Marital Status

MARRIAGE, DIVORCE AND TAX

Your marital status is also important.

If alimony or maintenance is involved, one spouse can choose to use the standard married exemption or claim the alimony and maintenance payments, whichever is larger. This rule applies only in the year of the separation and also only in cases where one spouse has no income while married. This is because the claiming spouse can use either the married exemption or maintenance payments " but not both. The spouse receiving the support payments must show it as income regardless of which method is used by the person making the payments.

After the year of separation, the spouse paying the maintenance must deduct only the amount of maintenance and alimony paid.

Who claims the children in the year of separation? The claim for a child is for a "wholly dependent" child whom you supported at some time during the year " not necessarily the whole year. The absent parent has the choice of claiming the maintenance paid or the full standard exemption for the period of time before the separation, and the other parent may make the same claim for the period of time after the separation.

It will be more beneficial to the parent who has custody to make the "equivalent to married" claim for a child, but since this prevents the absent parent making a dependent child claim, it is better to get together with your "ex" to decide which is the best method to choose. If you are not on speaking terms, make the best claim for yourself but remember if it can't be sorted out between you, Revenue Canada will disallow both claims.

If you are both claiming the children as dependents, who has to report the family allowance as income? You both do. The simplest way is to split it down the middle for each child you are both claiming.

In the year of re-marriage, you may still claim the "equivalent to married" exemption. Remember, you qualify because "at some time" during the year you were a sole head of the household. Your new spouse cannot make any claim in the year of re-marriage for the person you claim as equivalent to married.

In a common-law situation, who claims the children? The natural mother always has the first claim if she wants it. But, as long as she agrees, her husband may make the married equivalent claim for a child, even though it may not be his natural child. The tax department considers any child who is not related to you by blood or marriage, but who is dependent on you for support, to be adopted in fact, if not by law. Here is yet another reason not to get married! If both people are working, they each get the basic personal exemption, plus one of them can make an "equivalent to married" claim.

A single, separated or widowed father who has custody of his children may claim his common-law wife as a baby-sitter providing she is not the mother and does provide the care for his children. Once the mother's wedding bells have rung and she is officially the step-mother this claim is no longer available.

Claims can become very complex when death, divorce and re-marriage occur during a tax year and his, hers, and their children are involved. It is up to you to make certain you have made all the claims you are legally entitled to.

WHAT IS A LEGAL SPOUSE?

The tax act says a taxpayer may claim a married exemption if he (or she for that matter) is a "married person who supported his spouse". However, there is no definition of "spouse", or "married", in the act. Departmental policy is to accept a marriage if the parties are married in a church or by a justice of the peace or, in the case of a native Indian, in a tribal ceremony.

The 1990 return's amount for a spouse is $5,141 provided the spouse has no earnings. If you are not married "legally" this will cost you up to $2022 in income tax (40 % of $5,141) " more tax to pay " an unfair penalty!

In the last few years society's view of a legal spouse has definitely changed. For example, in several states in the U.S.A. it is now necessary for a couple to get a divorce if they have lived together for over two years and then separate. It would seem that in some jurisdictions at least, a common-law spouse is synonymous with a "legal" spouse. I maintain that we have reached that point in Canada because the Canada Pension Plan and the Old Age Security Act recognize the "common-law" spouse for pension benefit purposes after one year of living together, if there is no bar to marriage, and after three years where such a bar exists.

The rules for common law spouses and RRSP withdrawals and rollovers at the time of death of one of the spouses have changed dramatically. For all intents and purposes, common law spouses are being treated like `legal' spouses for pension and RRSP purposes (see my 1990 INVESTMENT/RRSP BOOK " $14.95 at your bookstore).

I also see legislation in several provinces recognizing "common-law" spouses for estate and family law purposes; there the common-law spouse (usually the woman) sues her "ex" or the estate for support and usually receives it.

In each province, and for each act, the qualifying cohabitation period varies any where from one to seven years. There is no doubt that society's morals are changing and I advise everyone living "common-law" to examine his or her situation and conscience carefully when the time comes to fill in that important question in the heading of the tax return.

If you then decide that you qualify as "married" under this broader definition then by all means check off the married box, and do not compromise your choice by writing in the words "common-law". Writing in those words only shows that you doubt your own marriage.

But while we are on this question it is also good for you to ask yourself the question, "For tax purposes, is it a good thing to be married?" Quite often the short term advantage of claiming the married exemption is very much outweighed by its long term disadvantage. The difficulty that arises from being married is not always obvious, and is based on a number of different parts of the tax law which will become obvious in other parts of this book. The effect of all of them together is that it is much easier to divide income down the middle if you are not married than if you are, because there are far more restrictive rules when you are doing business with a spouse than with anyone else.

The short of it is that even though we may be quite willing to defend a person's rights to claim a "common-law" spouse as a dependent, we do not always think that the claim is the best thing for a person's financial affairs. So if you are considering marriage or a "common-law" spouse claim, think of the tax consequences before you commit yourself.

Please Note: On November 19, 1979, a common law marriage claim was lost in a lower court where there was a legal wife in the background.

Also, Please Note... As of January 1, 1982, a legally married couple may NOT claim a principal residence each (such as the family house and a cabin). A common-law couple CAN claim the cabin and the house capital gains tax free. If we are talking about a cabin going from $100,000 to $200,000 in the next ten years, that would represent a $25,000 tax penalty for being married.

 

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Last Updated Friday, July 10 2009 @ 02:20 PM PDT|9,350 Hits View Printable Version

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