Common Law Relationships

Many common-law couples are unaware of how their relationship status affects their tax obligations and benefits. Jeffrey Behrendt frequently encounters clients who only discover significant tax consequences when filing returns or during separation. “The Canada Revenue Agency (CRA) actually has a broader definition of common-law than most provincial family laws,” Behrendt explains. “This creates both opportunities and pitfalls for unwary couples.”

Under CRA rules, couples are considered common-law after just 12 months of cohabitation (or immediately if they have a child together). This triggers several automatic tax implications that many couples don’t anticipate. For instance, common-law partners must:

• Report each other’s income when applying for certain tax credits
• Combine certain deductions and credits
• Consider attribution rules for investment income
• Potentially lose eligibility for some single-person benefits

Behrendt recently advised a client who had to repay thousands in GST/HST credits after failing to disclose her common-law status. “She didn’t realize that by CRA standards, she was in a common-law relationship even though Ontario law wouldn’t have recognized her as such for property division purposes,” he says. Learn more at Common Law Relationships

The tax consequences become particularly significant during separation. Behrendt notes that unlike married couples who can transfer assets tax-free during divorce, common-law partners may trigger capital gains when dividing property. “We had a case where a client faced an unexpected $18,000 tax bill when transferring his share of a cottage to his ex-partner,” he recalls.

On the positive side, common-law couples can access many of the same tax benefits as married couples, including:

• The ability to claim spousal amounts
• Pension income splitting opportunities
• Combined medical expense claims
• Rollover provisions for certain assets

Behrendt recommends that common-law couples:

1. Review their tax status with an accountant
2. Consider filing status changes proactively
3. Document the start date of their common-law relationship
4. Plan carefully for asset transfers during separation

“The tax system doesn’t always align with provincial family laws,” Behrendt cautions. “Being common-law for tax purposes doesn’t necessarily mean you have rights to property or support if the relationship ends. This disconnect catches many people off guard.”