Report on Federal Tax Expenditures - Concepts, Estimates and Evaluations 2017
Part 4 – Tax Evaluations and Research Reports
Evaluation of the Children’s Fitness Tax Credit and the Children’s Arts Tax Credit
Over the past decade, a number of tax credits have been introduced in Canada in order to encourage the participation of children in physical, artistic, cultural, recreational and developmental activities. At the federal level, Budget 2006 introduced the Children’s Fitness Tax Credit (CFTC) to promote physical fitness among children by recognizing the costs associated with supervised physical activity. Budget 2011 supplemented the tax recognition provided for children’s fitness activities by introducing the Children’s Arts Tax Credit (CATC) to provide relief for the costs associated with children’s artistic, cultural, recreational and developmental activities (hereafter simply referred to as “artistic activities”). During this period, some provinces and territories have also introduced their own children’s fitness and arts tax credits.
In Budget 2016, the federal government announced the phase-out of the CFTC and the CATC by 2017, as part of its efforts to simplify the tax code and better target support for families with children. This paper presents an evaluation of these two credits.
The paper starts by providing background information on the two credits. It then presents an evaluation of their relevance, effectiveness, equity and efficiency. The report concludes by summarizing the main findings of the evaluation.
The main findings of the evaluation suggest that the CFTC and CATC had relevant policy objectives but significant shortcomings in terms of their effectiveness, fairness and efficiency. Overall, it is assessed that the effective price effects that resulted from the CFTC and CATC were relatively small and unlikely to generate significant behavioural responses, including because family decisions as to the participation of children in physical and artistic activities are relatively price-insensitive. Some concerns are also raised with respect to fairness as both credits were primarily used by high-income families. It is also assessed that the credits led to significant windfall gains for those families who would likely have registered their children in activity programs with or without the credits.
2.1 History and Rules of the Credits
Budget 2006 introduced the 15% non-refundable CFTC effective as of January 1, 2007. The CFTC could be claimed for “eligible fitness expenses” incurred in respect of a “qualifying child”, meaning a child who is, at the beginning of a taxation year, under 16 years of age or under 18 years of age if the child is eligible for the Disability Tax Credit.
“Eligible fitness expense” was defined as a fee paid to a person or partnership that offers one or more “prescribed programs of physical activity”. A prescribed program of physical activity was defined as a program that is not part of a school’s curriculum, involves a significant amount of physical activity, and is of a duration of at least eight consecutive weeks or five consecutive days. Physical activity was defined as an activity that contributes to cardio-respiratory endurance and to one or more of muscular strength, muscular endurance, flexibility and balance.
Until the 2014 taxation year, eligible fitness expenses could be claimed up to a maximum of $500 per qualifying child, for a maximum non-refundable tax savings of $75 (i.e., $500*15% = $75) per child per taxation year. For parents of children eligible for the Disability Tax Credit and with at least $100 of eligible expenses, an additional amount of $500 could be claimed, increasing the maximum amount from $500 to $1,000, for a maximum non-refundable tax savings of $150 (i.e., $1,000*15% = $150) per child per taxation year. The additional amount was provided in general recognition of the extra costs that children with disabilities encounter in becoming involved in programs of physical activity, notably with regard to specialized equipment, transportation and attendant care.
Effective for the 2014 taxation year, the maximum amount was doubled to $1,000 per child under 16 years of age, for a maximum tax savings of $150 (i.e., $1,000*15% = $150). The CFTC was also made refundable, effective for the 2015 taxation year, to increase benefits to low-income families claiming the credit. The additional amount of $500 related to children eligible for the Disability Tax Credit was not affected by these changes.
Recognizing that, like physical activities, participation in artistic, cultural, recreational and developmental activities can contribute to a child’s development, the Government introduced the CATC in Budget 2011. The CATC could be claimed in respect of a “qualifying child” (children under 16 years of age or under 18 years of age for children eligible for the Disability Tax Credit) as for the CFTC, and became effective as of the 2011 taxation year. The CATC was available at a rate of 15% (non-refundable) on claims of up to $500 per child in eligible expenses for children’s participation in activities “intended to contribute to a child’s ability to develop creative skills or expertise, acquire and apply knowledge, or improve dexterity or coordination, in an artistic or cultural discipline including (i) literary arts, (ii) visual arts, (iii) performing arts, (iv) music, (v) media, (vi) languages, (vii) customs, and (viii) heritage” and that were not eligible for the CFTC. As with the CFTC, an extra amount of $500 could be claimed for children eligible for the Disability Tax Credit.
