Informal Partnerships: Financial Planning for a Woman Entering a Common-Law Relationship

14 May Informal Partnerships: Financial Planning for a Woman Entering a Common-Law Relationship

Roughly 10-15% of Canadians are living in common-law relationships, and more are choosing to live in common law as a kind of trial before marriage.

Yet there are a number of legal issues around common-law relationships that are unique, and it is a good idea to take steps to protect yourself and your assets.

Common-law Unions

Legally, a common-law union is somewhat confusing. It comes with some of the benefits of a marriage, but not all. It can be a challenge to determine exactly when a couple reaches common-law status. To make matters worse, laws around common-law unions vary across provinces.

Generally, a common-law relationship is a union in which you and your partner are not married but you live together in a conjugal relationship for at least one year. In some cases, you may share children and childcare responsibilities.

But be careful: If you moved in with your partner to save money when you lost your job six months ago, you’re already halfway to establishing a common-law relationship – whether that was your plan or not.

Tax Planning

Once your common-law relationship has been established, you and your partner must file your taxes together. Filing joint taxes can feel very different to a woman who has been single for a long time. Many of the tax benefits of common-law relationships are similar to those of married couples: income splitting, transferring personal tax credits, transferring assets without triggering capital gains and contributing to spousal RRSPs.

On the other hand, there are also drawbacks, such as a limitation on claiming one principal residence for both of you together and a potential loss of government benefits (i.e., guaranteed income supplement, childcare expense deduction). Understanding these advantages and disadvantages is important for deciding the best way to manage these changes.

Estate Planning

When a marriage occurs, spousal rights automatically kick in, regardless of the jurisdiction. But many jurisdictions don’t automatically grant rights to common-law partners. An estate plan is the only way to ensure that your common-law partner has the privileges you had hoped for, whether it means the ability to inherit your estate or make decisions for you when you are unable to do so.

Consider these tasks:

• Make a will, specifying what your common-law partner should inherit from you. Be sure you understand the tax implications of inheritance, and consider designating the estate as the beneficiary in some cases. Any will you create while in a common-law relationship will need to be revisited if you get married later.
• Create a power of attorney for property and care, whether you want your common-law partner to fill that role or not. A common-law partner may not be considered next-of-kin in some jurisdictions, but a power of attorney will allow your partner to make those choices for you.
• Look into survivor benefits. Common-law partners may receive survivor benefits under CPP, but employee pension plans vary. Check with your pension administrator to determine what you’re eligible for.
• Consider other end-of-life issues, such as organ donations and funeral arrangements.

Insurance Planning

If you’ve never had anyone depending on you financially before, it is a good idea to consider how much money you will leave behind to your loved ones when you die. Especially if your partner is earning less than you are – or if you have children or other dependents – these funds can be critically important.

• Build an emergency fund worth two or three months of living expenses. If you die suddenly, or become disabled, you will need those funds to survive in the early days.
• Designate a power of attorney, both for finances and for care. If your common-law partner knows what you want, it’s best to get this in writing ahead of time.
• Purchase sufficient disability insurance to protect your family in the event that you aren’t able to work for a period of time. If your partner is financially dependent on you, you’ll need to make sure the funds are sufficient to support both of you.
• Secure a life insurance policy to provide much needed income for your common-law partner in case of your death. If you have any children, they will need money to live on as well.

To learn more about preparing your estate, contact us.

Joel Rose

With over 35 years of experience, Joel Rose helps families – and their businesses – to prepare for the future. He offers guidance and support to help his clients create estate plans and succession plans that meet the needs of the whole family. Through his extensive professional and personal experience, Joel is known for his compassion and his ability to find a creative solution to meet each family’s needs.