Marriage Tax Benefits: What You Should Know

Understanding marriage tax benefits is crucial for Canadian couples who want to optimize their financial situation. When couples marry, or start living together under a common-law arrangement, their tax responsibilities and potential benefits can change significantly.

Overview of Marriage Tax Benefits

Marriage tax benefits are comprised of various tax advantages enjoyed by married couples due to their combined financial situation. In Canada, the tax system does not directly provide a marriage bonus or penalty but offers certain benefits that can indirectly impact married couples. These benefits are designed to accommodate shared expenses, and in some situations provide financial relief.

Tax Brackets and Filing Status

In Canada, married couples are not required to file jointly as in some other countries. Instead, each spouse files their tax return separately. If one spouse earns a lot more than the other, they are likely to be in a higher tax bracket paying tax at a higher rate than the lower-earning spouse. If their total income was the same but split evenly between them, their combined tax payable might be lower. Therefore it is beneficial to take advantage of the various marriage tax benefits outlined below.

Marriage Tax Benefits

• Spousal Amount: If one spouse’s income is below a certain amount, the higher-earning spouse may be eligible to claim the spousal amount on their tax return, which can reduce their taxable income.
• Income Splitting: Couples can sometimes optimize their tax situation by transferring income from the spouse in a higher tax bracket to the spouse in a lower tax bracket . The rules around income splitting tightened in 2019, but there are still opportunities available to split certain kinds of income, including that related to family businesses.
• Pension Income Splitting: Seniors can benefit from pension income splitting, where up to 50% of eligible pension income can be transferred between spouses, potentially reducing their overall tax burden.
• Registered Retirement Savings Plan (RRSP) Contributions: Married couples can contribute to each other’s RRSPs, which is useful when one spouse has a significantly higher income than the other. The contributing spouse receives a tax deduction for some or all of the contribution made, and the receiving spouse can eventually withdraw from the RRSP at potentially lower rates of tax if they continue to be in a lower income tax bracket.
• Tax Credits: Couples can maximize their tax credits by ensuring that claims for items like charitable donations or medical expenses are optimized between both spouses. The combined claims can sometimes result in better tax outcomes.

Conclusion

Marriage can bring about various tax benefits and considerations in Canada. By understanding the key advantages and planning effectively, couples can optimize their tax situation. Regularly reviewing your financial and tax strategies with a professional can help you make informed decisions and maximize your tax benefits.

This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.