Budget 2016 announced the phase-out of the CFTC and CATC by initially reducing the 2016 maximum eligible amounts from $1,000 to $500 for the CFTC (which remained refundable for 2016) and from $500 to $250 for the CATC, and then by eliminating both credits for the 2017 and subsequent taxation years.
2.2 Statistics on Claimants
Table 1 presents statistics on families who claimed the CFTC and/or CATC between 2007 and 2014 (the most recent year for which full tax data is available). It shows the number of families who claimed one or both of the credits, the number of children in these families, as well as the total and average amounts claimed and tax savings realized.
Some 1.8 million families claimed the CFTC/CATC in 2014, up from 1.6 million in 2011 (the first year where both CFTC and CATC were available), and from 1.3 million in 2007 (the year the CFTC was introduced). This represented about 43% of all families with children in 2014 compared with 40% in 2011 and 31% in 2007. Children in families claiming the CFTC/CATC (close to 3.4 million children) accounted for about 47% of all Canadian children in 2014.
In 2013, the last year in which the total CFTC claim was limited to $500, the total of all CFTC/CATC claim amounts reached $1.2 billion. This compared with $1.7 billion in 2014, the first year where the maximum amount for the CFTC was doubled to $1,000. Total estimated tax savings resulting from the CFTC and CATC were $220 million in 2014, up from $155 million in 2013.
Take-up of the CFTC grew by 12.5% between 2007 and 2008, the first year after the introduction of the credit, and then more modestly up to 2011 when the CATC was introduced, after which the combined take-up of the two credits grew between 2% to 3.7% each year.
|Total number of families claiming the CFTC/CATC (‘000)||1,277||1,437||1,487||1,529||1,639||1,682||1,715||1,778|
|As % of total nb. of families with children (take-up rate)||31.0||34.7||35.8||36.9||39.8||41.0||41.9||43.3|
|Year-to-year growth (%)||12.5||3.5||2.8||7.2||2.6||2.0||3.7|
|As % of total nb. of children of taxfilers||34.5||38.5||39.5||40.7||43.5||44.7||45.4||46.8|
|Year-to-year growth (%)||11.8||3.3||2.8||6.8||2.6||1.5||4.1|
|Amount claimed as CFTC/CATC|
|Year-to-year growth (%)||15.4||4.9||6.2||30.1||6.9||4.5||39.8|
|Avg. per family claiming the CFTC/CATC ($)||508||521||529||546||663||690||708||955|
|Avg. per child ($)||257||265||270||278||339||353||364||489|
|Tax savings associated with CFTC/CATC|
|Year-to-year growth (%)||16.7||4.8||0.0||27.3||7.1||3.3||41.9|
|Avg. per family claiming the CFTC/CATC ($)||70||73||74||72||85||89||90||129|
|Avg. per child ($)||36||38||38||37||44||46||47||64|
|Notes: Families are defined as spouses or common-law partners and their children. The matching of spouses is based on tax data, and as such may be affected due to data limitations. Available tax data also does not provide for the exact number of "qualifying children" for purposes of the CFTC/CATC (i.e., children aged 15 years or less and children with a disability aged 17 years or less). Children of CFTC/CATC claimants as shown in the table include children aged 17 years or less plus a number of children with a disability aged 18 years and over. As such, averages per child of claimants are likely to be slightly underestimated. There are a small number of families claiming the credits for whom the data does not show that they have children. These families are included in the total number of families with children.
From 2007 to 2010, families could only claim the CFTC while from 2011 to 2014 families could claim the CFTC, the CATC or both.
Take-up rate is calculated based on total number of families with children. Averages calculated based on the number of families claiming the CFTC/CATC or children of such families.
Source: Department of Finance Canada.
3. Evaluation Findings
The main objective of the CFTC was identified in Budget 2006 as promoting physical fitness among children. The Government justified this objective by indicating that “regular physical activity has many positive effects on children, including healthier growth and development and improved physical fitness.”
There is agreement among health policy experts that measures to promote physical activities among children address a real policy need. The Expert Panel for the CFTC underlined in its 2006 report that “encouraging families to help their children become physically active is an important goal, and one that is becoming increasingly important” in a context of “alarming” trends in children’s fitness and the prevalence of child obesity due to, among other things, a more sedentary lifestyle. Child obesity is associated with multiple negative health-related outcomes, such as type 2 diabetes, hypertension and emotional health issues, and overweight children have a greater chance of being overweight in adulthood. The cost of obesity is assumed not only by individuals experiencing the condition, but also by the entire population, which collectively bears the social costs associated with the condition (e.g., higher health care costs, loss of productivity due to absenteeism).
