Tax Benefits for Married Couples in Canada: Pay Less Tax

Navigating the Canadian tax system as a married couple can be intricate, but understanding your obligations and potential advantages can make a world of difference. This article sheds light on key tax considerations and steps for maximizing the potential tax benefits for married couples in Canada.

Do married couples have to file taxes together in Canada?

No, married couples in Canada will always have to file taxes separately. However, it’s crucial to note that even when filing separately, each spouse must report their marital status and their spouse’s information (including net income, even if it’s zero) on their tax return. This is required to calculate various federal benefits and credits, many of which are income-based.

Do common-law partners have to file taxes together in Canada?

Common-law partners in Canada, similar to married couples, also have to file their taxes separately. While both partners have to file separately, they must still report their marital status and their common-law partner’s information (including net income) on their tax returns. This is to ensure accurate calculations of any federal benefits or credits.

In Canada, you are considered a common-law partner if you have been cohabiting and living in a conjugal relationship with your partner for at least 12 continuous months, regardless of gender. This means that you don’t have the choice to file taxes as common-law partners or not since Canadian law is very clear about when you will be considered common-law partners.

What information must I include about my spouse in my tax return?

When filing your tax return in Canada, you must include certain information about your spouse or common-law partner in the “Information about you” section. This includes:

• Your spouse’s full name
• Their social insurance number (SIN)
• Their net income for the tax year (even if it’s zero)

This information is critical for the Canada Revenue Agency (CRA) to accurately calculate federal benefits and credits, which your combined household income can influence.

Additionally, you must indicate your marital status and the date of change in your marital status (if applicable). This includes if you married, entered into a common-law relationship, separated, divorced, or were widowed during the tax year.

Tax rates for married couples in Canada

All Canadian individuals are taxed on their personal income, with the rate depending on the total income amount following a system of progressive tax brackets. This remains true even if you are married as there are no specific “married” tax rates. Each spouse calculates their taxable income and tax owed individually based on their respective income level.

However, being married can influence the net family tax situation because of various tax credits, deductions, and benefits that may be available. Thus, while the tax rates are not directly impacted by marital status, the combined tax liability of a couple can be significantly reduced.

Next, we will look at all potential tax benefits for married couples.

Tax benefits for married couples in Canada

In Canada, there are several tax benefits specifically designed to reduce the total tax amount paid by married couples. These benefits exist to promote income splitting, support couples with varying incomes, and assist those with dependents or certain expenses.

Spousal tax credit

The Spousal Amount Tax Credit in Canada can be beneficial if one spouse earns significantly less income than the other. If a spouse or common-law partner’s net income is below a certain threshold referred to as the basic personal amount, the higher-earning spouse can claim a non-refundable tax credit.

For the 2023 tax year, the basic personal amount is $15,000. The higher-earning spouse can claim a spousal tax credit that equals the difference between the basic personal amount and their partner’s net income. For instance, if you have an income of $65,000 in 2023 and your partner earns $12,000, you can claim a spousal tax credit of $3,000 and thus lowering your own taxes. The specific amount you save on taxes depends on which tax bracket you fall under.

Pooled medical expenses

In Canada, eligible medical expenses can be claimed for a tax credit. Married couples can combine their medical expenses and claim them on one return, usually on the tax return of the partner with a lower net income. By pooling medical expenses, a couple may exceed the threshold required to claim the medical expense tax credit and as a result receive a larger credit.

Charitable donation tax credit

Married couples can combine donations to registered charities and claim them on one spouse’s return. This method can lead to a higher tax credit since the credit rate increases with the total value of donations made during the tax year.

Child care expenses

Childcare expenses can be claimed as a deduction from income in Canada. Generally, they must be claimed by the lower-income spouse. This can cover costs for daycare, day camps, boarding schools, and other care-related services necessary to earn income or go to school.

Pension income splitting

Pension income splitting can be a significant benefit for retired married couples in Canada. Up to 50% of eligible pension income can be split between spouses. This strategy can result in lower combined tax liability, especially when there is a large difference in income or tax rates between the two spouses.

Transfer tax credits

Certain non-refundable tax credits can be transferred from one spouse to another. This includes the Age Amount, Pension Income Amount, Disability Amount, Tuition Amount, and Caregiver Amount. If one spouse cannot fully utilize these credits due to low income, transferring them to the higher-income spouse ensures they are not wasted.

Dependents

If the higher-income spouse claims the other partner as their dependent can provide significant tax benefits for married couples in Canada. This includes the Canada Child Benefit, a tax-free monthly payment made to eligible families to help with the cost of raising children under 18. The amount depends on the number of children, their ages, and the family’s net income.

Registered Retirement Savings Plans (RRSPs)

The Spousal RRSP provides a tax planning advantage for married couples with significant income differences. The higher-income spouse can contribute to the lower-income spouse’s RRSP assuming there is still room for more contributions. This will reduce the amount of tax paid by the higher-income spouse, and also enable income splitting in retirement and potentially result in a lower combined tax rate.

Split capital gains and investment dividends

Investment dividends or capital gains, whether it’s from cryptocurrencies, stocks, or other assets, can be divided between spouses to reduce the tax burden potentially. Especially if one spouse is in a lesser income tax bracket, splitting the investment profits through joint investments can be financially advantageous.

The key to reducing taxes this way is to ensure that both partners contribute to the initial investment. When filing taxes and declaring assets, you can add details about the percentage claimed by your spouse, and this has to be the true amount contributed by your partner when the investment was made. This means that you can only split capital gains or dividends proportionally to the amount contributed originally.

Be aware that in a tax audit, the CRA may request to see bank transactions between spouses to verify the validity of the claimed division. For instance, if one spouse used their funds to buy the asset reported as a joint investment, it’s expected that the other spouse would have transferred their portion of the funds to the purchasing spouse, in line with the terms of their joint investment.

What if you are no longer married?

If your marital status changes during a tax year in Canada due to divorce, separation, or other means, it’s important to inform the CRA as soon as possible. Your change in marital status can significantly affect your tax situation, and failure to report these changes could lead to inaccuracies in your tax filings and benefits received.

When you are no longer married, certain tax credits, deductions, and benefits previously available as a couple may no longer be applicable. For instance, spousal tax credit transfers, income splitting opportunities like Spousal RRSP, and benefits calculated on household income like the Canada Child Benefit, may be affected.

In the case of divorce, you must indicate the date when the marriage was legally ended. In case of a separation, you must have been living apart from your spouse for at least 90 days due to a breakdown in the relationship to change your marital status with the CRA. If your spouse passed away, you would be considered married for the entire year for tax purposes, and you must include information about your deceased spouse on your tax return.

How to file taxes as a married couple in Canada

If you are filing taxes as a married couple in Canada, the first step is correctly updating your marital status with the CRA. When it comes to filing your actual tax returns, the procedure is very much similar to how you filed before getting married. The only difference is the information you enter in the annual tax return that must be submitted to the CRA by April 30 each year.

The procedure of filing your taxes may differ based on your chosen method, whether through the CRA’s online portal, by mail, using tax preparation software such as TurboTax, or by outsourcing the entire process to a tax professional. However, to ensure you take advantage of all the applicable tax benefits to married couples, it’s crucial to plan, prepare, and submit your tax return before the deadline.