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If you don t pay, you can t play: the Children s Fitness Tax Credit

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caledon

commentary

October 2014 ISBN #1-55382-631-0

If you don’t pay, you can’t play:

the Children’s Fitness Tax Credit

On October 9, 2014, the Prime Minister reiterated his 2011 election cam-paign pledge to boost the Children’s Fitness Tax Credit, one of his government’s growing arsenal of ‘boutique’ or targeted tax benefits. The maximum amount of fitness-related expenses that can be claimed on the tax form will double from $500 to $1,000, claimable in spring 2015 for the 2014 tax year. In addition, starting 2015 the program will be made refundable to expand its reach to more low-income families, hitherto excluded.

These changes may look good on the surface. In fact, the Caledon Institute has recommended that many of the current targeted tax credits be changed from non-refundable to non-refundable to ensure greater fairness among Canadian households [Battle and Torjman 2011]. We commend the government for making this important advance in the architecture of the Children’s Fitness Tax Credit. So far, so good.

But dig deeper into the govern-ment’s announcement and we find that the Children’s Fitness Tax Credit remains a limited benefit that may or may not be smart politics but is flawed public policy. To

qualify for the Children’s Fitness Tax Credit, families first must spend money on fitness-related programs. Many low-income fami-lies cannot qualify for the credit because they cannot afford to shell out any of their limited income on fitness activities.

There is also a more fundamental question at play here: Are tax measures the most appropriate policy instrument to achieve the social objectives of targeted tax credits such as the Children’s Fitness Tax Credit?

The Children’s Fitness Tax Credit was introduced in 2007 with the goal of helping to tackle the problem of low rates of physical activity among Canadian children. Fewer than 10 percent of children and youth meet physical activity guidelines of 60 minutes of moderate-to-vigorous intensity daily [Colley et al. 2012].

Tax reductions targeted to specific groups as an incentive to change behaviour are an increasingly popular public policy instrument. These narrowly targeted tax measures – often termed ‘boutique’ credits – are aimed at specific groups whose

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behav-iour Ottawa thinks can be influenced through the lure of tax breaks. The Child-ren’s Fitness Tax Credit is intended to encourage parents to enrol their children under age 16 in approved fitness activities.

Children’s fitness is a social as well as individual good, and thus worth encouraging with public money.

Poor families stand to benefit most from fitness-related programs because they typically do not have access to such per-sonal enrichment undertakings. These families simply cannot afford what might be con-sidered by them as a ‘frill,’ such as soccer, when they struggle daily with the choice of paying the rent or feeding the kids. Canada’s national game – hockey – with its extraordinarily expensive equipment and money-consuming travel is simply out of the question for most lower-income families.

The Children’s Fitness Tax Credit requires fitness activities to be ongoing (lasting at least eight consecutive weeks or, in the case of children’s camps, five con-secutive days), supervised, suitable for children and require significant physical activity. Generally, most of the activities must include a substantial amount of physical activity contributing to cardio-respiratory endurance, plusone or more of muscular strength, muscular endurance, flexibility and/or balance. Physical activity includes strenuous games like hockey or soccer, activities such as golf lessons, horseback riding, sailing and bowling as well as others that require a similar level of physical activity [Canada Revenue Agency 2014].

Boutique tax benefits, such as the

Children’s Fitness Tax Credit, can be

con-fusing not just to the groups they target but also to the media and politicians. First, these programs are worth substantially less than people might believe. On the income tax form, these measures are listed by their ‘amounts.’ But their actual value in terms of income tax savings is much less – specifi-cally, 15 percent of their amount (15 percent is the lowest federal income tax rate).

Currently, the Children’s Fitness Tax Credit allows eligible taxpayers to reduce their federal income tax at the rate of 15 percent of a maximum ‘amount’ of $500 in fitness expenditures, for a maximum tax cut of $75. Ottawa plans to increase the amount of a family’s fitness-related spending from $500 to $1,000, for a maximum federal tax break of $150 (15 percent of $1,000), effec-tive the 2014 tax year. $1,000 sounds like quite a bundle; $150 a lot less.

One key shortcoming of targeted tax benefits, such as the Children’s Fitness Tax Credit, stems from their non-refundable design. Their benefit comes in the form of a federal income tax reduction, not a cash payment. If you pay no income tax, you don’t qualify for the credit because you have no tax to reduce. If you pay a small amount of income tax, you receive a tax credit worth less than the current maximum $75. So low-income Canadians get little or nothing from boutique tax measures like the Children’s Fitness Tax Credit.

