What income-splitting techniques can I use with my common law partner?

Gena Katz, a chartered accountant and principal with Ernst and Young, has the answer.

Gena Katz 2 October, 2003 | 1:00PM
Dear Expert:

My spouse (we are not married) and I have been sharing a home for five years but we have continued to check off the "single" box on our tax returns each year. We keep separate financial accounts and "our" condo is registered only in my name. I pay the mortgage, condo fees, property taxes, homeowners' insurance and utility bills on it, while she owns "our" car and makes the lease payments and pays the insurance and other operating costs. I end up paying a little more each month than she does, but then my income is about one-third higher than hers.

It works out that we pay roughly the same. The point is there is no "paper trail" that would suggest to Revenue Canada that we are married (common law or legally). We have not made use of income-splitting techniques yet but I feel it would be advantageous to find a way to transfer some stock dividends or other income to my "wife". Can we feel fairly safe that this will not fall under the tax department's attribution rules?

Expert Answer:

You may be making too much of an effort get around the tax rules based on your taxpayer status. The attribution rules apply to transactions between any two people, not just spouses or family members. So you would stand to trigger the attribution rules regardless of marital status.

Moreover, you are in contravention of the Income Tax Act simply by not reporting your true marital status. The latter is not based on how you choose to file. If you and your partner are in fact "common-law partners" — two individuals who cohabit with one-another in a conjugal relationship and have so cohabited for a continuous period of at least one year — this is your marital status for income tax purposes. Common-law spouses are treated in the same manner as legally married spouses for all purposes of tax law. You should be aware that there are penalties for making false statements in tax returns.

That being said, there are potential income-splitting opportunities available to spouses that are not affected by the attribution rules. Among them are:
  • Spousal RRSPs;
  • Making prescribed-rate loans to a low-income spouse for purposes of investing;
  • Selling personal property to a high-income spouse and investing the fair value proceeds in investment assets; and
  • Gifts or transfers of investments assets with a view of splitting the income on the income.

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Gena Katz

Gena Katz