If you have any clients who’ve adopted a child or are thinking about adopting, you should let them know about the Canada Revenue Agency’s tax credit for adoption expenses. Ideally, you may want to let them know about this credit before they start the adoption process. Then they can save their receipts and track their expenses in preparation for tax season.
When claiming this credit, your clients can use most expenses related to foreign or domestic adoption. That includes fees paid to licenced adoption agencies and court costs. It also includes necessary travel expenses, translation fees if relevant, and fees for the child’s immigration. The CRA may also accept other reasonable expenses. As a general rule of thumb, reasonable expenses relate directly to the adoption. They don’t include purchases such as cribs, toys, or cloth diapers.
Timing of Expenses
To qualify for the credit, the expenses must be incurred during the "adoption period." The CRA defines the beginning of this period as the time your client registers for the adoption. The period ends on the latter of the date the adoption order is issued or the date when the child begins to live permanently with your client.
Your clients can claim the credit for the tax year during which the adoption period ends. For instance, if your client begins the adoption process in May 2017, but the adoption isn’t finalized until April 2018, they qualify to claim the credit on their 2018 tax return.
Claiming the Adoption Credit
To claim this credit on behalf of your clients, you simply need to note the expenses on Line 313 of Schedule 1 of the personal income tax return. As of 2018, your clients can only claim a maximum of $15,670 in expenses, and you have to reduce the claim by any reimbursements or assistance they received. For example, if your client has $15,000 in eligible expenses but received a $5,000 reimbursement from an employer, they can only claim this credit on $10,000.
As of 2018, your client will receive 15% of the eligible expenses as a credit. If you note $10,000 in expenses, the credit is worth $1,500. That helps to reduce their tax liability.
Splitting the Adoption Tax Credit
To help your clients make the most of this credit, you may want to split it between two adoptive parents. But you can’t exceed the threshold listed above. To explain, say your clients have $20,000 in eligible expenses. Unfortunately, you can’t just claim $10,000 on each parent’s tax return, as that total goes over the threshold.
That said, you don’t have to split the expenses equally. You can split them in whichever way makes the most sense for your clients. Imagine one adoptive parent has a much higher tax liability than their spouse or partner. In this situation, you may want to claim the majority of the tax credit on their return and claim the remainder on their spouse’s or partner’s return.
You need the right documents to support your client’s claim. You don’t have to send receipts or other documents to the CRA, but you or your clients need to keep these records on hand. They can be essential in the case of an audit.
This is just one of the many tax credits that can help your clients lower their tax liability. As you work with different clients, you may want to get to know them and find out what’s happening in their lives. This can give you the information you need to help them find tax credits that apply in their situations.