Spousal tax returns are always filed separately – that is, the tax returns are prepared separately. However, when tax returns are prepared using personal income tax return software, most software will give the option of “coupling” the preparation of both returns. The returns are still printed and filed separately, but the software will usually highlight ways in which taxes may be reduced.
You are required to report what your marital status was as of December 31st of the tax year. This is done by ticking the appropriate box on page 1 of the tax return. The boxes include:
- Living Common-law
You are married or living common-law as long as you and your spouse are not living separate and apart from each other on December 31st because of a breakdown of the marriage or common-law relationship. If you are living apart from each other due to some other reason, you would still be considered married or living common-law.
Claiming tax credits and deductions
If one spouse is unemployed or has very low earnings, the other spouse can claim a spousal tax credit. See the tables of non-refundable personal tax credits for the federal and provincial territorial amounts of the spousal tax credit.
There are some tax credit amounts which can be combined and claimed on either spouse’s return:
Medical expenses – expenses for both spouses should be combined and claimed on the tax return of one spouse. It is often better to claim all medical expenses for both spouses on the return of the spouse with the lowest taxable income.
Donations for both spouses should be combined and claimed on the tax return of one spouse, because the tax credit for the first $200 of donations is at the lowest tax rate.
Some tax credits can be claimed by either spouse, or apportioned between spouses:
- line 306 amount for infirm dependants age 18 or older
- line 364 public transit amount
- line 365 children’s fitness amount
- line 370 children’s arts amount
- line 369 home buyers’ amount
- line 313 adoption expenses
- line 314 caregiver amount
The deduction (not tax credit) for child care expenses must generally be claimed on the tax return of the spouse with the lowest net income.
If one spouse (or common law partner) cannot use all of the following tax credits, they can be transferred to the other spouse by completing Schedule 2 of the tax return:
- line 301 age amount
- line 367 amount for children under 18
- line 316 disability amount
- line 314 pension income amount
- line 323 tuition and education amounts (these can also be transferred to a parent or grandparent
Transfer of income from taxable Canadian dividends
Income Tax Act s. 82(3)
A taxpayer who is entitled to the spousal tax credit for his/her spouse or common-law partner may include all of the spouse’s dividends from taxable Canadian corporations in his/her income. This option is only available if doing so will increase the spousal tax credit.
There is no special form to fill out to do this. The spouse’s dividends would just be included on the taxpayer’s income tax return.
Transferring the dividends may not always be beneficial. Taxes payable should be calculated both ways (with and without the transfer), in order to determine which method results in lower taxes.
If the spouse has incurred deductible interest expense in order to earn the taxable dividends, the interest expense deduction is not transferred to the taxpayer. It may be used by the spouse to reduce other income. If the interest expense exceeds other income, a non-capital loss is created.
Canada Revenue Agency (CRA) has information on this transfer, in the General Income Tax and Benefit Guide, under Line 120 – Taxable amount of dividends from taxable Canadian corporations.
Other investment income
When investments are held in a joint account, the investment income should be reported based on the funds contributed to the account by each spouse. If the funds were provided equally by both spouses, then the investment income would be split equally. This subject is covered in the Canada Revenue Agency (CRA) web page Line 121 – Interest and other investment income, under the topic of Bank accounts.
In order for the lower income spouse to be able to claim more investment income, finances should be arranged so that the lower income spouse has money to invest.
Tax Tip: Try to arrange your finances so that both spouses have equal income before and after retirement.