Getting married is a significant milestone that brings many changes—emotionally, legally, and financially.
While love is the foundation of marriage, financial considerations, including tax implications, shouldn’t be overlooked. In Canada, getting married can affect how you file taxes, your eligibility for benefits, and your overall financial planning.
Below, we’ll explore the financial benefits and drawbacks of marriage from a tax perspective, helping you understand what changes once you say, “I do.”
The Financial Benefits
Income Splitting Opportunities
One of the most significant tax advantages of being married is the ability to reduce overall tax liability through income splitting. Although Canada doesn’t allow unlimited income splitting for couples, there are still ways to benefit:
- Pension Income Splitting. If one spouse receives eligible pension income, up to 50% of it can be transferred to the lower-income spouse. This can reduce the overall tax burden by lowering the amount taxed at a higher rate.
- Spousal RRSP Contributions: If one spouse earns significantly more than the other, they can contribute to a spousal Registered Retirement Savings Plan (RRSP), which helps balance taxable income during retirement and optimize tax savings.
Combining Tax Credits and Deductions
Married couples can take advantage of various tax credits and deductions, potentially lowering their overall tax bill:
- Spousal Tax Credit. If one spouse earns little or no income, the higher-earning spouse may be eligible for the non-refundable spousal credit, reducing their taxes.
- Medical Expenses. Couples can pool their medical expenses and claim them on the lower-income spouse’s return to maximize the tax deduction.
- Charitable Donations. Charitable contributions can be combined to exceed the threshold for higher deduction rates, leading to greater tax savings.
- Home Buyers’ Plan (HBP) Benefits. If both spouses are first-time homebuyers, they can each withdraw up to $30,000 from their RRSPs for a home purchase without immediate tax consequences.
Access to Government Benefits
Being married (or in a common-law partnership) can impact eligibility for government benefits such as:
- Canada Pension Plan (CPP) Survivor Benefits. If a spouse passes away, the surviving spouse may qualify for a portion of the deceased’s CPP benefits.
- Old Age Security (OAS) Benefits. If a couple’s combined income is below a certain threshold, they may qualify for the Guaranteed Income Supplement (GIS), which provides additional financial support in retirement.
- GST/HST Credit. If one spouse earns significantly less, the couple may qualify for higher GST/HST credit payments.
The Potential Drawbacks
Loss of Certain Benefits Due to Higher Combined Income
When spouses file their taxes, their combined household income determines eligibility for certain tax credits and government benefits. This can result in reduced benefits, such as:
- Canada Child Benefit (CCB). If one spouse earns significantly more, it can push the household income beyond eligibility thresholds, reducing or eliminating the benefit.
- GST/HST Credit. Similar to the CCB, higher combined income may disqualify a couple from receiving this credit.
- OAS Clawback. If the household income exceeds a certain amount, Old Age Security (OAS) payments may be reduced through the clawback system.
Taxation on Spousal Transfers and Divorces
Marriage also affects asset transfers and taxation, particularly in the event of a divorce or separation:
- Capital Gains Tax Implications. If assets are transferred between spouses, they typically transfer at the original cost (rollover provision), avoiding immediate tax consequences. However, if the couple separates, future capital gains may become taxable.
- Spousal and Child Support Taxation. Spousal support payments are generally tax-deductible for the payer and taxable for the recipient. However, child support payments are neither taxable nor deductible, which can impact financial planning.
- Division of RRSPs and Pensions. In the event of divorce, RRSPs and pensions may need to be divided, potentially triggering tax consequences depending on how they are split.
The ‘Marriage Penalty’ (In Certain Cases)
For some couples, marriage can lead to a higher overall tax burden. This occurs when both spouses have high incomes, and their combined income pushes them into a higher tax bracket.
Unlike the U.S., Canada doesn’t allow couples to file jointly, meaning each spouse files their own return separately, but with income-tested benefits calculated based on household income. This can sometimes result in a disadvantage compared to two single individuals earning the same amount.
How to Optimize Your Taxes and Finances
If you’re married or planning to get married, there are strategies you can use to minimize tax burdens and maximize financial benefits:
- Plan RRSP Contributions Wisely. If one spouse has a significantly lower income, contributing to a spousal RRSP can help even out taxable income in retirement.
- Time Your Capital Gains and Deductions. If you have capital gains or losses, consider timing sales and deductions strategically between spouses to optimize tax efficiency.
- Understand Benefit Eligibility. If household income is nearing thresholds that reduce government benefits, consider strategies such as delaying income realization (if possible) or splitting income to stay within eligibility ranges.
- Seek Professional Tax Advice. Every couple’s financial situation is unique, and professional tax planning can help optimize your tax strategy and ensure compliance with Canadian tax laws.
Final Thoughts from Isaac Achal Professional Corporation
Strategic tax planning can help married couples make the most of available opportunities while mitigating potential downsides.
If you’re navigating the complexities of marriage and taxes, Isaac Achal Professional Corporation can provide expert guidance tailored to your financial situation. Our team specializes in tax planning and accounting for individuals, families, and businesses.
Contact us today to ensure your finances are in order and optimized for success!
