Taxes for LGBTQ+ couples in Canada

Canada is a country that acknowledges all form of love. But love and taxes are two separate entities. Did you know that same sex couples, whether married or common-law partners have the same tax benefits in Canada as straight couples? The Canada government understands that whether you are binary, gay, lesbian, transgender, or anywhere on the LGBTQ+ spectrum, you deserve to be seen and empowered with the right kind of tax knowledge.

The dynamics of tax filing for same-sex couples have undergone a substantial transformation following the Supreme Court's decision to invalidate the Defense of Marriage Act (DOMA) last June. This landmark ruling mandates that legally married same-sex couples now file their taxes jointly, marking a historic shift. Consequently, these couples can now access the same federal tax advantages that were once exclusive to heterosexual marriages, marking a significant stride toward equality in tax benefits.

Navigating Tax Implications for Same-Sex Couples: What You Need to Know

In Canada, the Canada Revenue Agency (CRA) recognizes common-law partnerships for tax purposes. To be considered common-law partners by the CRA, you generally need to meet certain criteria, which include –

• Living Together

You and your partner must be living together in a conjugal relationship. This means a relationship akin to marriage, and not merely cohabiting as roommates.

• Duration of Relationship

You must have been living together for at least 12 consecutive months. Note that the clock starts ticking from the moment you begin living together in a conjugal relationship.

• Exclusivity

You should not be married to or in a common-law partnership with anyone else during the period you are claiming as a common-law partnership.

• Public Recognition

Your relationship should be publicly recognized. This means that you and your partner present yourselves as a couple to family, friends, and the community.

• Financial Interdependence

There is no specific financial criterion for common-law status, but the CRA may consider your financial interdependence. This could include joint bank accounts, shared bills, or other financial arrangements that demonstrate a merging of your economic lives.

Regardless of your gender or self-identification, your tax filing process remains unaffected by your relationship status unless you are in a common-law or marital arrangement. To qualify as common-law per the CRA, you and your partner must have consistently cohabited for over a year, share a child (biologically or through adoption), or have joint custody of a child under 18.

Once recognized as common-law partners, your taxation follows the same principles applied to married couples. If your cohabitation period is less than a year, and there are no children involved, simply designate yourself as 'single' on your tax return and proceed with filing.

Benefits of filing your taxes together

In Canada, each person is required to file their individual tax return; there is no provision for joint returns for couples. However, coordinating the preparation of your returns simultaneously is the most effective method to maximize the tax benefits associated with marriage or common-law partnerships.

4 important tax breaks to consider –

1. Transferring unused credits

If you file jointly as a married or common-law couple and find yourself with unused tax credits, there's the opportunity to transfer these credits to your partner, thereby reducing their taxable income. These transferable credits encompass various categories like the age amount, tuition amount, disability amount, and pension income amount.

In the tax year 2024, Canadians can earn up to $15,000 without incurring federal taxes, thanks to the Basic Personal Amount (BPA).

2. Combining credits and expenses

Now, you and your partner have the option to combine specific expenses and designate one of you to claim the total amount. This consolidation encompasses medical expenses incurred by yourself, your partner, and children under the age of 18, which can be recorded on line 33099. Additionally, you can claim amounts paid for other dependents on line 33199, such as children over 18, grandchildren, parents, grandparents, siblings, aunts, nephews, or nieces—provided they are residents of Canada. This pooling of credits allows for a more streamlined approach to claiming eligible expenses and optimizing your overall tax situation.

3. Contribute to spousal RRSP

A Spousal Registered Retirement Savings Plan (Spousal RRSP) is a financial tool available in Canada that allows a higher-earning spouse to contribute to an RRSP on behalf of their lower-earning or non-earning spouse. This strategy is designed to promote income splitting in retirement, potentially resulting in lower overall taxes for the couple. The only difference is that you can contribute to it, but it remains in your partner’s name and under their control. Some of the key features of spousal RRSP are –

• Contributions

The spousal RRSP is contributed by the contributing spouse on behalf of the lower earning spouse. The tax break goes to the contributing spouse.

• Tax Benefits

This permits income-splitting of RRSP funds upon retirement under the spousal RRSP. Withdrawals from a Spousal RRSP attract little or no taxes that have been paid and are hence a deduction in the hands of the low-income spouse thus reducing their net tax liability as a family unit.