The objective of the CATC was identified upon its introduction in 2011 as better recognizing the costs associated with children’s artistic activities. Budget 2011 underlined that “like physical fitness, participation in artistic, cultural, recreational and developmental activities can positively contribute to a child’s development.” Research also supports the idea that participation in artistic activities has a positive impact on mental health and the development of children, although such research is more limited.
As potential positive outcomes related to health and children’s development can theoretically benefit society as a whole, government interventions that aim at promoting children’s participation in a broad range of organized activities found to be correlated with such positive outcomes can be considered relevant.
Both theoretical considerations and empirical evidence provide strong indications that the CFTC was ineffective at promoting greater children’s participation in physical activities. The same theoretical considerations support the conclusion that the CATC was also ineffective at encouraging greater children’s participation in artistic activities, even though empirical evidence in that case is not available.
Two key findings support the conclusion that the CFTC and CATC were ineffective at encouraging greater participation of children in physical and artistic activities:
- The effective price effects provided by these credits were relatively small; and
- Family decisions as to the participation of children in physical and artistic activities are relatively price-insensitive.
This section discusses these two findings, followed by a review of the empirical evidence as to the effectiveness of the CFTC.
Price Effects From the Children’s Fitness Tax Credit and Children’s Arts Tax Credit
The effective price effects that resulted from the CFTC and CATC can be described as relatively small, and thus as unlikely to generate significant behavioural responses, all else being equal.
By design, the CFTC and CATC each provided a maximal 15% reduction in the after-tax price of eligible children’s activities vis-à-vis other family consumption items. However, there are multiple reasons to believe that for many families the effective price-incentive effect of the credits was in fact lower than the 15% maximal reduction:
- Families that face nil or low tax liabilities before credits or have sufficient other credits to offset their tax liabilities cannot fully benefit from non-refundable tax credits. The CFTC was made refundable as of 2015, but this limitation remained in the case of the CATC.
- The CFTC and CATC were capped, and thus did not reduce the price of eligible children’s activities at the margin for parents who would have spent more than the maximum eligible expenses on children’s activities.
- The net price effect of a price subsidy is a function in part of how supply responds to an increase in consumer demand (assuming there is such an increase in demand). For instance, in a scenario where supply is relatively fixed, suppliers would not be able (or willing) to accommodate an increase in demand, and would simply react to an increase in demand by increasing prices, thereby capturing part of the benefits from the price subsidy. Such a price dynamic should be at play to some extent in any market where supply cannot costlessly adjust to an increase in demand, for instance, due to the costs of building new sports infrastructure like arenas or gymnasiums or hiring additional coaches or trainers. The market for organized physical and artistic activities for children consists in part of private suppliers who are expected to react in such a manner, but also in part of public organizations (e.g., municipalities) whose pricing policies could be influenced by non-market considerations. This scenario suggests that to the extent families were responsive to the price incentives provided by the CFTC and CATC (which may not have been the case—see next section), the resulting increase in demand was likely partly muted by the effect of higher pre-tax prices.
- Any compliance burden imposed on parents (e.g., the requirement to collect and retain receipts in order to support claims for the credits) represented a cost that can partially offset the price reduction offered by the credits. These costs are subjective to some extent and may have changed perceptions with respect to the potential savings associated with the credits, at least for some families. Like any other business costs, compliance costs imposed on suppliers of organized physical and artistic activities for children (e.g., the requirement to issue receipts to parents, costs related to the need to assess the eligibility of their programs) were also expected to be partly shifted to parents through higher prices, further reducing the net price effects from the credits.
- Some parents eligible for the credits may have discounted the value of the price reduction due to the fact that the resulting tax savings were only realized after having filed an income tax return rather than at the time the eligible expenses were incurred. Some parents may also be unaware of the availability of the credits, which effectively would mean that the price effects from the credits were nil for these parents.
Information to measure the effective net price effects of the CFTC and CATC is only partially available. In the case of families that could not fully benefit from the credits because they face a low or nil tax liability, estimates using tax data indicate that 31% of individuals in families with children were not able to benefit from the CFTC or CATC, while 17% were able to benefit only partially. Because of this, the average potential savings on the first dollar of eligible expenses among individuals eligible to claim the CFTC or CATC (i.e., those in families with children) were 10 cents in 2013, which is below the theoretical maximal tax savings of 15 cents per dollar. Making the CFTC refundable as of 2015 ensured that all parents could get 15 cents of tax savings per dollar of eligible spending on children’s physical activities up to the maximum value. The CATC remained non-refundable; therefore it can be presumed that the net price effect remained below 15 cents for children’s artistic activities.