The Prime Minister has acknowledged this flaw by announcing that the Children’s Fitness Tax Credit will be converted to a refundable tax credit. Low-income families with children in approved physical activities will receive their benefit in the form of a cash payment rather than a tax reduction.

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To use the government’s own example, a low-income couple with two children enrolled in a soccer program at a cost of $240 per child or $480 in total is currently excluded from the Children’s Fitness Tax Credit because this household pays no income tax and thus gets no tax credit. Under the new system, the poor family will receive a benefit of $72 (15 percent of the $480 in fitness expenses). This example works out to a small tax break that is little better than nothing. But making the Children’s Fitness Tax Credit refundable at least will extend it to poor families with eligible fitness-related expenses – if they can afford such an expenditure in the first place.

When announcing the expanded Children’s Fitness Tax Credit and extolling its redesign to a refundable credit, the Prime Minister stated that: “For something this important, no child should be left out.” Would that were true. Most children from low-income families will continue to be excluded from the Children’s Fitness Tax Credit, even with the switch to a refundable design. The Children’s Fitness Tax Credit comes with an Achilles heel: Eligibility for

the program requires families to have expenditures on fitness-related activities.

Refundable credits, such as the Canada Child Tax Benefit, GST/HST credit and provincial/territorial child benefits, base their payments on net family income: The largest benefits go to poor recipients and diminishing amounts to the non-poor. But targeted tax measures, such as the Children’s Fitness Tax Credit, base their payment on how much families spend on the behaviour the government wants to affect – in this case, encouraging participation in fitness

programs. If parents want to put their

children into fitness activities but decide that they just can’t afford to, they are out of luck and not eligible for the Children’s Fitness Tax Credit. To play in the boutique tax benefit game, first you must pay –even if you are poor.

Our analysis of the most recent taxation data, for 2011, shows clearly that low- and modest-income families are highly unlikely to receive the Children’s Fitness Tax Credit [Battle, Torjman and Mendelson 2014: 23-25]. Figure 1 presents the results.

Figure 1

Percentage of taxfilers claiming

Children's Fitness Tax Credit, by income, 2011

0.00 5.00 10.00 15.00 20.00 25.00 income ($000) % 0.87 1.47 3.17 5.08 6.77 8.96 10.91 13.48 15.67 17.91 19.01 21.02 22.13 under 10 10-20 20-30 30-40 40-50 50-60 60-70 70-80 80-90 90-100 100-150 150-250 250+

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The percentage of taxfilers that received the Children’s Fitness Tax Credit in 2011 ranged from less than one percent (0.87 percent) of those with incomes less than $10,000 to a high of 22.1 percent of those with incomes over $250,000.

The changes just announced by the federal government will improve the Children’s Fitness Tax Credit’s reach to lower-income families, but the impact likely will be small. Most poor and modest-income families simply can’t afford to buy into boutique tax measures like the

Children’s Fitness Tax Credit. Even if they do manage to participate, lower-income taxfilers typically claim less than better-off taxfilers, as shown in Figure 2, and end up with smaller income tax savings (Figure 3). Note that the fitness-related expenditures shown in Figure 3 exceed the $500 maximum amount because they include taxfilers with more than one eligible child.

Doubling the maximum income tax reduction from $75 to $150 per child means

Figure 2

Average amount of Children's Fitness Tax Credit, by income, 2011

$0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $ 432 434 439 444 468 492 518 546 576 610 639 704 774 under 10 10-20 20-30 30-40 40-50 50-60 60-70 70-80 80-90 90-100 100-150 150-250 250+

that middle- and upper-income families will enjoy a modest increase in their benefits. But better-off families, especially those with high incomes, can afford to pay for their children’s fitness activities – with or without a tax break. The Children’s Fitness Tax Credit is an unnecessary windfall for the affluent, while still leaving most poor families out in the cold. This is not a fair way to operate a social program meant to ‘leave no child out.’

Ottawa estimates that its

enhancements will extend the Children’s Fitness Tax Credit from the current 1.4 million families to 2.3 million families once the increase to benefits and the change to a refundable design are fully implemented. The cost, currently $115 million, will rise to $140 million in fiscal year 2014-15 and $150 million per year after that. A 64 percent increase in the number of families receiving the credit, but only a 30 percent increase in the cost of the program suggests, as we have argued, that many of the families newly claiming the credit will be getting quite

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small payments. Nevertheless, $150 million is a lot of money.

Is the Children’s Fitness Tax Credit worth this sizable and growing expenditure? And is this the most effective way to spend $150 million to achieve the social objective of encouraging children to be more active?

