In Canada, marital status has a significant impact on personal tax filing. Married couples can maximize their tax returns by filing their taxes jointly. If you receive tax credits and benefits from the CRA that you are not entitled to, due to incorrect marital status, the CRA may ask you to repay them with penalties and interest charges thereon. If you are married, you must include your spouse in your tax return, as certain tax benefits are associated with family income.
Your tax preparation software may have the option to prepare a ‘coupled return’. All you need to do is to fill in your spouse related information and the software will automatically maximize the tax benefits for the couple as a whole while generating two separate returns. If your spouse claims credits, such as the CCB, or GST/HST, or if they owe any payments, you must report that as well. The spouse with the higher income should always maximize deductions to reduce paying taxes to the CRA at a higher rate. Your family income is combined to calculate the GST/HST tax credit and Canada Child Benefits.
Eligibility for Deductions & Benefits
Eligibility for deductions and benefits will change with the change of marital status. You can also reduce your tax liability to a joint return through certain transfers. If your spouse attended college and does not require the full tuition credit to reduce his/her taxes due, you can claim part of your spousal tuition expenses on your return. Other potential transfers may include the disability amount, pension income amount, and age amount. You can also pool your medical expenses and apply the deduction to a partner’s tax return who can use these deductions more effectively. Similarly, if your partner’s income is below a certain threshold, you can also claim an additional tax credit.
If you and your spouse have jointly elected to split your eligible pension income by completing Form T1032 (Joint Election to Split Pension Income), you can benefit from this by paying less tax overall.
RRSP Contributions
If you make contributions to your spouse's RRSP, it can be deducted from your taxable income. This is advantageous if you have a higher net income, which is taxed at a higher rate than your spouse. However, contributions you make to a spouse's RRSP lower your own deduction limit. The total amount you can deduct for the contributions you make to your or your spouse's RRSP cannot be more than your own deduction limit. If you are unable to contribute to your RRSP due to your age, you can still contribute to your spouse till the time your spouse turns 71.
It's easy to fill in your partner's relevant information in your tax software, but it's hard to decide which tax credits and deductions to claim on each tax return. Your tax software will ask you to enter your information and your spouse's information. The software will process the numbers and optimize both returns to minimize total tax liability, maximize refunds and tax credits, where possible.
Your tax software will also help you avoid common mistakes when preparing coupled returns. If you file your tax return with incorrect marital information, the CRA may reassess your returns and may also impose additional interest and penalties. Lastly, if you live apart for reasons other than the end of a relationship, you can still file your tax return as ‘Married’. For example, if you live separately for work, educational, or medical reasons, the CRA considers you married. Remember, once you get married, even if you get divorced, you will never be able to file a single return.
If you face any kind of difficultly in preparing and filing your personal tax return with the CRA, please do not hesitate to contact us at GTA Accounting, we will analyze your data and optimize your taxes to maximize tax benefits for you.