I have a new client who has been living with her partner since 2006 but both have filed as “Divorced” for all of those years. What would be the best way to handle this? Am I required to go back and adjust 15 years of tax returns to common law? Do I just continue filing as “Divorced”? Or switch it to Common-law for 2021? They do not have children together and their pension income is so similar that there is not much benefit to coupling them.
Thanks in advance!
Pretty sure you only have to go back 10 years. If they were doing their own taxes and just didn’t “know” what marital status they should have claimed – they are non-professionals. On the other hand, you are a professional and can’t really unknow something, so should do the right thing. They haven’t engaged you to correct past years returns, that is up to them. But on the current year, you should switch it to Common-law.
Thanks @gaywise. That was my thought but the client is so worried that filing differently all of a sudden will get her into trouble. How would you answer the question on the first page: “Did your martial status change in 2021” and “Date of change”? Technically there was no change in relationship status, only filing status.
Would the marital status make any difference in those prior year tax returns? If not, CRA likely has no interest in making the change to past years. I would definitely change it for this tax year.
I think the question refers to the marital status you’ve disclosed on your tax return. The answer has to be “yes” at some point, assuming these people are common-law.
Yes - that “point” was 2007. The question states, “Did your marital status change in 2021?”
I understand it likely happened in 2007. I had just made the point that CRA may not want all these prior year T1’s adjusted if there is no tax change. As I look at the 2021 tax return, it only asks what your marital status was on December 31, 2021, so making that change on the 2021 T1 would be the correct way of handling it.
Did either of them get any benefit (GST/HST, Climate Action Incentive, etc.) that would have been reduced or removed because they were a couple in the past three years? Because, the CRA (or Revenu Quebec) can only collect on those amounts (for the most part.)
Look, if there is no difference, don’t think overly much about it… They should have been filing common-law, they didn’t, but they didn’t get any benefit from doing so.
However, if they got a benefit, then you have a different picture. Evaluate, advise them of the issue, let them make the decision to correct or ignore. But file this year’s return correctly and don’t bother answering if the marital status changed in the year.
Thank you all for your helpful responses. @TimParris good point - I think the benefit payments are what CRA is really after. No GST credit or Ontario Trillium but yes to the Climate Action. However there were a few recent years they could have benefited from pension splitting. So I will stop overthinking and just file common-law. I will leave that box blank and answer the question if asked.
Who would have thought something simple like martial status would become so complicated for accountants? It can be an uncomfortable conversation with clients to determine if their relationship is conjugal or not
I’ve had this happen with clients and I had them file the change of marital status form with the correct date and left it at that. Filed the returns for that year as common-law.
They also would not have had any taxes owing from this on account of them both having higher incomes, but it is important when it comes to things like CPP survivor pension.
“living with her partner since 2006 but both have filed as “Divorced” for all of those years.”
The usual reason people do this is benefit fraud, such as GIS fraud and Disability benefits fraud.
In any event, the legal way of filing their tax returns for 2021 is to comply with the income tax act, as they should have already been doing for well over a decade, but have failed to do.
@Versa the relationship doesn’t have to be conjugal - if they present to the public as a couple, have joint accounts, etc., they are common-law.
I agree with Joe (did I just say that? ) in that most people understand that filing as common-law is required and the main reason not to is to qualify for benefits that a couple would not qualify for. Granted, some do it innocently, but that really isn’t an excuse - they sign the returns as being truthful, and they’re not.
All returns back 10 years need to be corrected, BUT, can be done by using a T1-ADJ and in the comment section ask CRA to go back the 10 years. Then CRA will do all the heavy lifting for you. My only proviso with letting CRA do it is that they will not apply pension splitting, so check on the limits of going back for that and use your judgement as to the most efficient way of getting these returns on the proper legal track.
One thng that I have mentioned to couples in the same position, is one it is the law that they must file common law, no choice. But something for them to consider is that, if something should happen to either of them, the other would be entitled to survivor benefits from CPP. If they are in a committed relationship this is something that I am sure that you would want.
Not to mention the tax-deferred transfer of RRSP’s/RRIF’s and other property.
If I recall correctly, I read around 8 months ago of a jurisprudence where two people were considered as being common law even though they were not living together if the community considered them as a couple. The headline read ‘’ You may be common law even if you donèt know it’’
I posed the question as to when a couple is common-law to a lawyer about 12 years ago.
The answer is that they are immediately when the move in together. However, most legislation imposes a delay before that law would recognize the relationship, EXCEPT for the Income Tax Act. The ITA permits a deferral of up to one year. The most that any federal legislation will delay the recognition is 5 years which is for the pension transfer rules in a marital split.
So, when faced with the question, my stance is, ‘Why would you not tell the truth?’