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Additional Child Tax Credit (ACTC)

A refundable tax credit that an individual may receive if their Child Tax Credit is greater than the total amount owed in income taxes

What is the Additional Child Tax Credit (ACTC)?

The Additional Child Tax Credit (ACTC) refers to a refundable tax credit that an individual may receive if their Child Tax Credit is greater than the total amount owed in income taxes. The ACTC is derived from the Child Tax Credit, which provides a $1,000 per child tax credit for up to three children. The ACTC allowed a portion of the regular Child Tax Credit that an individual was not able to claim to be refundable.

 

Additional Child Tax Credit

 

How Does ACTC Work: An Example

A tax credit is meant to reduce a tax liability that an individual owes to the government, and they usually come in non-refundable and refundable forms. To be a non-refundable tax credit, the government will not pay the difference between the tax liability and the tax credit if the credit exceeds the liability.

However, if the tax credit is refundable, it means that the government will pay the difference of the tax liability and the tax credit if the credit exceeds the liability.

 

ACTC - How It Works

 

The Child Tax Credit was the initial tax credit used for children; however, it was non-refundable. It means that a family could lose a tax surplus if the credit amount was over the tax liability they owed to the government. For example, if a family claimed $1,000 in tax credits, but only owed $200, then they would effectively lose the $800 tax surplus (i.e., the government would not pay the $800 difference).

The ACTC was created to act as a refundable avenue for families to capture the surplus. To qualify for the ACTC, the individual claiming it must pass the tests of the Child Tax Credit, namely:

  1. The child must be under the age of 18
  2. Be a Canadian citizen
  3. Has lived with the taxpayer for more than half the tax year
  4. Be claimed as a dependent
  5. Has not provided greater than half of their own financial support for the tax year

 

In addition, an individual will also need to earn at least $3,000 in income. The ACTC is converted into a refundable amount if a family would like to refund a portion of the Child Tax Credit that they were not able to claim. With the ACTC, you can claim 15% of an individual’s income that is in excess of $3,000 up to the maximum amount of the credit ($1,000 per child).

 

Taken all together, here is how the ACTC works:

Let’s say you are raising three children, and you meet all the criteria to qualify for the Child Tax Credit (including earning $75,000). Here are the steps you would take to get the ACTC:

  1. You would begin by subtracting $3,000 from $75,000, which equals $72,000 – the earned income above the $3,000 threshold.
  2. Multiply 15% by the earned income ($72,000), which equals $10,800 – the amount to determine the ACTC.
  3. Since $10,800 is more than the $3,000 you get for the three children, you are eligible for the ACTC.
  4. If your tax liability is less than $3,000, then you will be eligible for the ACTC and may receive a tax refund from the government.

 

The process is outlined in the diagram below:

 

ACTC - Sample Calculation

 

 

Requirements For ACTC

To qualify for the ACTC, an individual or family must also qualify for the Child Tax Credit. The requirements are listed above. Below, we will go through them in more detail.

  1. Age Test – The child must be under the age of 18 at the end of the tax year.
  2. Relationship Test – If you are a parent, the child must be either your own child, stepchild, an adopted child or a foster child. If you are an older sibling who is legally caring for siblings, then you can claim them as well.
  3. Support Test – The child must not have provided greater than half of their own financial support for the tax year.
  4. Dependent Test – The child must be claimed as a dependent. It means the child must pass the Relationship Test, be under 19 (or 24 if they are a student), have lived with you for more than half the year, and provided no greater than half their financial resources for the tax year.
  5. Citizenship Test – The child must be a Canadian citizen.
  6. Residence Test – The child must have resided with the claimant for more than half the tax year. Exceptions include a child being born (or dying) and being temporarily absent, such as attending university.

 

More Resources

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:

  • Alternative Minimum Tax (AMT)
  • American Opportunity Tax Credit (AOTC)
  • Canadian Income Tax Brackets
  • Nanny Tax

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