Tax Benefits of Marriage in Canada: What Couples ShouldKnow

September 11, 2024

Marriage is a significant milestone in life, filled with love, commitment, and dreams of a shared future. Beyond the emotional and social benefits, marriage in Canada also comes with various financial perks, particularly in the realm of taxes. Understanding the tax benefits of marriage can help couples optimize their financial situation and make the most of the advantages available to them.

1. Spousal Transfers and Income Splitting

One of the primary tax benefits of marriage in Canada is the ability to transfer certain tax credits and deductions between spouses. This can be especially beneficial when one spouse earns significantly more than the other or if one spouse has unused credits.

Spousal Amount:

If one spouse has a low income or no income at all, the higher-earning spouse can claim the spousal amount, which provides a non-refundable tax credit. For the 2023 tax year, the spousal amount is up to $15,000, depending on the lower-income spouse’s earnings.

Pension Income Splitting:

If one or both spouses receive eligible pension income, they can split up to 50% of this income on their tax returns. This strategy can reduce the overall tax burden, particularly if one spouse is in a lower tax bracket.

RRSP Contributions:

Contributing to a spousal Registered Retirement Savings Plan (RRSP) allows the higher-income spouse to receive a tax deduction while the funds grow tax-free until withdrawal. This is beneficial when the spouses expect to be in different tax brackets during retirement.

2. Tax-Free Transfers and Rollovers

Marriage allows for the seamless transfer of certain assets and funds between spouses without triggering immediate tax consequences.

RRSP Rollovers:

If one spouse passes away, the surviving spouse can roll over the deceased’s RRSP or Registered Retirement Income Fund (RRIF) into their own RRSP or RRIF without incurring taxes at that time. This allows the surviving spouse to defer taxes until they withdraw the funds.

Principal Residence Exemption:

If a couple owns more than one property, such as a home and a cottage, they can designate one property as their principal residence, which may be sold without incurring capital gains tax. While only one property can be designated per family unit, this
exemption can be strategically used to minimize tax liability.

3. Combined Tax Credits and Deductions

Marriage allows couples to combine certain tax credits and deductions, which can lead to significant savings.

Charitable Donations:

Couples can pool their charitable donations together and claim them on one spouse’s tax return. This is advantageous because the first $200 of donations are eligible for a lower tax credit, while any amount over $200 receives a higher credit rate. By combining donations, couples can maximize the higher credit rate.

Medical Expenses:

Similarly, couples can combine their medical expenses and claim them on the tax return of the lower-income spouse, which can lead to a higher tax credit. The threshold for claiming medical expenses is 3% of the lower-income spouse’s net income or $2,479 (for 2023), whichever is less. Combining expenses can help couples exceed this threshold and benefit from
the tax credit.

4. Canada Child Benefit (CCB)

For couples with children, the Canada Child Benefit (CCB) offers a significant financial advantage. The CCB is a tax-free monthly payment made to eligible families to help with the cost of raising children under 18.

Income Calculation:

The amount of CCB a family receives is based on their combined family net income. While a higher combined income may reduce the amount of the benefit, certain tax strategies, such as income splitting and maximizing RRSP contributions, can help lower the family’s net income and increase CCB payments.

Eligible Dependents:

In some cases, if one spouse supports a dependent child, they may be able to claim an additional amount on their tax return. This can further reduce the family’s overall tax liability.

5. Tax Planning for Retirement

Marriage offers several opportunities for tax planning during retirement, ensuring that couples can make the most of their savings and income.

Spousal RRSPs:

As mentioned earlier, spousal RRSPs allow couples to shift income from the higher-earning spouse to the lower-earning spouse during retirement. This strategy can help both spouses stay in lower tax brackets during retirement, minimizing the overall tax burden.

Pension Sharing:

Similar to pension income splitting, pension sharing allows couples to allocate pension benefits between themselves, which can result in tax savings. This is particularly useful when one spouse has a large pension while the other has little to no pension income.

Old Age Security (OAS) Clawback:

The OAS clawback is an income-tested recovery tax that reduces the OAS benefits for individuals with high net incomes. By splitting pension income or contributing to spousal RRSPs, couples can reduce their combined income and potentially avoid or minimize the OAS clawback.

Connect with The Marry Men

6. Tax Implications of Spousal Support

In the event of a separation or divorce, spousal support payments can have tax implications for both
the payer and the recipient.

Deductibility:

Spousal support payments are tax-deductible for the payer and taxable income for the recipient. This can provide a tax advantage to the higher-income spouse, as the payments reduce their taxable income. However, it’s important for the recipient to plan for the tax liability on the support received.

Child Support:

Unlike spousal support, child support payments are neither tax-deductible for the payer nor taxable for the recipient. Couples should consider this when negotiating support payments to understand the full tax impact.

7. Legal and Administrative Considerations

While marriage offers many tax benefits, there are also legal and administrative considerations that couples should be aware of.

Updating Information:

After marriage, it’s essential to update personal information with the Canada Revenue Agency (CRA), including changing marital status and updating beneficiary information on accounts like RRSPs, TFSAs, and life insurance policies.

Joint Filing:

In Canada, spouses do not file a joint tax return. However, their information is interconnected, and certain credits and benefits are calculated based on the combined income. Couples should ensure that their tax returns are coordinated to maximize the benefits available to them.

Legal Responsibilities:

Marriage creates legal responsibilities between spouses, particularly in terms of financial support. It’s important for couples to understand their rights and obligations, especially in the event of separation or divorce, to avoid unexpected tax liabilities or financial
hardships.

8. Consulting with a Tax Professional

Navigating the tax benefits of marriage can be complex, and the strategies that work best for one couple may not be ideal for another. Consulting with a tax professional is highly recommended to ensure that couples are making the most of the tax advantages available to them.

Personalized Advice:

A tax professional can provide personalized advice based on the couple’s unique financial situation, helping them optimize their tax planning strategies.

Tax Planning:

Regular tax planning meetings can help couples stay on top of changes in tax laws and regulations, ensuring that they continue to benefit from all available tax advantages throughout their marriage.

Avoiding Pitfalls:

A tax professional can also help couples avoid common pitfalls, such as inadvertently triggering a tax liability or missing out on valuable credits and deductions. Marriage in Canada brings not only joy and companionship but also a variety of tax benefits that can significantly enhance a couple’s financial well-being. From income splitting and spousal transfers to retirement planning and child benefits, understanding these advantages allows couples to make informed decisions that benefit their financial future. As with any financial matter, it’s important to seek professional advice to navigate the complexities of tax planning and ensure that you and your spouse are maximizing the benefits available to you.