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.
