Canada has made significant strides in recognizing and protecting the rights of the Two-Spirit, Lesbian, Gay, Bisexual, Transgender, Queer, or those who identify with another non-binary gender or minority sexual identities (“2SLGBTQ+”) community. As a result, many same-sex couples now have the option to legally marry or enter common-law relationships across the country. With these legal advancements comes the need for comprehensive wealth planning to ensure the financial security and well-being of married and common-law 2SLGBTQ+ couples. In this article, we will explore key considerations and strategies for wealth planning in Canada for these couples.
A growing community
Much has been accomplished since the beginning of the new millennium, including the legalisation of same-sex marriage in 2005, and protecting gender expression and identity in the Canadian Human Rights Act and the Criminal Code in 2017.
According to the most recent census, conducted in 2021, Canada is home to approximately 1 million people, aged 15 years and older, who identify as belonging to the 2SLGBTQ+ community.1
Approximately 25% (127,640) of this population is coupled, and within this community there are 32,205 couples with at least one transgender or non-binary person; and 95,435 same-gender couples.2
Whether married or in a common-law relationship there are certain disadvantages centred around distribution of property and finances in the event of a breakup in the relationship or in the case of death of one of the partners. Without proper planning, 2SLGBTQ+ couples can face significant legal and financial challenges.
What is the importance of wealth planning and how do you get started?
It is important to seek professional advice and establish a plan that will protect each partner and their families. Planning can help ensure that everyone’s rights and interests are respected. It’s prudent to be well prepared and strategic when it comes to planning your finances.
For anyone setting financial and estate planning goals for their future, there is a lot to consider. A customized wealth management plan can guide you in ensuring you stay on track and meet your financial goals. For members of the 2SLGBTQ+ community, there are additional considerations from a tax, family and estate law perspective to be aware of.
What are the tax considerations?
The passing of the Canadian government’s Bill C-38 (the Civil Marriage Act) in 2005, provided same-sex married partners many of the same legal rights as other married couples. In addition to marrying rights, equality under Canada’s taxation rules was granted in 2001, when the definition of commonlaw partner3 was updated to include a same-sex partner. This significant change gave 2SLGBTQ+ couples the same tax benefits as heterosexual couples, which can be used to reduce tax costs and to make tax-efficient retirement and estate plans.
In the proceeding sections, references to “spouse” and “partner” are used interchangeably and include both married and common-law same sex relationships.
Tax credits and filing your income taxes
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If your marital status has changed (this includes entering a common-law relationship), you will need to inform the Canada Revenue Agency (“CRA”) with Form RC65 Marital Status Change.
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As a spouse or common-law partner, you may be able to claim a tax credit for a financially dependent partner, and/or transfer credits and amounts (such as the age amount, disability amount, tuition amount and pension income amount) to a partner. Additionally, credits may be shared or combined by partners to maximize the tax credit for transactions such as charitable donations, medical expenses, etc.
Income-splitting
Income-splitting strategies such as the use of Spousal RRSPs, prescribed rate loans between spouses, pension income-splitting, and the ability for partners to elect to share their Canada Pension Plan (“CPP”)/Quebec Pension Plan (“QPP”) payments between spouses, helps couples reduce their overall tax bill.
Reduced availability of the principal residence exemption
It is quite common for individuals to separately own homes while in a relationship. They may eventually decide to move into one of their homes and sell the other either immediately or in the future. If this occurs subsequent to marriage, the home they move into continues to qualify for principal residence status; however, the other home may become a secondary residence, as only one property per family unit is designated as a principal residence each year. Accordingly, when the secondary residence is sold, capital gains may arise.
Tax-deferred rollover of certain assets
The Tax-Free Savings Account (“TFSA”) allows for tax-free financial growth, such that the account can be transferred to a surviving partner tax-free following the death of the account holder, and continue growing on a tax-free basis. At death, RRSP and RRIF assets can be rolled over on a tax-deferred basis to a surviving partner designated as a beneficiary or successor annuitant. Other capital property, such as non-registered assets or real estate, can also be rolled over at the adjusted cost base.
Application of income attribution rules
As discussed above, non-registered assets may be transferred on a tax-deferred basis from one partner to another during their lifetime. However, any subsequent investment income or gains earned on the transferred asset will be attributed back to the transferor, whereas the income generated on that income will be taxed in the hands of the transferee.
The prescribed rate loan is on such income-splitting strategy that can be implemented to avoid attribution. This strategy involves the higher-income partner lending a sum of money to the lower-income partner at a fixed interest rate prescribed by the government. If the borrower pays interest on the loan annually by January 30 of the following year, any investment earnings are taxed, minus the interest payment, at the borrowing partner’s tax rate. Where a prescribed rate loan arrangement is implemented, it is important to document the existence and conditions of the loan, as well as the desired outcome should the couple dissolve or one partner passes away. For more information, ask your BMO financial professional for a copy of our publication, Reduce Your Taxes with a Prescribed Rate Loan.