An excellent study published recently by the Canada Tax Foundation found that a sizeable 65 percent of all families surveyed said they had heard of the Children’s Fitness Tax Credit, but only 10.5 percent of those with incomes under $40,000 [Fisher et al. 2013: 613]. The majority of families (58.8 percent) rated the CFTC as very important and another 17.3 percent as somewhat important. But when asked whether the Children’s Fitness Tax Credit motivated or encouraged them to register their children in physical activity or sport, only 30.6 percent agreed. Only 34.2 percent said the CFTC made it easier to register their child in physical activity or sports. Most telling of all, a mere 15.2 percent of families surveyed indicated that the Children’s Fitness Tax

Credit allowed them to register their child in fitness activities when they wouldn’t have otherwise been able to do so, though that number rises to close to 30 percent for households with incomes under $40,000 [Fisher et al. 2013: 629].

A revealing result of the study was parents’ view of various strategies aimed at increasing children’s physical activity. More than 70 percent of parents rated convenient and accessible programming (71.2 percent) and sports and recreation facilities (70.9 percent) as most important, followed by opportunities for free play (62.4 percent), coaching or instruction (60.0 percent), and school or after-school programs (59.9 percent). The lowest was credits or benefits such as the Children’s Fitness Tax Credit, at 48.4 percent [Fisher et al. 2013: 627].

Are boutique tax credits like the Children’s Fitness Tax Credit the best way for government to influence behaviour? The critique presented here suggests that Ottawa should jettison the Children’s Fitness Tax Credit and explore another approach –

Figure 3

Average federal income tax savings from Children's Fitness Tax Credit, by income, 2011

$0 $20 $40 $60 $80 $100 $120 $140 income ($000) $ 2 21 54 64 69 73 77 82 86 91 96 105 116 under 10 10-20 20-30 30-40 40-50 50-60 60-70 70-80 80-90 90-100 100-150 150-250 250+

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investing in community programs and amenities rather than individual income benefits.

The annual $115 million federal cost of the Children’s Fitness Tax Credit – soon to rise to $150 million – would be better spent investing in fitness-related spaces and facilities that benefit everyone. Families cannot possibly construct and maintain through their individual contributions essential infrastructure such as parks, trails, arenas, rinks and pools [Torjman and Battle 2014].

Public funds are also needed to help train parents, youth and community leaders to become coaches or physical activity leaders, and to forge partnerships among community groups to improve community capacity related to physical activities and sports [Walia and Leipert 2012]. Federal funding could help support community-based organizations that sponsor low-income children’s participation in fitness activities. For example, not-for-profit groups, service clubs and municipalities provide financial support or no-cost programming for children in need to help them take part in fitness activities [Spence et al. 2010].

Some functions in society are best carried out through social investment rather than individual tax breaks. Tax benefits targeted to certain groups do not build a country with public amenities that can be enjoyed by all citizens, regardless of income.

Ken Battle and Sherri Torjman

References

Battle, K., S. Torjman and M. Mendelson. (2014). The 2014 Unbalanced Budget. Ottawa: Caledon Institute of Social Policy, February.

Battle, K. and S. Torjman. (2011). When is $500 not $500? Ottawa: Caledon Institute of Social Policy, April.

Canada Revenue Agency. (2014. Children’s Fitness Tax Credit. http://www.cra-arc.gc.ca/nwsrm/txtps/ 2013/tt130225-eng.html.

Colley, R., D. Garriguet, I. Janssen, C. Craig, J. Clarke and M. Tremblay. (2011). Physical Activity of Canadian Children and Youth: Accelerometer Results from the 2009 to 2009 Canadian Health Measures Survey. 22:1 Health Reports 15-23. Ottawa. Fisher, K., A. Mawani, B. von Tigerstrom, T. Larre, C. Cameron, K. Chad, B. Reeder and M. Tremblay. (2013). “Awareness and Use of Canada’s Children’s Fitness Tax Credit.” Canadian Tax Journal. 61:3, 599-632.

Spence, J., N. Holt, J. Dutove and V. Carson. (2010).

Uptake and Effectiveness of the Children’s Fitness Tax Credit in Canada: The Rich Get Richer. BMC Public Health 1-6.

Torjman, S. and K. Battle. (2014). The Six Billion Dollar Man. Ottawa: Caledon Institute of Social Policy, October.

Walia, S and B. Leipert. (2012). Perceived Facilitators and Barriers to Physical Activity for Rural Youth: An Exploratory Study Using Photovoice. 12 Rural and Remote Health article no. 1842.

Copyright © 2014 by

Caledon Institute of Social Policy 1354 Wellington Street West, 3rd Floor

Ottawa, ON K1Y 3C3 CANADA

Tel/Fax: (613) 729-3340

E-mail: caledon@caledoninst.org

References

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