The Companion Advisor: General Interest

Married and common-law couples can benefit from financial planning strategies that are simply not available for their single counterparts. However, what is often overlooked is that changing legislation in recent years has opened the door to significant planning opportunities for same-sex couples too. The challenge for many investors is keeping up with the rules, so that everyone who qualifies can take advantage of the same financial planning benefits.

The Changing Landscape

A common-law couple is defined by the Income Tax Act as any two people, regardless of gender, who have lived together in marital union for at least 12 consecutive months, or who are the natural or adoptive parents of the same child and are living together. This update to the definition, along with the Modernization of Benefits and Obligations Act and federal redefinition of marriage to include same-sex couples, has effectively changed the landscape of investment and retirement planning for Canadian couples.

As a result, every couple that meets the common-law definition is entitled to the same financial planning opportunities. However, many same-sex couples in particular are not aware that they could qualify for couples planning opportunities. In those cases, it would be prudent to set up a meeting with a Financial Advisor to discuss how to take full advantage of the financial planning opportunities available for couples.

Retirement Planning

Common-law partners are permitted to contribute to a spousal Retirement Savings Plan (RSP). This could enable them to participate in a potential income-splitting opportunity that works most effectively for couples with dramatically different salaries or pension plans.

Case Studies

In Pat and Jake's case, Pat works as a corporate lawyer earning $150,000 a year, while Jake waits tables while establishing himself as an actor. Jake's net pay is just $30,000 a year. If Pat contributes to a spousal RSP in Jake's name, Pat receives the immediate tax savings advantage, while Jake may pay tax on withdrawals from the spousal plan in retirement. Ideally, Jake's income and marginal tax rate upon withdrawal would be considerably lower than Pat's is today.

Meanwhile, Sally and Jo earn similar incomes - $75,000 each - but Sally
has a substantially more generous company pension plan than Jo. Sally would have a Pension Adjustment (PA) reported on her T4, which would lower her contribution limit, but she can use her remaining contribution room to contribute to Jo's spousal RSP.

Increasing Jo's retirement savings would result in comparable incomes after they retire, as Jo's larger payments from her spousal registered accounts would be offset by Sally's larger pension income. As a result, the total amount of taxes they pay as a retired couple may be lower than if Sally had a large retirement payment from her registered accounts in addition to her pension payments, resulting in Sally being taxed at a higher bracket. It is also important to remember that any amount contributed to a spousal RSP would reduce an investor's own RSP contribution limit.

If you are in a marriage or common-law relationship and are not sure if you are fully utilizing these retirement planning benefits, speak to your Financial Advisor today.

Estate Planning

Common-law partners have the same rights as married couples when it comes to RSP beneficiary designations.

If a common-law partner is named as the sole beneficiary of an RSP, the RSP may roll over into their name without tax consequences upon the account holder's death.

This is an important strategy for same-sex couples, many of whom may not know they are eligible for a potential tax-free RSP rollover. It remains one of the best ways to defer taxes due on an estate until the second spouse passes away. After all, if anyone else is named as the beneficiary of an RSP, the fair market value would be assessed on the death of the RSP annuitant, and that amount would be included as income for the year of the annuitant's death. This could potentially result in a large amount of taxes due.

Tax Planning

Another important RSP strategy that may be available to married and common-law couples is the Lifelong Learning Plan (LLP). The LLP allows individuals to withdraw money from their RSPs in order to finance enrolment in a qualifying educational program at a designated educational institution. The withdrawal can be used for the individual, their spouse or common-law partner. The funds that are withdrawn would not have to be included as income, and no tax would be withheld. However, the withdrawal must be repaid to the plan within 10 years or it would be taxed as income in the year it was due.

Individuals in common-law or marriage arrangements may also be eligible to take a credit on their tax returns for a fully dependent common-law spouse. There are also other tax-planning opportunities available by utilizing various credits. For example, individuals can transfer unused personal credits and claim them for medical expenses and charitable donations made by their spouse. In addition, the Canada Revenue Agency now accepts certain tax credits that were previously unavailable to same-sex common-law couples. These may include the spousal amount, the transfer of age amount, the pension income amount, the disability amount and tuition credits.

Talk to your accountant or financial advisor today to ensure that you are fully utilizing all of the tax planning benefits that you are entitled to.

Speak to Your Financial Advisor

If you are married or in a common-law relationship, there may be strategies that you have yet to take advantage of. You should consider meeting with your Financial Advisor to get to know the advantages and disadvantages of the income attribution rules which restrict income splitting, and the various tax credits that may be available to all married and common-law couples. Speak to your advisor today to fully employ of all the benefits that are available to you surrounding couples financial planning.

The statements contained herein are based on material believed to be reliable, but are not guaranteed to be accurate or complete. The article is not intended to provide tax or investment advice and is for information purposes only. Particular investment or trading strategies should be evaluated relative to each TD Asset Management Inc., The Toronto-Dominion Bank and its affiliates and related entities are not liable for any errors or omissions in the information or for any loss or damage suffered.

TD Mutual Funds is a trade-mark of The Toronto-Dominion Bank, used under license.

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