Paul Delean: Living with other people can lead to tax complications

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The potential tax complications of living with other people was a recurring theme in several recent questions from readers. Here’s what they wanted to know.

Q: “My live-in partner moved in with me approximately four years ago. I own my house free of mortgage. She does not pay anything in terms of the upkeep of the house. She has just received a notice from Revenue Quebec stating that she owes them approximately $15,000. Can Revenue Quebec or Canada put a lien on the house to recover the money because she is considered a common-law spouse?”

A: Both Revenue Quebec and Canada Revenue Agency (CRA) have the authority to take action against another person if they suspect an individual with a tax debt provided a “financial benefit” to that person — such as transferring assets to them below market value — in an attempt to get out of paying. But the tax collectors​​’ course of action is dictated by the particulars of each situation. If you’ve owned the house outright all along, and there’s been no asset transfer between you and your common-law partner, it’s unlikely they would involve you in their recovery effort. If your partner co-owned the property, or transferred her stake to you without compensation, it might be another story.

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Q: “My ex-wife and I separated in 2018 and the divorce became final in May 2020. I’d been living in a seniors​’ residence prior to the COVID-19 outbreak, but my ex and I began speaking again and she invited me to move into her condo, which would be safer. I’ve been living there ever since, sharing living expenses with her 50-50. We both listed ‘divorced’ on our 2020 tax returns, but how will we be viewed by the tax departments for 2021? We do not want to be considered as being in a common-law relationship. What does conjugal mean? We keep our financial affairs separate, including named beneficiaries.”

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A: You made the case convincingly to me, and I don’t see why the tax departments would come to a different conclusion if they request explanations from you at some point. The problem is the fuzziness of the tax rules on this subject. CRA’s definition of conjugal relationship is very broad. It’s described as one “of some permanence, where individuals are interdependent — financially, socially, emotionally and physically — when they share household and related responsibilities, and when they have made a serious commitment to one another. Conjugal does not mean ‘sexual relations​’ alone. It indicates there is a significant degree of attachment between two partners.” Joint ownership of assets, joint decision-making and financial support are among the considerations. No wonder so many people are unsure about what box to tick on their tax return.

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Q: “I own two-thirds of a house and my father had one-third. I lived in it only a few years, while my father — who passed recently — lived there his whole life. Will I have to pay capital gains tax on the years I didn​’t live in it?”

A: The principal-residence exemption can apply to a home you own or co-own that is occupied by another family member. Unfortunately, parents aren’t on the list. The rules limit it to a spouse or common-law partner, ex-spouse or partner, or child. So yes, you will have to pay something. In this case, the exemption would apply to your father’s one-third interest in the property for the entirety of his time there. For your two-thirds stake, you’d be exempted only for the years you lived there with him. If the property appreciated by, say, $300,000, in the period you owned it jointly, his share of the capital gain ($100,000) would be exempted from tax, and you’d pay tax on 50 per cent of your gain, which would be adjusted downward from $200,000 to account for the percentage of time you lived there (assuming you did not elect to take your exemption on another property).

CLARIFICATION: An answer to a question in last week’s column might have left the impression that a taxpayer could have a retirement allowance transferred into a spousal RRSP. That is not the case. CRA rules specifically exclude spousal RRSPs. Thanks to the reader who flagged it.

The Montreal Gazette invites reader questions on tax, investment and personal finance matters. If you have a query you’d like addressed, please send it by email to Paul Delean at gazpersonalfinance@hotmail.com