• Withdrawals

There are usually attribution rules which apply for Spousal RRSP withdrawals. The income could be shifted outwardly and be treated as if it was contributed by the contributing spouse in the year of withdrawal, or some other year between calendar years immediately before the withdrawal year.

• Contribution Limits

A spousal RRSP has the same limit for contributions, as the regular one does. Nevertheless, an addition to a Spousal RRSP affects no contribution space owned by the adding spouse. Contributing to one’s own RRSP affects one’s own RRSP contribution room and does not contribute to the spouse’s contribution room.

• Retirement Planning

Most times, this strategy is resorted to on cases of marked income disparities across spouses, where each partner makes different contributions to their retirement accounts. Couples can also reduce overall taxes on retirement by having equalized retirement income.

• Estate Planning

Estate plan can also be facilitated through spousal RRSPs. Since there is no tax payable on contributions into such retirement plan, upon the demise contributing spouse, these assets can be rolled over for a living spouse’s own RRAP and/or RRIF without immediate taxation.

4. Applying for a joint mortgage

Are you anxious to settle down among fellow men where you want yourself to belong? This would therefore mean getting a joint mortgage application. You stand a better chance of having a higher mortgage and a low interest on the loan because the combined income strength is considered during approval of the mortgage application.

Additionally, going beyond the 20% of the initial deposit exempts an individual from paying mortgage insurance premia. This not only boosts your buying power, but it brings a step further to your joint dreams of having that home which you’ve been picturing for a long time now-side by side.

Tax breaks for LGBT couples planning to start a family

1. Adoption related expenses

Regardless of sexual orientation and gender identity, there is an adoption expense tax credit available to all parents. The same-sex couples will be eligible for the tax credit where they will claim an adoption-related expense. Here are key points specific to adoption-related expenses for same-sex couples –

• Equal Treatment

Canadian laws on adoption-related expenses are not biased against same-sex couples who wish to become parents. Same sex couples enjoy similar benefits, subject themselves to the same eligibility requirements like their straight counterparts.

• Eligible Expenses

Adoption expenses that same-same couples have to pay are the fees directed to licensed adoption agencies as well as travel fees spent on a child’s journeying and life support. In some cases, medical costs associated with adopting the child may be allowed.

• Claiming the Credit

Same-sex couples can claim the Adoption Expense Tax Credit in their fiscal year, which ends at the conclusion of the adoption process. This period includes application for registration of the adoption or physical transfer of a child in the custody and under the control of the adoptive parents.

• Receipts and Documentation

Like in any case of adoption in the US, same sex couples must also keep every receipt of their expenses on the adoption. Such documentation involves invoices from adoption agencies, lawyers’ bills, or any other evidence of expenses.

• Limits and Carry-Forward

However, there are restrictions on the amount of adoption expenses that can be deducted per child. Whereas any unused amounts can be carried forward and claimed on an annual basis where the total expenses exceed the limit.

Canada Child Benefit (CCB)

The Canada Child Benefit (CCB) is a tax-free monthly payment provided by the Canadian government to eligible families to help with the costs of raising children under the age of 18. The CCB is intended to support low and middle-income families and is designed to be responsive to each family's unique circumstances.

Key features of the Canada Child Benefit include –

• Eligibility Criteria

To be eligible for the CCB, you must meet certain criteria, including being a resident of Canada for tax purposes and primarily responsible for the care and upbringing of the child. The child must be under 18 years of age, and you must be the person responsible for the child's care and upbringing.

• Application Process

Most individuals are automatically assessed for the CCB when they file their annual tax returns. However, it's important to ensure that you are filing your taxes each year, even if you have no income, to determine your eligibility for the benefit.

• Calculation of Benefit

The amount of the CCB is calculated based on various factors, including family income, the number of children in the family, and the age of the children. The benefit is income-tested, meaning that it is reduced for higher-income families.

• Payment Structure

The CCB is typically paid monthly, and the amount is recalculated every July based on your income tax return for the previous year. Payments are directly deposited into your bank account, and you may also receive a statement outlining the benefit.

• Additional Benefits

Families with children under the age of six may be eligible for the Canada Child Benefit Young Child Supplement, providing additional financial support for younger children.

• Responsibility Changes

If there are changes in your family situation, such as a change in custody arrangements or a change in the number of children in your care, it's important to inform the Canada Revenue Agency (CRA) to ensure that your benefit is accurately calculated.