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Financial pitfalls for common-law couples
Wednesday, February 18, 2004
When Jennifer Casey and Mike Fleming moved in together, last year, the economics of their common-law relationship seemed simple. They paid all their household expenses through a joint account, with each contributing an equal share.
But as soon as they started to think ahead to future investments, tax planning and major purchases, they realized that figuring out how to handle family finances can be far more complicated and confusing for common-law couples than for those who have chosen to walk down the aisle.
"It's a little overwhelming," says Ms. Casey, a Toronto public relations consultant.
Ms. Casey says she recently searched government Web sites looking for answers to her questions about the legal status of common-law couples and "couldn't find anything."
Mr. Fleming, a film company executive, says their finances are still relatively easy to organize now, as they are renting an apartment.
But buying a house together would be so complicated that he would rather wait until they decide to get legally married.
They have good reason to be confused about their legal status and what it means for their family finances, according to lawyer Christine Van Cauwenberghe, director of tax and estate planning for the Winnipeg-based Investors Group Inc.
"When you're married, your rights and responsibilities are clear but if you are living common-law, it is a little bit more of a grey area," she says.
She notes that such couples are treated the same as married couples under the Income Tax Act, but while some provinces, such as Alberta and Saskatchewan, give them the same property rights as married couples, others, including Ontario, do not.
With more than 1.2 million Canadian couples living common-law, by Statistics Canada's latest count, the numbers sure to grow with the recognition of same-sex couples, and a majority of people under 30 choosing to live common-law before getting married, there are many Canadians either confused about or blissfully unaware of the financial pitfalls that their legal state of limbo can create, according to Ms. Van Cauwenberghe and other experts.
So what do the experts advise?
First and foremost, talk to an adviser who understands the tax, estate and family-law provisions that apply to common-law couples in the province where you live, Ms. Van Cauwenberghe suggests.
"You need to understand that the law is changing at a breakneck pace and it's a checkerboard across the country," she suggests.
"Common-law couples have to understand what the rules are in their specific province or territory, and get advice from an adviser who is well-versed in this area, because the issues are very unique and people who dabble may not be aware of how you are treated differently in income tax and estate legislation," she says.
Family law in Ontario, for example, sets clear rules for the division of property, assets and support payments after a marriage break-up.
However, these rules do not automatically apply to common-law couples, according to Mary Jane Binks, a partner in the Ottawa office of the law firm Gowling Lafleur Henderson LLP.
When a common-law marriage breaks up, either party can sue for spousal support or a share of the property but, with no set rules, it is "a free-for-all," Ms. Binks says, "and, if one were to look at it crassly, it's a lawyer's dream because everything is open to dispute."
For couples who have children together, common-law status doesn't have any impact on issues such as custody or child support in the event of a break-up.
Couples can avoid future complications by signing a cohabitation agreement, Ms. Binks suggests.
This would involve each partner completely disclosing all of his or her assets and liabilities, then coming to an agreement about what financial arrangements and division of property would be reasonable and appropriate if they ended up going their separate ways, Ms. Binks says.
But most common-law couples do not have such a contract, she adds. Certified financial planner Frank Wiginton, a senior personal banking officer at Bank of Nova Scotia, says he always advises clients who are in a common-law relationship to draw up a cohabitation agreement.
"A lot of people think it's a really good idea because it will avoid fights down the road but never follow through," he says. Talking about these issues and getting lawyers involved seems too stressful for many couples, he says.
Another key step is for each partner to make a will, advises David Matchett, vice-president of the financial planning services group at BMO Nesbitt Burns Inc.
Since estate laws in some provinces, including Ontario, do not recognize common-law marriages, the surviving spouse of a common-law couple could end up with nothing, if their property happens to be in the name of the partner who dies first, he notes.
"You could die and all the money go to your siblings or parents, instead of your spouse," he says.
You may not have this problem if you own all your assets jointly in both names, but the simple solution, he adds, "is to spend a few hundred dollars and go to see an estate lawyer to get a will."
Mr. Matchett also suggests checking the terms of corporate benefits packages and pension plans to make sure that common-law spouses are included and will be eligible for survivor benefits. He says a growing number of companies are now adding common-law spouses to their employee benefit plans, but some still do not.
Certified financial planner Ian Adams, a senior adviser with Toronto-based Olympian Financial Inc., who is himself in a long-term, common-law relationship, says he always reminds clients to fill out forms stipulating who their beneficiaries will be for life insurance policies, joint accounts, registered retirement savings plans and other investments.
Everyone should do this, he says, but it is particularly important for those in common-law relationships who do not have a will.
The one area where the status of common-law couples is respected consistently throughout the country is in federal income taxes rules and regulations.
When you fill out your tax forms, you must file as a couple if you have been living together in a common-law relationship for 12 months or if you have children together and have been living together for any length of time, Ms. Van Cauwenberghe notes.
Mr. Matchett says common-law couples should remember that they are entitled to the same tax benefits that legally married couples enjoy.
These may not amount to a lot of money, but are nevertheless worth taking advantage of, Mr. Matchett suggests.
For example, a couple can combine charitable donations so that the person with the higher income and, therefore, the higher tax bracket can claim the tax credit.
With respect to medical expenses, a couple can take the opposite approach, putting all their expenses on the lower-income person's tax return, thus minimizing the amount that is deductible, Mr. Matchett advises.
Common-law couples need to rely more on formal agreements, wills and contracts than most married couples.
And this is ironic, given the fact that many of them think they are taking a more informal path, Ms. Binks observes.
"People say to me, time and time again -- and sometimes through a veil of tears -- 'You know, Mary Jane, the reason we didn't formally get married was that we wanted to keep it simple.'
"And yet, nothing has the potential for becoming more complicated than a situation of resolving entitlement upon the break-up of a cohabitation that has been lengthy or where there's a real imbalance of the assets and liabilities."
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