The income tax system in Canada requires that every individual file their own income tax return and report only their own income.
From time-to-time, I come across situations where a married couple has filed only one income tax return as a joint filing. This strategy is not something that is permitted under Canadian tax law and can end up costing you more tax money.
Read on to find out how spouses file taxes in Canada and why filing jointly can cost you!
What Does Filing Jointly Mean?
In the United States, married couples are permitted to combine their income and file a single income tax return. The US tax brackets and certain deductions are adjusted to reflect the fact that the couple may be reporting higher income. This is what is meant by filing jointly.
In Canada, a married and common law couples are required to report the income of their spouse as a disclosure on their income tax return. Our tax system provides some tax relief through tax credits for couples where one of the spouses has little or no income.
Married couples in Canada should not combine their income and file jointly.
Married Must File Separately
The tax system in Canada is based on individual incomes. There are tax rules to prevent married couples and families from shifting income between related groups. Similarly, there are no provisions to allow combined reporting for married couples.
Rather a married or common law couple is required to report the income from their spouses’ income tax return on the front of their own income tax return. The result is that each spouse only pays tax on their own income.
If You Have Combined Your Income
Combining income on a single tax return can be costly!
Consider the case of an Ontario couple who whose incomes are $25,000 and $18,000 respectively. By filing individual tax returns and reporting their spouses’ income properly, the tax on $25,000 would be $2,800 and on $18,000 the tax is $1,200 for a combined tax bill of $4,000.
If the couple combines their incomes on a single tax return, the tax bill increases to $6,600. By combining incomes on a single return, this couple pays $2,600 of extra income tax!
A Final Word On Disclosure
If you are married or are common law and are considering filing as single, think again. If you are married or common law you must report your spouse’s income and your marital status correctly on your tax return. Failing to do so can result in a reassessment and you may incur interest and penalties.