With regards to awareness of the credits, some surveys indicated that this was an issue for the CFTC in the early years after the introduction of this credit, in particular among low-income parents. However, as the trend in the take-up rate suggests, it is likely that awareness increased over time as the credit was regularly publicized by the Government. Media coverage that took place following the 2014 announcement of the doubling and refundability of the CFTC also likely increased awareness of the CFTC, especially among low-income families. It can be expected that awareness of the CATC followed a similar evolution. The take-up rates for the CFTC and CATC increased from 31.3% in 2007 to 41.0% in 2014 for the CFTC and from 11.5% in 2011 to 14.9% in 2014 for the CATC. Among families who generally have sufficient income to be taxable (e.g., those who report more than $40 000 a year), the combined take-up rate for the two credits was about 55.2% in 2014, up from 52% in 2011.
Price Sensitivity of Family Decisions Concerning Children’s Participation in Physical and Artistic Activities
The CFTC and CATC provided a tax subsidy for the consumption by families of eligible children’s activities. The effectiveness of the credits, for the level of price effects that the credits effectively provided, depended therefore on the degree to which families were responsive to these price effects, that is, on the extent to which families were willing to give up other forms of spending in favour of spending on eligible children’s activities.
No studies are available that estimate the price elasticity of the demand for organized children’s physical or artistic activities. However, research on the determinants of physical activity among children indicates that factors other than cost are more likely to be significant determinants of participation in organized physical activity. This research identifies a number of characteristics that are associated with physical activity among children, notably age, gender, family education and income, and whether parents are involved in their children’s physical activities. In spite of the positive association between family income and children’s participation in physical activities, the evidence is mixed as to whether or not cost represents a significant barrier to physical activity. This suggests that the relationship between income and physical activity reflects other characteristics that are correlated with income, such as the educational level, values and lifestyle of the parents, more than the ability of families to pay for children’s physical activities.
Different reasons may explain that cost is a secondary determinant of decisions concerning children’s activities. The degree to which families are willing to reduce time spent on unorganized children’s activities (e.g., playing sports with friends in the park, going to the movies, reading books) in order to spend more time on organized children’s activities is likely low because such substitution requires parents and children to compromise on both the degree of organization or structure of the activity and its intensity. According to the literature, parents and children seem to demonstrate strong preferences regarding the degree of structure and intensity of children’s activities; in particular, children that are less physically active express strong preferences for unstructured and quieter activities. Affordability is likely to be a secondary consideration in the presence of such strong preferences against organized children’s activities.
Time constraints may also be a key factor limiting family decisions, above and beyond affordability or preferences. Some families, in particular families with many children or who had already registered their children in some organized programs of activities, may have been unwilling to register their children in additional eligible programs due to a lack of time or because they were not available on the days and at the time these programs were offered. Other families might have been willing to marginally increase the amount of time spent on children’s activities in a given week but might not have been able to allocate the time required to register their children in a full program of activities eligible for the credits. Such time constraints could have limited the scope for substitution between forms of children’s activities that otherwise would appear to have been easily substitutable—for instance, programs of organized activities that met or did not meet the minimum duration or intensity requirements that were set out under the CFTC and CATC.
Overall budget constraints may have been another limiting factor for certain families. The price reduction provided by the credits may not have been sufficient for families for whom the cost of registering a child for one additional program of activity was significant relative to their budget (assuming these families were in a position to benefit from the credits).
Finally, the possibility for families to choose among different physical activities at different prices may be another explanation why cost does not seem to be a significant barrier to physical activity generally, but rather may be more of a barrier to the type of activity. There is some evidence that children in high-income families tend to participate in more expensive sports such as skiing or hockey, and children in low-income families in less expensive sports such as basketball. It is possible that the CFTC and CATC led some families to spend more on eligible children’s activities, without necessarily dedicating more time to these activities. For instance, parents who had registered their child for an eight-week soccer program may have decided, after the introduction of the CFTC, to instead register their child for a more expensive eight-week hockey program, as the CFTC now made this latter activity more affordable and the child preferred hockey to soccer. In such a situation, the substitution effects brought about by the credit may not have resulted in the child doing more physical activity overall. Increased spending on eligible activities may have had beneficial fitness or developmental outcomes to the extent that the additional spending permitted to improve the quality of the child’s activities being undertaken (e.g., private music lessons instead of group lessons), but could also have been used to make a substitution among physical activities, without clearly enhancing the fitness or developmental outcomes.
While no Canadian research was found concerning the determinants of children’s participation in artistic activities specifically, evidence for the United States in the field of research on organized activities (physical or not) indicates that availability and affordability are the most basic factors affecting children’s participation in out-of-school organized activities. According to this research, the requisites for participation in such activities are the presence of resources such as community centres and playing fields, and the availability of competent and willing adults to provide the activities. Beyond availability, factors such as family income, culture, ethnicity, individuals’ competence and age also influence participation rates.
