Canada increases the limit of Adoption Tax credit

Canada has recently increased the limit of maximum expenses that can be claimed under the adoption expense tax credit. In the 2014 budget, this amount was increased to $15,000 from the earlier limit of $11,774. This change is applicable to all adoptions completed after the year 2013.

The adoption tax credit is a 15% non-refundable tax credit. Under this credit, parents who are adopting a child can claim a credit for eligible expenses incurred on adopting a child below 18. The tax credit is available for claim in the year of adoption. Both parents can also split the expenses and separately claim the credit for their portion.

The adoption credit is available on any adoption-related expenses incurred between the time of matching the child and the completion of the adoption process. As per CRA, the adoption period begins when you make an application for registration either with the concerned provincial or territorial ministry or a licensed agency. The adoption period ends upon issuance of an adoption order or with the child permanently moving in with the new family - whichever happens later.

Some of these eligible expenses include fees given to a licensed adoption agency, adoption-related legal or administrative or court fees, any compulsory fees paid to a foreign organization, fees incurred on child's immigration, and so on. Certain adoption-related expenses incurred before matching the child are also eligible for the tax credit. An example of such expense is an adoption home study, which is a background check of adoptive parents and their homes by an independent agency.

Let's try to understand the implications of this new limit:

Suppose you incurred adoption related expenses (eligible) to the tune of $13,000 in 2014. Under the old limit, you could have claimed 15% of only $11,774 or $1,766 as federal tax credit. However, starting from 2014, you can claim a 15% credit on the entire $13,000, which is $1,950. So if your total tax liability is $5,000, $1,950 will be deducted from your income tax payable. Your total tax liability will be $3050. In case you and your partner decide to split the credit equally, each one of you can claim a credit of $975.

In total, as per the new change, this credit can reduce the total tax liability by up to $2,250 (15% of $15,000) as opposed to $1,676 (15% of 11,174).

The aim of this increased credit is to support families who are considering adoption. According to a 2013 survey, out of all Canadians who were considering adoption, 75% were worried about adoption expenses. The expansion of this credit should help in addressing some of these concerns.