Have your long weekends already been booked up? Did you have much of a say on how you used your vacation days? Are your social media accounts inundated with congratulatory messages and ideas for the perfect centrepiece? If so, it's because wedding season is upon us.
I am a supporter of marriage; after all, I am happily married. However, it's worth considering whether it's more financially beneficial to be married or live in a common-law arrangement. By common-law, I mean a couple that is living together but who are not legally bound. According to projections by Statistics Canada approximately 43 per cent of marriages entered into in 2008 will end in divorce. For that reason alone, some people may think that a common-law partnership is a better idea, to avoid a possible legal headache.
With tax season wrapping up, it's important to note that the Income Tax Act treats legally married and common-law couples the same across the country. In fact, you're obligated to file your taxes together if you are a couple by either definition. There are a number of tax benefits available to legally married and common-law couples that you and your spouse can take advantage of.
Some benefits to filing your tax return as a couple includes the ability to:
•Split certain types of pension income
•Split retirement income
•Transfer assets between each other without triggering gains or losses
•Open a spousal RRSP
•Withdraw up to $50,000 as a couple from your RRSPs under the Home Buyers' Plan (HBP) and put the loans toward your first home
•Withdraw up to $20,000 from your RRSP under the Lifelong Learning Plan (LLP) for you or your partner to pursue higher education or training
•Claim the Spousal Tax Credit
•Transfer unused personal tax credits between each other
Income splitting
You can do this through spousal RRSP contributions, but keep in mind that after age 65 it doesn't matter whether the income is in the form of a Pension or RRIF. This strategy is perfect for relationships where one spouse earns more than another. It involves the higher-earning partner investing in a spousal RRSP, resulting in balanced retirement incomes and a lower marginal tax rate, as well as a tax reduction at the time of investment.
You can also enjoy the benefit of income splitting with your pension and allocate up to half of your pension income to your spouse. Like a spousal RRSP, this will help lessen your tax burden and reduce the overall combined tax amount you pay as a couple.
While these strategies are available to all couples, it's important to work with an advisor to ensure that you're taking advantage of them correctly.
Financial differences
The obvious financial difference between getting married or being a common law couple is the cost of the wedding itself. I really loved my wedding, and my wife and I carried with us the positive energy we received for a long time afterwards. But it wasn't cheap! I have chatted with several clients who have opted to use the money they would have spent on a wedding for a down payment for a house or a dream trip together.
Aside from the potential cost of the wedding, the major financial difference between a legally married couple and a common law couple occurs if they decide to end the relationship. Married couples need to file for a divorce; common law couples do not. Divorce proceedings can be expensive.
On the other hand, common-law partners do not necessarily have any guaranteed financial assets or property rights. Legally, common-law relationships fall under provincial jurisdiction, and while Family Law Acts exist to protect unmarried spouses, they vary greatly. Unless you signed a domestic contract or cohabitation agreement, you might be in for a surprise. For example, in some provinces, if a common-law partner dies without a will, their partner will not automatically inherit the estate. For this reason, I strongly advise people to seek out professional advice when it comes to tax and estate planning, including updating your current will, as marriage may void any existing will you've prepared.
Whether you're married or in a common law relationship, it's important to discuss your expectations and make sure that you are on the same page when it comes to your assets and financial plan.
Holistic advice
Schedule a meeting with your advisor and your lawyer in order to update your will, review your insurance coverage and discuss strategies to maximize your tax efficiency. This is where holistic financial planning becomes so important. It's crucial to have communication and integration across all platforms -- accountants, lawyers, advisors -- to ensure that you are properly protected.
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