On balance, it seems doubtful that the price incentive that the CFTC and CATC provided has significantly increased children’s participation in organized activities. Tax credits like the CFTC and CATC may marginally reduce the cost for families of registering their children in organized physical or artistic activities, but they do not affect other important factors that influence participation in such activities, such as preferences, competences or time constraints. Because cost is only one of the various factors determining children’s participation in organized physical or artistic activities, the price elasticity of the demand for such activities is probably low.
Some sophisticated empirical analyses of the impact of the CFTC on the demand for children’s physical activities also suggest that this credit was of limited effectiveness. A 2014 study compared the change in participation in physical activity for children eligible for the CFTC to that of children not eligible for the credit, before and after the introduction of the credit, using a well-known evaluation technique (i.e., a difference-in-difference estimation method) and data from two nationally representative Statistics Canada surveys, the Canadian Community Health Survey and the Survey of Household Spending. Results from this study show that the overall impact of the CFTC on the probability that children will participate in organized physical activity is small and insignificant, leading its authors to conclude that the CFTC had “no effect of increasing physical activity participation for children.”
In two earlier surveys, parents of children were asked whether the CFTC has had an impact on their children’s participation in physical activity. Spence et al. (2010) reported that 26.1% of all parents with children claimed the CFTC in 2007, and that 15.6% of these parents agreed the CFTC had increased their children’s participation in organized physical activities. Put differently, 4% of all parents who answered this survey said that the CFTC had increased their children’s participation in physical activities. Fisher, K.L. et al. (2012) indicated for their part that, among parents aware of the CFTC in 2009-2010 (65.4%), 31% said the CFTC motivated them to register their child in physical activity, 34% said the CFTC made it easier to register their child in physical activity, and 15% said they would not have been able to register their child in physical activity if not for the CFTC. Such survey results should be interpreted with caution in assessing the effectiveness of the credit, as parents may overstate the importance of the credit when answering such surveys.
Health policy experts were generally of the view that the CFTC was ineffective at promoting physical activity among children. For instance, an international panel of experts that was set up by a team of researchers to review the effectiveness of tax credits and other economic instruments in dealing with child obesity and inactivity in the Canadian context concluded that “tax credits were seen as rather ineffective at encouraging physical activity amongst the sedentary,” and “were deemed to provide windfall gains to those who already participate in physical activity.” The panel suggested that “there was insufficient evidence to clearly recommend specific tax credits or subsidies to promote physical activity.”
A 2014 paper that evaluated the effectiveness of the CFTC and similar credits at increasing physical activity levels in Canada also came to the conclusion that such credits are unlikely to be effective at achieving their objective.
Statistics on trends in physical activity among children since the introduction of the CFTC also point to the limited effectiveness of the credit. A review of existing Canadian data on physical activity trends for children shows little difference in the levels of physical activity among children before and after the introduction of the CFTC in 2007. A Canadian Physical Activity Levels Among Youth (CANPLAY) study, which collected pedometer data from eight surveys between 2005 and 2014 to describe physical activity trends for individuals 5-19 years old, found that the median number of steps per day taken among this population increased between 2006-07 and 2007-08 but then decreased in 2012-14. Statistics Canada, which measures the levels of physical activity among Canadian children aged 12-19 on an annual basis through survey questions, also found no clear trend in the levels of physical activity among these children over the last decade (Chart 1). Despite a slight decrease in activity levels for girls in 2008 followed by a noticeable rebound by 2011, no significant differences in the average levels of physical activity among boys and girls were observed before and after the introduction of the CFTC, with the percentage of children who reported being moderately active or active decreasing slightly from 71.1% in 2005 to 70.4% in 2014.
While no similar empirical results are available regarding the impact of the CATC on children’s participation in artistic activities, the theoretical considerations described earlier provide reasons to believe that the results of such empirical studies would likely lead to similar conclusions, i.e., that the CATC was most likely ineffective at promoting greater children’s participation in artistic activities.
