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Dangling the Tax Incentive Carrot to Encourage Participation in Fitness Programs: What is the healthiest approach?

In April 2006, the decision of the Federal Court of Canada in AYSA Amateur Youth Soccer Association v. CRA[i] upheld the CRA’s determination that AYSA was not a charitable organization under the Income Tax Act (Canada)[1] because it was established to promote a sport.  Although, as the decision indicates, historically provincial amateur athletic programs have not been eligible to receive creditable or deductible donations, in light of the recent statistics that report a substantial increase in Canadian child obesity rates and predictions about the strain obesity related illness and disabilities will have on our health care system, it appears that it is time that the courts or the legislature revisit this issue.  The courts will have this opportunity sooner than expected.  In June 2006, AYSA’s leave to appeal to the Supreme Court of Canada was granted. 

In the interim, the government has proposed a different approach to increasing fitness levels for Canadian children and youth.  The Children’s Fitness Tax Credit proposal, announced in the government’s May 2006 Budget, shortly after the AYSA Federal Court of Canada decision, attempts to create an equally attractive alternative to the charitable tax credit.  However, the proposal does not appear to be the best solution for all Canadians.

Outline of Fitness Tax Credit

In Budget 2006, the Conservative government proposed to introduce the Children’s Fitness Tax Credit.  In October 2006, Finance Minister Flaherty received a Report of the Expert Panel for the Children’s Fitness Tax Credit that provided recommendations for meeting the objective of the credit.[ii]  The recommendations are based on the government’s proposal to provide parents with a

[1] RSC 1985, c. 1 (5th Supp.), as amended (herein referred to as the “Act”).  Unless otherwise stated, all statutory references herein are to the Act.

[i] 2006 FCA 136. (Hereinafter, “AYSA”).

[ii] Canada, Department of Finance, Report of the Expert Panel for the Children's Fitness Tax Credit (Ottawa: Department of Finance, October 26, 2006).

tax credit to cover eligible fees up to $500 for enrolling a child in a physical activity program.  The recommendations are reflected in guidelines released by the Department of Finance in December, 2006 (the “Guidelines”), which are to provide the basis for future regulations.[1]

The new Children’s Fitness Tax Credit will be effective for taxation years commencing January 2007.  The tax credit is being promoted as an ideal way of encouraging regular exercise, balanced growth and healthy lifestyles among children.  The government believes that the tax credit will cause more children to be physically active and help parents with the costs of organized sport and fitness activities. 

Under the Guidelines, an eligible program is defined as “an ongoing, supervised program suitable for children, in which substantially all of the activities undertaken include a significant amount of physical activity that contribute [sic] to cardio-respiratory endurance”.   The program must assist the child in developing muscular strength, muscular endurance, flexibility, or balance.

An ongoing program must be a minimum of one session per week for eight weeks.  A camp is also considered to be an ongoing program if a child is registered and attends the program for at least five consecutive days, provided that at least half of the program time is devoted to physical activities.  All programs eligible for the credit must be physically safe for children and cannot create undue risk.

Further, the Guidelines require a minimum daily physical activity based on a child’s.  For children under ten, a minimum of 30 minutes of activity is required.  Children over ten are required to engage in at least 60 minutes of activity to be eligible for the credit.[i]  The credit is only available in respect of children under the age of 16.

Under the proposed Guidelines, there is no requirement to register in a program that provides instruction or coaching.  However, the eligible activity must be supervised.

The guidelines specify certain costs that will be eligible for the credit.  Certain fees for membership in organizations that involve physical activities are eligible.  Fees that are charged for extra-curricular teams or programs that take place at a school are also eligible. 

Is the New Tax Credit the Solution?

According to the Report of the Expert Panel, it was determined that 26 percent of Canadian children were overweight in 2005.  Of that 26 percent approximately 8 percent were categorized as obese.  This is a significant increase from prior years and has now placed Canada near the top of the list that measures the highest obesity rates in the developed world.

