Marriage or the single life: Which is more taxing?

At one time, tying the knot was a given for many Canadians, but it’s a different story today. According to new Statistics Canada census data, there are more unmarried people than married people in the country for the first time ever.

The newly released census data says that 51.5% of Canadians aged 15 and over are not married, while 48.5% are. These stats differ drastically from 20 years ago when only 38.6% of the population was single.

What does this mean? Well, from a tax perspective, it could mean a lot.

The common perception is that marriage equals tax savings, which isn’t necessarily true. In fact, before the last budget, lovebirds were at a disadvantage to their single friends.

At that time a working spouse, whose partner wasn’t employed, was only allowed to use $7,581 of their significant other’s basic personal amount. The problem was that the basic personal amount was $8,929, so a married couple couldn’t claim the equivalent deduction as two working individuals. The “marriage penalty,” as it was called, was wiped out in the 2007 budget, when the government raised the spousal amount to fall in line with the basic personal amount.

While marital benefits from year to year are marginal, marriage can invite some significant tax advantages over the longer term. “All the rollover provisions in the Income Tax Act apply,” says Sandy Cardy, vice-president, tax and estate planning services, Mackenzie Financial. That means if a spouse passes away, his or her registered plan will roll over to his partner without any immediate tax effect.

Another advantage is those who are married or in common-law relationships can contribute to their partners’ RRSP accounts. “You get the tax deduction, but the money is in the spouse’s name,” says Jamie Golombek, vice-president, taxation and estate planning, AIM Trimark Investments. “When it’s withdrawn upon retirement, the money can be taxed in the spouses’ hands at their own rates.”

Golombek says this is often done to “smooth out retirement income.”

One of the biggest coups for married couples was when the federal government announced last March that couples could split pensions. “I think it’s a fantastic measure,” says Golombek. “And that pension that they may be splitting could be a company registered pension plan.”

Now, a married person can take up to 50% of his or her pension and give it to the lower-earning spouse, bringing down overall taxes. “That’s a huge benefit of being married,” says Golombek.

But while there are definite tax savings for those in married or common-law relationships, coupledom has its downsides.

For one, individuals who each own a property before marriage better think about selling one of their homes after getting hitched. That’s because a couple is allowed to have only one property as the primary residence. “In my situation,” says Cardy, “I’m married and we have a home and a cottage, but when we sell, we can only take a principal residence exemption on one.”

If your client’s not considered a family unit — which could be tough to prove if a couple has been living together for more than a year — then that client could sell his or her home tax free. Luckily, newly minted couples have a year to sort out their property issues before the post-married principal residence exemption takes effect.

The other disadvantage to marriage or common-law relationships is attribution rules. That means, essentially, that you can’t split income with a spouse. “If you give money to your partner to invest, then any income and gains attribute back to you,” says Golombek.

“If you’re the one that earns it, you’ll be forever reporting income on that,” adds Cardy.

But if you give a friend a lump some of cash to invest, that friend will have to report its earnings as income. This can work with adult children, says Cardy, but the money has to be considered a gift, not a loan.

While there are pros and cons to getting married from a tax standpoint, it’s unlikely the 48.5% of married people are doing it to split their pension. Still, when retirement rolls around for your single clients, you might want to suggest that they get hitched.

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(09/12/07)

Bryan Borzykowski