Canada’s Children’s Fitness Tax Credit – The Rich Get Richer?

Income taxAs many of our readers will know Canada is in the midst of an election campaign and the major parties are putting out a number of policy ideas on a daily basis. One idea proposed by Conservative leader Stephen Harper was to expand the Canadian Children’s Fitness Tax Credit (CFTC).  As it currently stands, the CFTC offers a $500 non-refundable tax credit that parents can receive by enrolling their child in an approved physical activity program.  If I understand it correctly, this means that if your income is $50,000, claiming this credit would effectively reduce your taxable income to $49,500.

While a $500 tax credit may sound pretty large, at the end of the day parents only save a maximum of $75 per child (this saving can be increased by another $75 if the child has a disability).  And keep in mind that parents still need to be able to afford the full $500 fee up front – they don’t get the $75 saving until tax season.  So if Junior’s soccer fees come to $500 and you only have $425 dollars, you’re out of luck.  You need to be able to pay that full $500 fee and then wait until the following spring to have your tax-bill reduced by $75.

Mr Harper is proposing that the current CFTC be expanded to offer a $1,000 tax-credit per child, as well as offering a similar $500 tax-credit for adults (an important detail being that these credits won’t be until the budget is balanced… which is projected to be 2015 at the earliest).  This would mean that parents could now save up to $150 per child, and an additional $75 for themselves…. once the budget is balanced.

These types of tax-credits seem to be catching on with politicians on both sides of the political spectrum as similar credits have been enacted or expanded by the Liberal government here in Ontario, the New Democratic Party in Manitoba, the Progressive Conservative Party in Nova Scotia, the Yukon Party in the Yukon and the Saskatchewan Party in (you guessed it) Saskatchewan (one key difference for the Saskatchewan program being that it is fully refundable).  Similar credits are rumored to be in the works in both Australia and the USA as well.

So, since are these types of tax-credits seem to be increasing in popularity among politicians, and given the limitations described above, is there any evidence that they actually increase physical activity levels? Luckily, a recent paper by John Spence and colleagues at the University of Alberta looked at this exact question.

In this new paper, Dr Spence et al. surveyed a representative sample of 2,135 Canadian adults to ask them if they were aware of the CFTC, if they had claimed it/planned to claim it, and whether they believed that the CFTC led to their child being more involved in physical activity programs.

I have inserted 2 figures of their most telling results below.  I graphed it twice and wasn’t sure which way did a better job of breaking it down, so I have included both.

Figure 1.  Result by Income Quartile (Q1 = lowest income, Q4 = highest income).

Data from Spence et al., 2010

Figure 2. Results by question.

Data from Spence et al. 2010

Not surprisingly, both graphs suggest that the individuals with a higher income were much more likely to report having a child involved with organized physical activity (68% in Q4 vs 40% in Q1).  Similarly, these high income individuals were much more likely to have knowledge of the CFTC, and have claimed it in 2007 or plan to claim it in 2008.  The proportion of individuals in Q3 and Q4 who claimed the CFTC in 2007 was double the proportion of individuals in Q1. The authors also note that among those who claimed the CFTC in the past only 15% said that it led to their children being more involved in organized physical activity.

Given these findings Dr Spence and colleagues conclude that:

More than half of Canadian parents with children have claimed the CFTC. However, the tax credit appears to benefit the wealthier families in Canada.

Clearly, if increasing enrollment in organized physical activity is the goal, this type of tax-credit seems unlikely to make much of a difference.  Based on the results of this paper, it seems that the current CFTC is of benefit to people who can already afford to put their kids in organized sport, but is of little use to the children who need it the most.

I would argue that for the same amount of money, we could get far more children involved in sport by funding programs directly, or by working out a system whereby children from  low-income families simply have to pay lower registration fees compared to those from high-income families.  I know that many sports programs, such as the Fredericton Youth Hockey Association, already have systems like this in place by reducing registration fees and/or providing free equipment to children in financial need.  If getting kids involved in organized activities is the goal then I would argue that this type of program is much more likely to make an actual difference than the fitness tax credits that are popping up around the country (Full disclosure – my dad is heavily involved with the FYHA and its program for kids with financial need, although I’d be a fan of the program even if he wasn’t).

All that to say that while expanding the CFTC isn’t necessarily a bad thing, it’s probably not going to do much to increase enrollment in organized physical activity among those who need it most.

For an excellent explanation of why the CFTC isn’t terribly effective from an economic perspective, I suggest this Globe and Mail article by Kevin Milligan.

Hat tip to Meghann Lloyd for letting me know about the plans to expand the CFTC (if/when the budget is balanced).

