If you are in a common-law relationship in Canada, deciding when to declare it to your friends and family is one thing, but when it comes to the Canada Revenue Agency (CRA), you don’t enjoy nearly the same discretion as to when you get to do so. This is because it carries legal and financial implications and misrepresenting your relationship status can have serious consequences.
When Do You Need to File as Common-Law?
The definition of a common-law relationship depends on the legal context. Under the Income Tax Act, a common-law partner is defined as:
- A person who cohabits in a conjugal relationship with the taxpayer and either:
- Has cohabited with the taxpayer for at least 12 consecutive months, or
- Has a child with the taxpayer.
This relationship is considered to have ended if the partners have been living separate and apart for at least 90 days due to the breakdown of the conjugal relationship.
You must declare your common-law status on your tax return once you meet this definition, as it directly impacts your eligibility for certain credits, benefits, and tax obligations.
Not Sure What You Should Do?
Consult an accountant or tax professional to ask them.
What is the Penalty if You Don’t Declare Your Common-Law Status?
Failing to declare your common-law status and instead filing as single is technically falsifying records and claims, therefore it is considered tax fraud under Canadian law.
Here are the potential consequences:
Financial Penalties
The CRA may impose significant fines for filing false or misleading tax returns. These penalties are separate from the repayment of any overclaimed benefits.
Interest on Past-Due Taxes
In addition to requiring repayment of any overclaimed benefits or credits, the CRA will apply interest to amounts owed. If you have misrepresented your status for many years, the accumulated interest can be substantial.
Criminal Charges
In extreme cases, the CRA may pursue criminal charges for tax fraud. A conviction under the Criminal Code can result in severe consequences, including:
- A prison sentence of up to 14 years,
- A criminal record,
- Fingerprinting,
- Restrictions on foreign travel, and
- A permanent loss of credibility with financial institutions or employers
Section 380 of the Canadian Criminal Code
Cohabitation agreements
Moving in together is a big step. Take it on solid ground.
A cohabitation agreement protects you both, whatever comes next.
How Would the CRA Know You’re in a Common-Law Relationship?
The CRA uses several methods to identify misrepresentation, including:
- Random Audits: Your returns may be selected for audit without prior suspicion.
- Red Flags: Discrepancies or inconsistencies in your tax returns can trigger further review.
- Tips: The CRA accepts tips from the public through its Informant Leads Program, which allows individuals to report suspected tax fraud anonymously.
If the CRA determines that you have falsely claimed single status, you will likely be required to repay the full amount of any benefits or credits received as a result of your misrepresentation, along with interest and potentially additional financial penalties.
Why Does Filing Status Matter?
Your relationship status affects your eligibility for certain credits, benefits, and deductions, such as the GST/HST credit, Canada Child Benefit (CCB), and spousal amounts. Filing as single when you’re actually common-law isn’t seen as just an oversight, it’s considered tax fraud.
For example, the CCB is calculated based on household income so if you don’t include your partner’s income, you might receive a benefit you’re not entitled to. This can lead to an overpayment you’ll have to repay, often with interest. Similarly, some deductions available to single taxpayers aren’t available to those who are common-law.
Filing as Single When Common-Law and Alternative Ways to Protect Your Finances
Accurately declaring your relationship status on your tax return is not optional, it is a legal obligation. Claiming single when you are common-law can result in financial penalties, interest on unpaid taxes, and even criminal charges.
If you are uncertain about whether you meet the CRA’s definition of common-law, consult with a tax professional to ensure you comply with the law. Honesty in your tax filings is not only the right thing to do but also protects you from costly and potentially life-altering consequences.
If you would like to discuss other ways to safeguard your assets in a common-law relationship, consult with a legal advisor to see how you can do so legally and strategically with a cohabitation agreement.
Can you live together and not be common-law in Canada?
Yes, if you are not in a conjugal or romantic relationship or have lived together for a period of time shorter than 1 year. You can also be separated common-law spouses continuing to reside in the same home after the separation, but this is situation dependant.
Can you opt out of being common-law spouses?
Technically no, and overall no when it comes to the CRA, but you can opt out of following the family law legislation when it comes to what obligations you may have towards one another through a cohabitation agreement.
How do you prove common law status in Canada?
Items that can be used as proof of a common-law relationship include shared ownership of residential property, joint leases or rental agreements, bills for shared utility accounts, identification documents and other important documents showing both of you residing at the same address, such as driver’s licenses and insurance policies.
