474 ($11,474 subtracted $5,000) to their partner, which reduces spouse 2’s taxable income to $68,526. Spouse 2 then saves over $1,000 in taxes.

This benefit is great for households with one spouse working and the other is taking care of a child. It’s also helpful if one spouse is out of the workplace for an extended period of time or has low-income due to self-employment. Households will also receive more tax savings if one spouse is disabled, or is retired.

2) Tax Credit Transfers

Transferring tax credits is another big area that that can be used to save. Medical, educational, transit passes, donations and more can be transferred between spouses.

A general rule is that the higher income spouse should claim the tax credits.

3) Spousal RRSPs

Spousal RRSPs allow a spouse to contribute to a spouse’s RRSP, but still receive the tax credit. The savings occur when a higher earning spouse contributes to a spouse that has lower FUTURE income. In the future, the spouse would withdraw the funds and pay less in taxes because they have a lower income.

4) Changing Qualifications for Benefits and Tax Credits

The qualification criteria for receiving benefits and tax credits is another big change. Qualifications are based on household size and are adjusted once your marital status changes. This can be good or bad depending on your situation.

Starting with the good, income qualifications increase as your household size grows and in some cases, makes it easier to qualify for benefits. For example, income eligibility for children benefits increases as a household’s size grows, including children.

Negatively, you may become ineligible for a benefit and in the worst case scenario, even owe the government money! This can be a rude surprise and is often caused when an individual in the household is still receiving a benefit, but hasn’t changed their marital status with the CRA yet. Once this marital status changes, a portion or all of the benefits will be clawed back from the stated date that your marital status changed.

5) Other Changes

While not discussed here, there are many other changes that affect couples. These include pension splitting, the age tax credit and other pension benefits.

Also, spouses should also consider how they want to organize their assets, such as; bank accounts, investments, property and more. Making assets joint, changing ownership, adding rights of survivorship and more must be properly considered.

That’s it for now, but please contact me with any questions. Also, please share this article if you believe that it can help your friends or family.

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