Tax Implications of Separated Couples Living Under the Same Roof

Posted on by Tax Partners
01
Jan

Introduction

Separation often involves physical distancing between former partners, but the situation becomes complex when separated couples continue to live under the same roof. While family law may consider such couples as separated based on intent and certain behaviors, the Canada Revenue Agency (CRA) has stricter criteria for recognizing separation for tax purposes.

This article outlines the CRA’s definition of separation, the tax implications of living arrangements, and essential steps to ensure compliance.

CRA Definition of "Separated"

According to the CRA, couples are considered separated for tax purposes only if:

  1. They have lived apart for at least 90 consecutive days due to a breakdown in their relationship, and
  2. They have not reconciled within those 90 days.

The date of separation is retroactively recognized as the first day of this 90-day period.

Key Considerations

  • Couples who reconcile within 90 days are not considered separated.
  • Physical separation due to work, school, or other involuntary circumstances does not qualify as a separation under CRA rules.

Living Under the Same Roof

Separated couples who remain in the same residence face unique challenges in proving their separation to the CRA.

Factors Considered by the CRA:

  1. Sleeping Arrangements: Couples should sleep in separate rooms or areas.
  2. Financial Independence: Maintaining separate finances, including bank accounts and household contributions.
  3. Social Independence: Engaging in separate social activities and not presenting themselves as a couple publicly.
  4. Parenting Arrangements: Clear division of responsibilities for any children, without joint parenting efforts.
  5. Shared Amenities: Avoiding shared use of household resources such as groceries, utilities, and vehicles.

Tax Court Precedent:

In R v Aukstinaitis, the Tax Court of Canada ruled that a couple living together could still be considered separated for tax purposes. The court emphasized factors like financial independence, separate living quarters, and the absence of shared responsibilities. This case highlights the CRA’s flexibility when clear evidence supports a couple’s separated status despite living under one roof.

Tax Implications of Separation

Reporting Separation to the CRA

Once a couple meets the CRA’s definition of separation, they must notify the agency by:

  1. Using the CRA My Account portal and the “Change My Marital Status” feature.
  2. Filing Form RC65 (Marital Status Change).
  3. Calling the CRA directly to update their marital status.

Failing to report a separation accurately may result in penalties, including accusations of tax fraud.

Impact on Benefits and Credits

Separation affects several tax benefits and credits, including:

  1. Canada Child Benefit (CCB): Recalculated based on the net income of the parent primarily responsible for childcare.
  2. GST/HST Credits: Determined based on the individual’s income rather than the combined household income.
  3. RRSP Contributions and Deductions: Contributions may need reevaluation based on changes in taxable income.

If a couple continues to live together but maintains financial and social independence, these benefits may still be impacted.

Shared Custody and Tax Benefits

In cases of shared custody, each parent may receive 50% of the CCB they would have received if they had sole custody. Other tax benefits may also be divided accordingly.

Pro Tax Tips for Separated Couples

1. Maintain Clear Documentation

  • Keep records of separate finances, utilities, groceries, and parenting arrangements.
  • Document any legal agreements or court orders outlining the separation.

2. Seek Legal and Tax Advice

  • Engage an experienced Canadian tax accountant to navigate CRA rules and ensure compliance.
  • Obtain family law advice for clarity on custody and property division.

3. Avoid Tax Fraud Accusations

  • Falsely claiming separation to gain tax benefits may result in penalties or criminal charges.
  • Use the Voluntary Disclosure Program (VDP) to rectify errors without incurring penalties.

4. Plan for Tax Changes

  • Understand how separation impacts benefits, deductions, and liabilities.
  • Adjust RRSP contributions and other financial plans accordingly.

Conclusion

For separated couples living under the same roof, meeting the CRA’s definition of separation requires clear evidence of financial, social, and personal independence. Properly establishing separation with the CRA ensures compliance and maximizes tax benefits without legal repercussions.

Given the complexities of tax law in these cases, consulting with an experienced Canadian tax accountant is essential. They can provide tailored advice on how to structure living arrangements, report separation to the CRA, and manage the resulting tax implications effectively.

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.

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