Since the introduction of the CFTC and CATC, the credits (in particular the CFTC) have been criticized as being inequitable. Table 2 shows some CFTC/CATC statistics for 2014 by total family income. This table shows that take-up rates, as well as average amount claimed and average tax savings per child, increased steadily with income. For instance, the take-up rate for families with $40,000 or less in income in 2014 was less than half the take-up rate for families in the $40,000 to $80,000 income group, and less than a quarter of the take-up rate for very high income families (more than $200,000 in family income).
|Total family income||Total number of families claiming the CFTC and/or the CATC||Total amount claimed||Total tax savings||Average amount claimed per child||Average tax savings per child||Take-up rate|
|($)||(‘000)||(%)||($ million)||(%)||($ million)||(%)||($)||($)||(%)|
|Up to 40,000||210||11.8||137||8.2||5||3||348||14||16.8|
|Notes: Available tax data does not provide for the exact number of “qualifying children” for purposes of the CFTC/CATC (i.e., children aged 15 years or less and children with a disability aged 17 years or less). Children of CFTC/CATC claimants as shown in the table include children aged 17 years or less plus a number of children with a disability aged 18 years and over. As such, averages per child are likely to be slightly underestimated. The take-up rate is calculated based on the total number of families with children. Averages are calculated based on the number of families claiming the CFTC/CATC or children of such families. See Table 1 for other notes.
Source: Department of Finance Canada.
The lower take-up rate and amount claimed among families with total income of $40,000 or less primarily reflects the fact that low-income families may not have had sufficient tax payable to fully benefit from the credits. However, families in the $40,000 to $80,000 income group, who would generally be taxable, also exhibited a lower take-up rate and average amount claimed per child, at about 55% of those of very high income families. This indicates that non-refundability of the credits (up until 2015 for the CFTC) only partially explains why lower-income families were less likely to benefit from the credits as higher-income families. Making the CFTC refundable in 2015 made the credit more beneficial to low-income individuals that claimed eligible expenses, which lessened to some extent the equity concerns discussed above. However, preliminary data for 2015 suggests that despite refundability, the take-up rate among low-income individuals and amounts claimed remained much lower than for other income groups.
Chart 2 also provides little evidence that the refundability of the children’s fitness and arts tax credits offered in Saskatchewan, Ontario and Quebec has had a significant impact on the CFTC/CATC take-up rates among low-income families with children. Even in the presence of refundable provincial tax credits in these provinces, the take-up rates for the CFTC/CATC continued to be significantly lower among low-income families than among higher-income families.
The lower take-up rates and tax savings among low-income families in spite of refundability may have been attributable to a number of factors, including the fact that low-income families have less discretionary income to spend on organized children’s activities or that these families may have access to municipal financial assistance programs designed to support their children’s participation in organized activities.
Statistics on claims by province of residence in 2014 show that take-up rates varied little by region, with the exception of the Northwest Territories and Nunavut where take-up was much lower than elsewhere in the country (Table 3). The ability to participate in activity programs for children depends on the availability of resources in the community, for instance on the availability of recreational infrastructure, transportation and human resources. Accordingly, accessibility to activity programs for children can be more challenging in smaller communities than in larger communities, which means that the CFTC and CATC likely benefited children in larger communities to a greater extent.
|Number of families claiming the CFTC and/or the CATC||Total amount claimed||Total tax savings||Average amount claimed per child||Average tax savings per child||Take-up rate|
|(‘000)||(%)||($ million)||(%)||($ million)||(%)||($)||($)||(%)|
|Newfoundland and Labrador||23.3||1.3||23.2||1.4||3.2||1.5||564||79||39.5|
|Prince Edward Island||7.5||0.4||6.7||0.4||0.9||0.4||451||61||44.9|
|Notes: Same notes as for Table 1. Taxfilers filing in multiple jurisdictions are not included in province totals but are included in Canada totals. These comprise 0.1% of the total number of families making a claim.
Provincial tax credits for children’s fitness activities are available in the following jurisdictions: Nova Scotia (effective 2005, eliminated for 2015 and later years), Manitoba (2007), Yukon (2007), Saskatchewan (2009), Ontario (2010), British Columbia (2012) and Quebec (2013). The tax credits in Saskatchewan, Yukon, Ontario and Quebec are refundable.
Relatively low tax savings for taxfilers resident in Quebec reflect in part the 16.5% tax abatement that is available to Quebec residents.
Provincial tax credits for children’s artistic, cultural, recreational and developmental activities are available in the following jurisdictions: Manitoba (2011), Yukon (2011), British Columbia (2012), Saskatchewan (2009), Ontario (2010) and Quebec (2013). The tax credits in Saskatchewan, Ontario and Quebec are refundable.
Source: Department of Finance Canada.
That the CFTC and CATC were unlikely to have resulted in significant additional children’s activities implies that these credits were also largely inefficient because the bulk of the costs arising from the credits were incurred in relation to activities that would have taken place even in the absence of the credits. This holds true for the fiscal cost that the Government incurred, that is, the tax revenues that were foregone because of the credits. This cost was estimated at $255 million in 2015, before the credits began to be phased out. Because the CFTC and CATC led to little additional children’s activities, it can be concluded that most of the forgone tax revenues accrued as windfall gains to families that would have registered their children in eligible activity programs even in the absence of the credits.
