Marriage & Common-Law: Pt. 1
So it’s now November and you know what this mean…Happy Financial Literacy Month!
To celebrate our 8% of the year, I’m putting together a multi-part series on some of the biggest life changing events and how to financially handle them – including tricks to save money, some best practices, and just explaining what the heck is going on.
Today, in our first episode were going to take a look at marriage and common-law relationships. Over the series we’ll also look at retirement and finally – what happens when someone passes away. As a financial nerd, this is pretty interesting stuff and I hope that you feel the same way.
So I was originally going to do a single episode for today but thought that it would be best to break it up into two parts. So in this episode we’re going to look at what it even means to be Married or Common-law status and hidden ways to save on your taxes. Next episode we’ll top it off with techniques to protect your household and what financially happens if a relationship breaks down .
Marriage & Common-Law: What Does It Really Mean?
So to kick things off it’s important to understand what marriage and common-law even mean. The legal definition of marriage is “Marriage, for civil purposes, is the lawful union of two persons to the exclusion of all others”. Whether your registered in a large ceremony or even just city hall, paperwork is filled out that makes you legally married.
On the other hand, the definitions of common-law is more tricky and can be very confusing as there are different conditions for the federal and provincial designation. These two different designations are also applied at different times.
For example, federal designation is used for your income taxes and the provincial definition is typically issues that fall under federal law – like assets division during a relationship breakdown and spousal support.
The basic structure is when a person lives with another person that they are not married to. They must also have a conjugal relationship with and lived with them for a period of time. Special rules also apply if there is a child.
So the federal definition of common-law applies when you have been with the other person for either; i) a continuous 12 months, or ii) or are parents by birth or adoption, or have legal custody.
The provincial definition varies province-to-province – for example, in Ontario you have to have lived with them for at least 36 months or have a child and lived with them for a 12-months.
Marriage & Common-Law – Your Taxes
So now that we’ve made sense of what the concepts mean, let’s look at how this affects your income taxes and what opportunities can be used to cut your tax bills.
First of all, breaking a common myth, you don’t file joint taxes when you’re married or common-law. All of your income, deductions, and tax credits are claimed by a each person – however, you do need to list your spouse’s information on your return and certain benefits can be shared with each other.
There are quite a few big tax benefits that are available as you can now share some tax deductions and credits. For example, the lower earning spouse can claim child expenses – which can offer a deduction up to $8,000 per child under 7 years of age, you can share the basic personal amount if your spouse earns under approx. $12,000 per year, any tuition that’s paid can also be shared between spouse’s taxes on the year that they were incurred, and you can pool your medical expenses together and have the lower earning spouse claim them as they often have a lower threshold to claim them. In retirement, you can also split pensions – which offers a massive tax savings and something we’ll talk more about next episode. If you’re taking care of a spouse there’s a caregiver spousal tax credit and you can also share the disability tax credit.
One of the downsides of this new tax situation is that you may loss certain tax benefits that are tied to your household income. Very often a dual-income earning household income will disqualify a household from them. In some cases, you may also have to pay them back if you received them and later turned out to not qualify.
That’s it for today, but join us next week as we look at ways to financially protect your household and what happens if a relationship breaks down.