What are the family and estate law considerations?
There is a misconception, since common-law couples are treated equally to legally married couples for income tax purposes, that common-law couples enjoy the same rights as legally married spouses when it comes to family and estate law. While marriage and divorce are governed by Federal legislation, family and estate law falls within provincial jurisdiction and varies from one province to another.
In certain provinces, there are still significant differences between the treatment of legally married and common-law couples, with respect to property rights, the matrimonial home, support obligations and intestate succession (dying without a valid Will). The very definition of “common-law” varies across the country and may range from two to three years of cohabitation, or less if the couple are the parents of a child. For instance, the most notable distinction in marital status is in the province of Quebec, where the provincial legislation is based on the principles of civil law, and the term “common-law” couple is more accurately known as a “de-facto” spouse.
When outlining estate planning objectives, you should take these provincial differences between married and common-law relationships into consideration:
Property division
In some provinces, the definition of “spouse” does not include a common-law partner for the purposes of property division.
Matrimonial home
In some provinces, married couples may have equal rights to the ownership and/or possession of the matrimonial home. In certain provinces this is not the case for common-law couples, and if the home is only registered in the name of one partner, the other partner may find themselves without recourse should the relationship dissolve or their partner passes away.
Spousal support
In most provinces, common-law partners have the right to seek support payments from their partners provided they meet the cohabitation period set out in their province of residence; it may be a shorter time if the common-law partners have a child. The exception should be noted in the province of Quebec where un-married couples cannot claim spousal support, as confirmed by the Supreme Court of Canada in Eric v. Lola (2013 SCC 5).
Intestate succession
First and foremost, it is recommended to have your Will prepared by a legal professional to ensure that your estate settlement is aligned with your wishes and that the settlement process is as smooth as possible for your heirs. Under most provincial legislation, the surviving spouse is entitled to an automatic share of the estate of a spouse who dies intestate. But some provinces do not provide a common-law partner with the same rights as those who are married. In this case, should you pass away without a valid Will, your blood relatives may inherit your property, rather than your partner.
Dependant relief
A surviving spouse may make a claim against their spouse’s estate if they’re not adequately provided for in the deceased’s Will to maintain an adequate lifestyle. Most provinces provide this right to support for all dependants regardless of marital status, including children and, in some instances, stepchildren. For more information, ask your BMO financial professional for a copy of our publication, Estate Planning and Dependant’s Relief Claims.
Planning tips for 2SLGBTQ+ couples
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Understand your legal rights: It is crucial for same-sex couples to understand their legal rights and obligations in both marriage and common-law relationships. Marriage provides certain legal protections and benefits, such as spousal tax deductions, inheritance rights, and access to spousal benefits like pensions and healthcare. Common-law couples may also have similar rights, depending on the province or territory, but they may not have the same level of legal recognition as married couples. Consulting a lawyer who specializes in 2SLGBTQ+ issues can help navigate these complexities.
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Budgeting and financial goals: Developing a comprehensive budget and setting financial goals is essential for any couple, regardless of sexual orientation or gender identity. Start by creating a joint budget that includes all income sources, expenses, and debts. Discuss your short-term and long-term financial goals, such as saving for a down payment on a home, future retirement, or travel. Consider using online tools or working with a financial planner to help you create a realistic budget and prioritize your financial objectives.
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Review and update your Will: Estate planning is crucial for protecting your assets and ensuring they are distributed according to your wishes. Wills made prior to a marriage are often invalid (unless made in contemplation of marriage). It is always recommended to have a lawyer draft your Will to ensure it is worded appropriately and addressees any applicable considerations under provincial law. An up-to-date Will can become even more important where the family dynamic or projected size of the estate may lead to issues down the line. For example, secondary marriages, blended families or uneven division of assets among beneficiaries may all lead to the Will being contested and can draw out the settlement process, cause irreparable harm to the family and erode the value of the estate.
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Review and update beneficiary designations: Designating beneficiaries on insurance policies, retirement accounts, and pensions will help ensure they align with your current wishes. Naming your partner as the beneficiary of your pension and registered plans aides in a smooth, tax-efficient transition of assets, as funds can be rolled over to the surviving partner on a tax-sheltered basis and may avoid probate. If it is your intention to name a beneficiary, please speak to your lawyer and have it documented in your Will. Note that in Quebec only insurance products can contain beneficiary designations, such as segregated funds, and other registered plans must be designated through the plan holder’s Will.