The same holds true for other costs associated with the CFTC and CATC, including administration and compliance costs as well as the economic costs associated with the need for the Government to raise other taxes to make up for the tax revenues forgone because of the credits. Even though these other costs may have been minimized per unit of activity subsidized, the bulk of these costs represented a loss from the point of view of society as a whole, since these costs did not lead to significantly greater participation in children’s activities.
In any event, behavioural responses may fail to lead to beneficial outcomes, which would be another source of inefficiency. In the case of the CFTC and CATC, it has been questioned to what extent a change in the mix of organized versus unorganized children’s activities is beneficial to children from physical and developmental standpoints. With regards to physical fitness, such a change may not result in any significant increase in levels of physical activity of children, as one form of physical activity only replaces the other. With regard to children’s development, participation in organized physical or artistic activities may help develop specific physical, cognitive and social skills, although the same can also be argued for participation in unorganized activities.
The above suggests that the costs associated with the CFTC and CATC exceeded the realized benefits, and that other alternatives would have likely been more efficient from a benefit-cost standpoint.
This paper presents an evaluation of the Children’s Fitness Tax Credit and Children’s Arts Tax Credit from the standpoints of their relevance, effectiveness, equity and efficiency. While the main findings of the evaluation support the relevance of the credits’ objective of promoting greater participation of children in physical and artistic activities, they provide little evidence to support the effectiveness of the CFTC and CATC in achieving these objectives. This evaluation finds that the price effects induced by these credits were relatively small, and that family decisions with respect to participation of children in organized physical and artistic activities are likely relatively insensitive to prices. The evaluation also raises concerns with respect to the equity and efficiency of the credits, as both were primarily used by high-income families who would likely enrol their children in organized activities even in the absence of the credits, meaning that the Government forgoes tax revenues with little resulting behavioural changes or social benefits.
Overall, this evaluation indicates that the CFTC and CATC had relevant policy objectives but many shortcomings in terms of their effectiveness, equity and efficiency. These shortcomings demonstrate that the CFTC and CATC were likely inferior to alternative approaches to promote fitness and artistic development among children, such as targeted direct subsidies to families and service providers or investment in sport and social infrastructure.
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1 The analysis presented in this paper was prepared by David Messier and Dominique Fleury, Economists, Tax Policy Branch, Department of Finance Canada, with the support of Rachel Lott, Economist, Tax Policy Branch, Department of Finance Canada. Enquiries regarding Department of Finance Canada publications can be sent to firstname.lastname@example.org.
2 More than 50% of the daily activities or 50% of the time scheduled for activities had to include a significant amount of physical activity.
3 Income Tax Act, section 122.8 and Income Tax Regulations, section 9400.
4 This additional amount could be claimed subject to the parents spending a minimum of $100 on registration or membership fees for an eligible program of physical activity.
5 See the Department of Finance Canada news release PM Announces Intention to Double the Children’s Fitness Tax Credit, October 9, 2014.
6 Income Tax Regulations, section 9401(1).
7 Available tax data does not provide for the exact number of “qualifying children” for purposes of the CFTC/CATC (i.e., children aged 15 years or less and children with a disability aged 17 years or less). Children of CFTC/CATC claimants as shown in Table 1 include children aged 17 years or less plus a number of children with a disability aged 18 years and over. As such, the total number of children in families with claimed CFTC/CATC is likely slightly overestimated, and averages per child of claimants underestimated.
8 Report of the Expert Panel for the Children’s Fitness Tax Credit, October 2006. Data collected by organizations such as Active Healthy Kids Canada and ParticipACTION indicate that children and youth physical activity levels are fairly low in Canada. Active Healthy Kids Canada found that, in 2014, only 7% of children aged 5-11 and 4% of youth aged 12-17 met the criteria of the Canadian Physical Activity Guidelines, which recommend that children and youth engage in at least 60 minutes of moderate- to vigorous-intensity physical activity every day. See Active Healthy Kids Canada (2014), Is Canada in the Running? The 2014 Active Healthy Kids Canada Report Card on Physical Activity for Children and Youth. Statistics Canada also found a deterioration in physical fitness indicators among children aged 7-19 between 1981 and 2007-2009. See Tremblay, Mark S. et al. (2010), “Fitness of Canadian Children and Youth: Results From the 2007-2009 Canadian Health Measures Survey,” Health Reports, Statistics Canada, January 2010, pp. 7-8.
