Here’s why the CRA wants to know what’s going on in your bedroom
So you snore a little and your spouse has you sleeping in a separate bedroom. That’s your business, right? Maybe not.
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The state of your marriage or your common-law status is the government’s business as well because of the tax advantages you might get from being married or, conversely, the deductions you might be able to keep by saying you’re still single.
Expanding income splitting for families, something seniors have been able to do with pensions since 2007, could bring the government into your bedroom like never before.
It’s not like the Canada Revenue Agency and the courts haven’t been there previously. Case law on the subject goes back as far as 1980, with one particular court decision often cited because it outlines key criteria for defining what constitutes a common-law or marital relationship.
That decision — in which the judge decided to provide guidance into what could be considered cohabitation in a marriage-like or conjugal relationship — included a general list that pointed to shelter, sexual and personal behaviour, services performed like meal preparation, social activities together, economic support and what is happening with any children involved.
Living together and sharing expenses is not enough. You have to have a relationship
“People claiming something they are not run the risk of the CRA sending a detailed questionnaire which will ask questions based on all of the criteria,” said lawyer Robert Kepes, of Morris Kepes Winters LLP. He has had clients who have been sent such a questionnaire but it has been focused on people claiming to be living “separate and apart” in the same house.
“Living together and sharing expenses is not enough. You have to have a relationship,” said Mr. Kepes. “I think a judge will look at all of them and see whether you tip the scales in terms of all of the criteria.”
Just because you sleep together in the same room doesn’t mean you won’t meet the criteria of being married. Mr. Kepes says he knows married people who don’t sleep in the same room. “They had to get a second room for a husband because he snores so badly,” he says.
More than a few couples might fail the part of the relationship test that asks if they eat their meals together but might score points for buying gifts for each other on special occasions.
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Jamie Golombek, managing director of tax and estate planning at Canadian Imperial Bank of Commerce, says historically the federal government has been more interested in proving you are married to yank away some of the clear benefits to singles, than proving claims to be coupled are false.
Singles found to be in a marital relationship can lose income-tested benefits like GST/HST credits, the Child Tax Benefit or the Guaranteed Income Supplement. Also, since 1982, couples can only claim one exemption from capital gains on principal residence.
For seniors, pension income-splitting has been around since 2007 and one certified financial planner has even joked about telling two of his female clients they should “marry” to take advantage of the the government policy which allows the partner with the richer pension to notionally pass on income to the poorer person in the marriage in a lower tax bracket.
Some singles might see the latest move by the federal government to allow income-splitting for families as a reason to get into a “relationship” to fool the Canada Revenue Agency. In the case of income-splitting provisions announced a week ago, mind you, you do need to produce children under the age of 18. And the maximum benefit is $2,000 a year.
You would really have to commit tax fraud to do this and lie
“You would really have to commit tax fraud to do this and lie,” says Mr. Golombek, who has never seen a case of the CRA going after seniors for a “fake” relationship. “The real disadvantage here is you can’t pension split,” says Mr. Golombek.
The CRA has rules about what constitutes marriage, common-law or otherwise. “You are married or in a common-law partnership with each other in the year and were not, because of a breakdown in your marriage or common-law partnership, living separate and apart from each other at the end of the year and for a period of 90 days or more beginning in the year,” according to a link provided by the government agency.
“The CRA runs multiple validation reviews each year. One component of these reviews is the validation of the marital status information,” said Philippe Brideau senior media relations advisor and spokesperson for CRA, in an emailed statement.
Certified financial planners say they seldom see people faking their marital status for tax reasons. “I know somebody who did that [got married for tax and financial reasons] and their marriage has since split up,” says Jeanette Brox, a certified financial planner with Investors Group Financial Services Inc. “It was the end of the year and she wants to get married and he’s thinking ‘I can claim her as a dependent so what the hell.’ Well, they’re divorced.”
That’s why she advises keeping your relationship decisions separate from your tax decisions. “I have a lot of clients who are very close in income, so splitting income and pensions won’t do much good,” says Ms. Brox.
Susan Eng, vice-president for advocacy at CARP, which represents seniors and retired people, said even though about 6% to 7% of seniors in Canada are below the poverty line, people should tread very carefully on declaring their marital status. “You don’t want the CRA coming down on you,” she says, referring to tax penalties that could force you to pay back the benefit plus a penalty of as much as 50% of the amount.
Garry Marr- Financial Post- November 7, 2014