Travis

ResearchBlogging.orgSpence, J., Holt, N., Dutove, J., & Carson, V. (2010). Uptake and effectiveness of the Children’s Fitness Tax Credit in Canada: the rich get richer BMC Public Health, 10 (1) DOI: 10.1186/1471-2458-10-356

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11 Responses to Canada’s Children’s Fitness Tax Credit – The Rich Get Richer?

  1. Embittered minds think alike: http://www.weightymatters.ca/2006/12/childrens-fitness-tax-credit-for-rich.html

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    • Travis says:

      That we do. If only I had been reading your blog back in high school I would have caught that post ;)

      I found this line especially interesting:

      It may surprise you to learn that over the course of the last seven years, Canada has posted a budget surplus of over $60 billion, and it’s predicted that there will be similar surpluses over the next seven years.

      Surpluses through 2013? Makes me nostalgic just thinking about it!

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  2. Matt says:

    Great article Travis! These tax credits sounds really great on paper until you examine their supposed benefits further. It is also pretty frustrating that adults must wait until the budget is balanced to receive a tax credit. I agree that money would be better spent subsidizing activity on a larger scale and promoting fitness by making it available to everyone.

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  3. Travis says:

    There is some confusion on my part as to whether this program is actually a tax credit or a tax deduction. I have been told that the program as described sounds more like a tax deduction, and yet the name of the program is the Fitness Tax Credit. Anyone who can shed light on this?

    Thanks to Sean Van Der Lee for pointing out the distinction for me.

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  4. Dave Munger says:

    In the US a tax credit is deducted from your taxes paid — it’s like money. I just got a pretty nice one due to the fact that my son is in college. A deduction reduces your taxable income.

    One big problem with tax incentives is that they only work to the extent that you pay that much in taxes. Low-income families in the US pay very little in income taxes (though that is made up in payroll and sales taxes). A $1000 tax deduction or credit for someone who only pays $250 in taxes wouldn’t help them very much.

    I’m not complaining about my tax credit, but that money would have probably been better spent on Pell grants or other direct education assistance.

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  6. Chris says:

    In the US at least ‘tax credit’ = money taken off the taxes you owe. ‘tax deduction’ = money taken off of your income. A $500 tax deduction may save you $150 depending on your marginal tax rate. A $500 tax credit will save you $500.

    Also there’s refundable tax credits (or something like that) that will pay you even if it means you didn’t pay that much in taxes. E.g., you only paid $100 in income taxes but have a $500 refundable tax credit means you get $400 back.

    As for ‘end of the year’ that’s a moot point if you have the ability to adjust your withholdings – you just get a few more bucks per paycheck. But this can be misleading since you don’t really notice it – compare Bush’s one-time tax refund vs. Obama’s larger tax cut that’s been paid out as an extra $20+ per paycheck. A lot of people don’t even know there was an Obama tax cut.

    Getting back to the original question there’s another way that this can benefit the rich/hurt the poor. If I charge $300 per student for a program but I know everyone gets a tax credit (or deduction) I might be tempted to raise the fee to $350. The people who are getting the tax credit won’t care since they’re still coming out ahead.

    But the people less well-off? The people who don’t make enough to take advantage of the tax credit or who simply don’t have that much cash on hand? They’re screwed.

    Some people think they’ve seen this in practice in US tuition rates. More money available has led to higher tuitions, not more people attending full time or more people able to take more hours since they don’t have to work as many hours in a part-time (or full-time!) job. However the students are really screwed since that additional money isn’t in the form of grants and scholarships, it’s in the form of high-interest student loans that they’ll have to pay back later. They would have been better off with fewer student loans but lower tuition.

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  7. R E G says:

    I’m a Canadian tax accountant.

    The fitness tax credit is a non-refundable federal tax credit- It will cause $ 500.00 of your income to be tax exempt – at the lowest tax rate. Therefore the maximum cash benefit is only $ 75.00 for 2010 ( $ 500.00 at 15%).

    No one is ever going to push junior off the couch and spend $$$ on his fitness just to get a $ 75.00 benefit.

    Ironically, it will never benefit some groups at all. If you are a single parent making minimum wage, with one child, your non refundable tax credits will already wipe out any federal tax you owe.

    In the meantime, politicians will point to this as a great new initiative, while telling the electorate there is no money for school phys ed, parks, trails, community centres etc.

    I have mentally dubbed this the “Halloween election”. Apparently if you open your door, there will be a candidate offering you a treat. The pandering has become absolutely shameless; I am disappointed in all of them.

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  8. Charles A-M says:

    Thanks for raising this, Travis. I was annoyed when I got the latest Fitnet.ca newsletter that trumpeted the Conservative Party’s proposal to increase the child fitness tax credit, without at all mentioning the timeline or the minimal impact of the proposal on low SES people.

    The other comments elaborating on other nuances with this proposal are great.

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