9 Roberts, Karen C. et al. (2012), “Overweight and Obesity in Children and Adolescents: Results From the 2009 to 2011 Canadian Health Measures Survey,” Health Reports, Statistics Canada, August 2012, p. 3.
10 A Statistics Canada study released in the early 2000s found correlations between children’s participation in organized activities outside of school (including sports, but also music, the arts and clubs) and positive development outcomes, such as self-esteem, interaction with friends and performance in school . In 2005, American researchers reviewed the literature on organized activities and found that organized activities (such as sports or any other types of organized activities) help kids build competencies, allowing them to successfully negotiate the challenges encountered in childhood and adolescence. They concluded that participation in such activities “is associated with academic success, mental health, positive social relationships and behaviors, identity development and civic engagement”. See Mahoney, Joseph L. (Yale University), Reed W. Larson (University of Illinois) and Jacquelynne S. Eccles (University of Michigan) (2005), Organized Activities as Contexts of Development: Extracurricular Activities, After-School and Community Programs, LEA Publisher, p. 10.
11 The ability of suppliers to shift costs to consumers depends on the market structure and the extent to which demand is responsive to prices. To the extent families were responsive to the price incentives provided by the CFTC and CATC, it is likely that suppliers of organized physical and artistic activities for children were at least partially successful in shifting compliance costs to families.
12 See Canadian Fitness and Lifestyle Research Institute, 2008 survey; Spence et al., 2009 survey; and Fisher et al., 2009 survey.
13 Information on combined take-up rates for the CFTC and CATC can be found in Table 1 and Table 2 below.
14 In theory, income effects—the fact that families that would have been spending on eligible children’s activities in the absence of the credits were richer to the extent of the credits they obtained in respect of this spending—could also have resulted in additional spending on eligible children’s activities. However, income effects were likely small given average tax savings (see Table 1), and only a small fraction of the additional income would probably have been spent on eligible children’s activities in any case.
15 Clark, Warren (2008), “Kids’ Sports,” Canadian Social Trends, Statistics Canada, cat. no. 11-008-X; Gilmour, Heather (2007), “Physically Active Canadians,” Health Reports, Statistics Canada, vol. 18, no. 3; Kremarik, Frances (2000), “A Family Affair: Children’s Participation in Sports,” Canadian Social Trends, Statistics Canada, cat. no. 11-008-X.
16 While the ease of substitution between eligible physical activities and eligible artistic activities is likely more significant, the CFTC and CATC provided the same price reduction to both types of activities; as such, the relative prices between these two categories of activities were unaffected and families had no price incentive to substitute one for the other. Such a price incentive only existed for families who were spending more than the maximum amounts eligible for the credits for only one of the two categories of children’s activities. The situation differed before the introduction of the CATC in 2011, at which time the CFTC lowered the price of children’s physical activities relative to children’s artistic activities.
17 See Kremarik (2000).
18 Mahoney, Joseph L. (Yale University), Reed W. Larson (University of Illinois) and Jacquelynne S. Eccles (University of Michigan) (2005), Organized Activities as Contexts of Development: Extracurricular Activities, After-School and Community Programs, LEA Publisher, p. 13.
19 Nguyen, Hai V. (Duke-NUS Graduate Medical School Singapore) and Paul Grootendorst (University of Toronto), Does the Child Fitness Tax Credit Program Make Children More Active?, working paper, November 2014.
20 Faulkner, Guy et al. (2011), “Economic Instruments for Obesity Prevention: Results of a Scoping Review and Modified Delphi Survey”, International Journal of Behavioral Nutrition and Physical Activity, vol. 8, pp. 109 and sq.
21 Sauder, J. (2014), Canada’s Experiment With Children’s Fitness and Activity Tax Credits, University of Saskatchewan, August 2014.
22 Cameron, C. et al. (2016), “CANPLAY Study: Secular Trends in Steps/Day Amongst 5-19 Year-Old Canadians Between 2005 and 2014,” Preventive Medecine, Volume 86, May 2016.
23 See for instance, Caledon Institute of Social Policy (2014), If You Don’t Pay, You Can’t Play: The Children’s Fitness Tax Credit, October 2014.
24 The relatively low spending on children’s physical activities by low-income households may also reflect in part the availability of financial assistance for sport participation for low-income families.
25 Ontario’s Children’s Activity Tax Credit was eliminated as of January 1, 2017.
26 In most cases, taxes impose economic costs as they distort decisions made by economic agents. The economic welfare and efficiency losses arising from these distortions represent a cost of having to raise taxes to finance the cost of a tax expenditure.