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Evelyn Jacks: New relationship? Beware of tax consequences

October 24, 2012

If you have a new relationship in your life, it’s important — although often not the first priority — to understand the tax consequences of living with your sweetheart in a family unit.

The Canada Revenue Agency has very definite ideas of who is or is not a spouse for income tax purposes. Here’s what you need to know about your primary "conjugal” relationship with your new significant other.

For tax purposes, a spouse is someone to whom you are legally married. A common-law partner, on the other hand, is not your spouse but a person of the same or opposite sex with whom you have lived in a relationship for a continuous 12-month period, or someone who at the end of the tax year was the actual or adoptive parent of your child. Note that separations of less than 90 days do not affect the 12-month period.

All tax rules that apply to a spouse apply equally to a common-law partner. You claim your spouse on your income tax return under the Spousal Amount if net income levels are low enough; ditto, a common-law partner. You also qualify to transfer other provisions, such as the age or disability amount.

In addition — and this is where expensive mistakes can occur — you will have to combine the net income of both partners for the purposes of claiming refundable tax credits. Also, your new family unit will be allowed only one tax-exempt family residence, not two. If each spouse owns a residence, real estate valuations are required when spouses cohabitate. One of those properties will become a taxable residence.

It's Your Money. Your Life. Don’t be taken by surprise by the tax consequences of your new relationships. When your marital status changes, it’s good to be proactive in finding out about your new obligations. See a tax professional to understand the impact.

Evelyn Jacks is president of Knowledge Bureau, which offers wealth-management and income tax preparation courses within its curriculum. You can also offer financial education books to your clients or family members. For more information, click here.

Additional Educational Resources

Related Book: Essential Tax Facts by: Evelyn Jacks

Related Course: Introduction to Personal Tax Preparation Services

Related Event: Distinguished Advisor Workshop