It’s everyone’s favourite time of year again: tax time! This year a reader asked us for help understanding how to claim Canada’s adoption tax credit. In this article, adoptive dad and financial professional John Hakkarainen returns for the third year in a row—this time, to explain the nuts and bolts of Line 313.
What is the adoption tax credit and why it is important?
My children often tell me that my jokes are taxing! I am hoping that the guide below helps you to reduce your tax liability so that you have more money to spend on cheese.
With all seriousness, line 313 on your tax return allows you to claim the adoption tax credit, which will enable you to reduce your tax owed so that you can focus on your new child or children. The credit has been put in place for two primary reasons:
- in recognition of the additional expenses you will incur to complete the adoption process, and
- because overall income is often lower in the year(s) of adoption.
The adoption tax credit allows adoptive parents to claim up to $18,210 (2023 tax year) for each child for eligible expenses incurred.
How does the adoption tax credit work?
The adoption tax credit can be claimed in the year in which you legally complete your adoption(s). This is different from the majority of other tax credits. With most other tax credits, you to claim the credit in the year in which the expenses occurred.
Tax credits and tax deductions are two different things. The goal of a tax credit is to ensure that all tax payers receive equal tax reductions for the same expenses. Simply put, a tax credit reduces the amount of tax you owe.
The adoption tax credit helps to reduce your tax liability at the lowest tax rate, which is 20.06% (BC and Federal tax rate combined). This means that if you incurred $15,670 (the maximum amount you could claim for the 2017 tax year) in adoption expenses, you could reduce your tax liability by up to $3260.75. If you adopted multiple children, you are eligible to make the claim for each child.
As an example, Ted and Laura are in the process of adopting Tony, Lance, and Gina in 2017. They incur $60,000 in adoption-related expenses. Once their adoption is complete, they can claim a credit of $47,010 (3 x $15,670). With the help of their tax preparer and financial planner, Ted and Laura decide that Laura should claim $27,200 and Ted should claim $19,810.
As a result of the tax credit, Ted and Laura reduced their tax bill by $9,430.20; however, they also incurred $12,990 in adoption expenses that will not be eligible for any tax relief.
What types of adoption qualify for the tax credit?
There are various circumstances around adoption that make each situation unique. Whether your children come to you via local infant option, international adoption, or adoption from foster care, the CRA makes the tax credit available for adoption-specific expenses. This means that the tax law is written to be flexible for a variety of circumstances as long as the expenses are considered to be “reasonable”.
What expenses can be claimed?
A variety of expenses can be claimed for the adoption of children who are under the age of 18. Here are just a few examples of costs that may be eligible for the adoption tax credit:
- Fees paid to an adoption agency licensed by a provincial or territorial government. This includes consultation expenses and expenses related to placement.
- Fees paid to immigrate to Canada
- Document translation fees for documents being translated to English and from English to the local language of the birth country.
- Court, legal, and administrative expenses (domestic and international). This may include court costs or fees paid for legal counsel.
- Mandatory fees paid to a foreign institution, such as “international partner agency” fees and orphanage fees.
- Reasonable travel and living expenses for the child and the adoptive parents. This includes accommodations, food, flights, vehicle rental, and fuel costs.
- Any other reasonable expenses related to the adoption required by a provincial or territorial government.
In some cases, adoptive parents may receive a subsidy or reimbursement of some of their fees or expenses. The amount you claim for the adoption tax credit will be reduced by the amounts for which you are reimbursed. You may only claim the net amount.
As a personal example, my wife and I drove more than 6200 kilometres, took two flights, paid for a bed-and-breakfast, and spent money on meals out and groceries during our adoption process; all these expenses were eligible for the adoption tax credit. MCFD reimbursed us for $1,000 in accommodations, so we had to reduce our claim of the adoption tax credit by $1,000.
When do expenses start being eligible for the tax credit?
The eligibility for the tax credit begins either when an application is made for registration with a provincial or territorial ministry responsible for adoption (or with an adoption agency licensed by a provincial or territorial government) or when an application related to the adoption is made to a Canadian court, whichever is earlier.
When do adoption expenses stop being eligible to be claimed?
Expenses cannot be claimed if they are incurred after the time the child begins to live with you permanently or after the adoption order is issued by the province, whichever is later.
When can I claim the adoption expenses?
It is my experience that once your child comes home to live with you, there is a period during which you must wait for your adoption to be completed. In the case of my wife and I, it was 13 months before our adoption process was completed. We were able to claim the adoption tax credit in the tax year that our adoption was completed.
What documentation needs to be kept?
In addition to keeping your adoption documents in a safe location for future reference for your child and for yourself, I strongly suggest that you keep all receipts and transaction reports stored in both paper and electronic format for at least seven years. It’s also valuable to hold onto itineraries and additional paperwork detailing the timeline and process of the adoption.
For me and my wife, the adoption transition process had three phases. It was important that our paperwork clearly show the dates and process of each phase and when the children arrived home with us.
It is important for you to have a discussion with your tax preparer or financial planner: Explain to them that you are in the adoption process and that you will incur expenses. This may initiate a conversation around other financial decisions, tax credits, or tax planning considerations.
Where can someone go for more help or information?
Taxes and tax planning are not simple, and rules change over time. Accordingly, I suggest speaking with a qualified Certified Financial Planner (CFP) or Chartered Professional Accountant (CPA) to better understand how the adoption tax credit may be applicable in your situation.
The adoption process involves overwhelming amounts of information and decisions. Throughout the process, talk to other adoptive parents and professionals and practice self care. Make sure you track everything, whether it is related to finances or not.
My kids now inspire my wife and me to share our story and to help other families who are interested in growing their family through adoption. However your adoption story transpires, I’m sure that when you look back on your journey after four or five years with your adopted kid(s), you’ll be happy with your decision. We wish you all the best.
John is the proud adoptive father of three and has been managing partner of JFH Insurance & Investment Services Inc. for 14 years.
