Common-Law Partnership: A Status That Affects Your Taxes

Common-Law Partnership: The Sneaky Status That Affects Your Taxes

As a common-law couple, you can take advantage of certain tax credits and benefits unavailable to singles, but you could also lose access to others.

If you’re living with a partner but aren’t married, you may be in a common-law partnership — a relationship status that can significantly affect your finances, especially during tax season. Roughly a quarter of Canadians are common-law couples, according to a 2022 study from Statistics Canada.

“In Canada, if you meet the definition of common-law partners, then you are treated the same as a married couple for income tax purposes,” Michael Callahan, an advice and planning strategist at Edward Jones Canada, said in an email.

Common-law partners have access to certain tax credits and perks. But they may also lose some of the benefits they received as a single person.

Are you in a common-law partnership?

Unlike marriage, which often comes with a degree of foresight, common-law partnerships typically develop without formal planning, so the status can sneak up on you.

If you’ve lived with your partner for at least one year in a conjugal relationship, you’re likely considered common-law by the Canada Revenue Agency (CRA) and must declare so on your tax return to avoid penalties.

Other circumstances can also trigger the common-law status: “If you have not lived together for up to 12 months, the Canada Revenue Agency may still consider you common-law partners if you share a child by birth, adoption, or if one of you supports the other’s child,” Callahan says.

Provinces and territories have their own rules regarding how long you need to live together to be considered common law. For example, in Ontario, it is three years (or one year if you have children), but the threshold is only two years in British Colombia.

How your finances can change after you couple-up

Entering a common-law partnership changes the way the government evaluates your total household income, which can affect your taxes and access to benefits, similar to marriage.

“Your combined income might make you ineligible for certain benefits programs you previously qualified for,” Callahan says. But it can also provide a few perks. “Married and common-law couples can leverage various tools that could reduce the taxes they pay at the household level.”

The upsides

In a common-law partnership, you get access to certain tax credits and benefits that can help lower your tax liability as a couple.

Spousal tax credit: If your partner’s net income is less than your personal basic amount (BPA) — how much tax-free income you can earn — you may be eligible for a spousal credit. The credit is calculated by subtracting your partner’s income from your BPA, then multiplying it by 15%. For the 2024 tax year, the maximum BPA is $15,705.
Caregiver credit: You may qualify for an additional credit if your partner “has an impairment in physical or mental functions,” according to the CRA. This amount is typically added to the spousal credit.
Transfer unused BPA: If you don’t fully use your BPA, you can transfer unused portion to your partner to help them lower their tax liability. For example, if you only earn $10,000 in the year, the remaining $5,705 can be transferred to help them lower taxes.
Pension splitting: Eligible couples can split up to 50% of their pension income. Depending on the income levels of both partners, splitting a pension can also help lower tax liability. For example, if one partner earns $60,000 in pension income and the other has none, splitting the income can reduce the rate from 20.5% to 15%.
Higher deduction for medical expenses: Medical expenses are deductible minus 3% of your income (or $2,635, whichever is less). So, if your partner earns less than you, they’ll likely be able to deduct more to achieve additional tax savings.
Registered Retirement Savings Plan (RRSP): Couples can contribute to a spousal or common-law partner RRSP which allows the higher earner to lower their tax liability while setting up a retirement plan for their partner.
FHSA deductions: While you cannot contribute directly to a partner’s first-home savings account, you can gift them money, which they can use to contribute to their own account and take advantage of the deduction.

The downsides

When you couple-up, your adjusted family net income is likely to increase, which may make you ineligible for certain credits and benefits, such as the GHT/HST credit, CCTB and CWB entitlements.

GST/HST credit reduction: While single filers earning $55,000 each could qualify for the credit, a couple with the same incomes may not. Even if eligible, the maximum credit for a couple is $680, compared to $519 each as singles, a difference of $358.
CCTB and CWB entitlements may change: Similar to the GST/HST credit, eligibility for the Canada Child Tax Benefit (CCTB) and Canada Workers Benefit (CWB) is based on your adjusted family net income, which can increase when you marry or become part of a common-law partnership.

Long term financial effects of common-law partnerships

While common-law partnerships are treated similarly to marriage in many respects, significant differences emerge in cases of separation and inheritance. For instance, support obligations and the division of assets during a breakup are handled differently, Callahan says.

Unlike married couples, common-law partners generally don’t have automatic rights to property and assets after a relationship ends. The perk is that common-law separation is a lot less legally complex. After living apart for at least 90 days due to a breakup, you are no longer considered to be in a common-law relationship.

Inheritance is another right that isn’t automatically afforded to common-law partners. Without a will, surviving spouses typically inherit assets automatically, but common-law partners only receive what is stated in a will.