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Establish Powers of Attorney or Healthcare Directives: Partners may not automatically have legal authority to manage each other’s financial affairs or make healthcare decisions. Having Continuing Powers of Attorney documents drafted in which a partner is the designated attorney, will ensure that they can handle your financial affairs or make healthcare decisions for you in the event of incapacity. Future planning for these situations ensures your wishes are respected and reduce stress on your partner or other family members.
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Register assets as “JTWROS”: Consider holding property as Joint Tenants with Right of Survivorship (“JTWROS”) for assets such as bank accounts, principal residence, and vehicles (this strategy is not applicable in Quebec). This enables the surviving partner to assume immediate ownership of important assets. By excluding these assets from the deceased’s estate, probate may also be avoided.
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Retirement and tax planning: Plan for a secure and comfortable retirement by starting early and maximizing your savings. Explore retirement savings options like Registered Retirement Savings Plans, First Home Savings Accounts (“FHSAs”), and TFSAs to take advantage of tax benefits and compounding growth. If available, contribute to workplace retirement plans such as Registered Pension Plans or Group RRSPs. Consult with a financial planner to create a retirement plan that suits your lifestyle and goals.
Marriage can have significant implications for your taxes. Same-sex married couples are treated the same as opposite-sex married couples. Explore the potential tax benefits available to married couples, such as Spousal RRSPs, claiming spousal tax credits, or pension incomesplitting. Consult a tax professional who understands 2SLGBTQ+ tax issues to optimize your tax situation and identify potential savings opportunities.
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Insurance and protection: Review your insurance coverage to ensure you have adequate protection for your unique circumstances. Consider life insurance policies to provide financial security for your spouse or partner and review disability insurance, and critical illness coverage options to safeguard against unexpected events. Understand the policy terms and conditions to ensure they align with your needs and goals. Naming a beneficiary directly on the policy can quicken the payout process and avoid probate, where applicable. The policy can also be designated to the estate which will then flow through to the beneficiaries named in your Will.
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Adoption and parental rights: In Canada, public adoption legislation, guidelines and eligibility are unique to each province. Prospective parents should familiarize themselves with practices within their home province as eligibility criteria vary. Consult a legal professional with expertise in 2SLGBTQ+ family law to navigate the complexities of adoption, surrogacy, and parental rights.
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Charitable giving: Consider supporting 2SLGBTQ+ focused charities and organizations that align with your values and goals. Research and verify their impact and financial transparency before making donations. Consult with a financial advisor to understand the tax advantages associated with charitable giving, including potential deductions or credits.
BMO Private Wealth supports the 2SLGBTQ+ community
BMO is proud to be a leader in advancing equality in the workplace and for our customers. We have a long history of award winning allyship activations to support the well-being of all 2SLGBTQ+ people across our global network of offices and the communities they engage with. BMO Private Wealth is committed to customizing our wealth planning services to the needs of 2SLGBTQ+ individuals and families. It’s our goal to help you take the best possible financial care of yourself, your spouse/partner, your children and other loved ones and charities.
Seek advice
Due to the complexity of the relevant tax rules, professional tax advice as well as legal and estate planning advice should be sought when considering any of the strategies and tips provided in this article, to determine if they are appropriate for your personal situation.
For more information, please speak with your BMO financial professional.
1 Canada at a Glance, 2022 LGBTQ2+ people: https://www150.statcan.gc.ca/n1/pub/12-581-x/2022001/sec6-eng.htm
2 State of the union: Canada leads the G7 with nearly one-quarter of couples living common law, driven by Quebec: https://www150.statcan.gc.ca/n1/dailyquotidien/220713/dq220713b-eng.htm
3 For the purpose of the Federal Income Tax Act, in Canada you are a “common-law partner” if you cohabit with another person in a conjugal relationship, whether that person is of the same or opposite sex, if: (a) that relationship has lasted at least 12 continuous months; or (b) the two of you are legal parents of a child (including a natural or adopted child). Provincial legislation may vary on the length of cohabitation required for a common-law relationship to be recognized. If you are in a common-law relationship, ensure you are aware of the applicable criteria in your jurisdiction.
BMO Private Wealth provides this publication for informational purposes only and it is not and should not be construed as professional advice to any individual. The information contained in this publication is based on material believed to be reliable at the time of publication, but BMO Private Wealth cannot guarantee the information is accurate or complete. Individuals should contact their BMO representative for professional advice regarding their personal circumstances and/or financial position. The comments included in this publication are not intended to be a definitive analysis of tax applicability or trust and estates law. The comments are general in nature and professional advice regarding an individual’s particular tax position should be obtained in respect of any person’s specific circumstances.
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