Do You Have to File Taxes with Your Common Law Partner in Canada?

Filing taxes is an annual obligation for Canadians, and those who are in common-law relationships, there are specific considerations that must be taken into account. Understanding whether to file taxes jointly as common-law partners or individually has both advantages and disadvantages. The information provided by our civil litigation law firm in Edmonton will explore how common-law partnership is defined under Canadian legislation; the advantages and disadvantages of filing taxes as common-law partners; and the penalties for incorrect filing. 

How do you determine if you are common-law for tax purposes? 

In Canada, a common-law partnership is legally recognized as a relationship in which two individuals have been living together in a conjugal relationship for a continuous period of at least 12 months. Since family law falls under provincial laws, the definition of what a common-law relationship is differs from province to province. 

Under Section 248(1) of the Federal Income Tax Act the definition of common-law partner, with respect to a taxpayer at any time, means a person who cohabits at that time in a conjugal relationship with the taxpayer and:

1. Has so cohabited throughout the 12-month period that ends at that time, or 
2. Would be the parent of a child of whom the taxpayer is a parent, if this Act were read without reference to paragraphs 252(1)(c) and (e) and subparagraph 252(2)(a)(iii), 

and, for the purpose of this definition, where at any time the taxpayer and the person cohabit in a conjugal relationship, they are, at any particular time after that time, deemed to be cohabiting in a conjugal relationship unless they were living separate and apart at the particular time for a period of at least 90 days that includes particular time because of the breakdown of their conjugal relationship. 

How should I file my taxes if I am in a common-law relationship?

Common-law partners can file their taxes individually, however, must indicate that they are in a common-law relationship. While filing your taxes, you are required to include information pertaining to your partner for tax purposes, which includes but not limited to; social insurance number, net income. 

Advantages and disadvantages of Filing Taxes as Common-Law

The advantages of filing taxes as common-law include but not limited to the following:

1. Income Splitting: One of the significant advantages of filing taxes as common-law is the potential for income splitting. This can lead to a lower overall tax burden for the household, as income can be redistributed between partners to take advantage of a lower tax bracket. 
2. Eligibility for Certain Credits and Benefits: Filing taxes as common-law can make you eligible for various tax credits and benefits, such as medical benefits and charitable donations. These benefits are often calculated based on the combined income of both partners, potentially resulting in a greater total benefit. 
3. Transfer of Tax Credits: Common-law partners can transfer certain tax credits between one another, optimizing the allocation of deductions and credits to minimize their overall tax liability. 
4. Enhanced Pension Benefits: Common-law partners who choose to pool their pension income may enjoy increased benefits, as pension income splitting can lead to a reduction in taxes paid on the pension amount. 

The disadvantages of filing taxes as common-law, include some of the following:

1. Shared Liability: When filing jointly, both partners become equally liable for any tax debts, interest or penalties incurred. If one partner has an outstanding tax obligation, it could affect the other partner’s finances. 
2. Loss of Certain Credits: While some tax credits and deductions increase when filing jointly, others may decrease or become unavailable. For instance, single individuals may qualify for certain credits that are not applicable to individuals in a relationship whether that be common-law or married. To be eligible tax credits such as GST/HST and the Canada Child Benefit (CCB), you must meet the Canadian Revenue Agency’s (CRA) low-income requirements. 
3. Complex Financial Situation: if one partner has a complex financial situation, such as business with various deductions, it could complicate the tax filing process when combing finances. 

Filing as Single When in Fact Common-Law

Choosing to file taxes as a single individual when in a common-law relationship can lead to significant penalties and complications with the CRA. There are penalties that you may incur if you file taxes without claiming common-law status. These penalties include but not limited to:

1. Financial Penalties: Filing as single rather than indicating you are common-law on your tax return can lead to penalties. The CRA may impose fines based on the amount of tax underpaid due to misrepresentation on your tax form.
2. Interest Charges: The CRA can apply interest charges on the unpaid taxes as a result from incorrect filing. The interest charges can accumulate over time and increase the overall amount owed. 
3. Criminal Charges for Fraud: Intentionally providing false information on your tax return, such as inflating deductions or underreporting income, can lead to criminal charges, fines, and even imprisonment. 

Filing taxes with your common-law partner in Canada requires careful consideration of the advantages and disadvantages. While joint filing can offer income splitting and other benefits, it is important to understand the potential impact on individual credits and liabilities. Further, incorrect filing can lead to hefty penalties and even legal consequences. Seek advice from tax professionals or use the resources provided by the CRA to ensure accurate and compliant tax filings.