Because obesity adversely affects health, which often translates into loss of productivity, disability and reduced quality of life, the government is concerned that today’s obese children will create a burden on tomorrow’s health care and social systems.  According to the Report of the Expert Panel, Canada currently spends 2.4 percent of the total health care budget on direct health care costs related to obesity.  This is equal to a dollar value of $1.6 billion.  Therefore, it is no surprise that the government wants to intervene and reduce the incidences of obesity where possible in order to preserve government revenues. 

Assuming that government involvement is necessary, the government must ensure a fair response to the issue to preserve the integrity of the tax system.  Although the Children’s Fitness Tax Credit proposal demonstrates a commendable effort by the government to reduce the increasing levels of obesity in our children and control the future revenues that would be spent resolving the problem it does not represent a fair response to the issue.  What the government does not address in its proposal is how it will provide better access to families with limited means for paying for memberships or activities for their children.  For example,, a parent that cannot afford to pay registration fees of up to $500 will see little benefit in incurring the expense to place their child in an eligible program if the only incentive is a $75 credit that will reduce their tax liability without generating any additional disposable income.  Failing to address this issue in the proposal essentially creates a credit that is inequitable.  The credit, as it is currently structured, only benefits those parents who have sufficient disposable income to register their children in physical activity programs and neglects to provide any additional advantages to lower income families without disposable incomes, although they are faced with the same issues of child obesity.

To resolve this inequity, the government should consider subsidizing eligible fitness organizations.  Such subsidy can be achieved through either the tax system or direct funding programs.  Directly funding an organization has the advantage of providing better predictability for government spending because a budget is established in advance of approving the program.  However, a major disadvantage to providing this type of funding is an increase in administration costs and the potential for bias in assessing eligibility for funding.  On the other hand, tax incentives can also achieve the same results as a direct grant program without the additional administrative challenges.  For example, charitable tax credits encourage charitable giving by lowering the cost to donors.[ii]  In fact, under the current federal income tax system corporations can claim a deduction[iii] and individuals can claim a tax credit[iv] for gifts made to registered charities and registered “Canadian amateur athletic associations”. [v] 

In AYSA the courts had the opportunity to extend charitable status to an organization that was established to promote sport among young people and thereby provide government support not only for sport, but also its health and fitness benefits.  However, the court considered itself bound by prior decisions holding that the promotion of sport as an end in itself is not a charitable objective, and thus AYSA was denied registered charity status.  The court also noted that, while the Act makes “Canadian amateur athletic associations” eligible to receive creditable or deductible donations, such status requires that the relevant athletic association have a nationwide presence.  AYSA’s activities were confined to Ontario.  Considering the findings of the Expert Panel about the long-term benefits of reducing obesity levels, it seems that this decision should be overruled by the Supreme Court of Canada and a new precedent that will provide regional amateur athletic associations with the same advantages as national amateur associations should be established.   

Whether the government decides to provide direct funding or extend charitable registration to eligible fitness organizations and regional amateur athletic associations such as AYSA, it is our view that subsidizing the organizations responsible for providing these activities is more equitable than the proposed Fitness Tax Credit.  This is because subsidies will increase the amount of available programs as well as provide wider access to all Canadians irrespective of ability to pay.  At the same time either one of these alternatives will in some measure satisfy the government’s objective of encouraging more children to be physically active. 

* Marsha Henry, McMillan Binch Mendelsohn LLP, (416) 865-7894; [email protected].

[1] Canada’s New Government Establishes Program Eligibility for the Children’s Fitness Tax Credit (Ottawa: Department of Finance, December 19, 2006).

[i] Although Canada’s Physical Activity Guides to Healthy Active Living for children and youth recommends that children should increase daily physical activity to 90 minutes, the Report of the Expert Panel for the Children’s Fitness Tax Credit suggests that a lower threshold based on the age of the child is more reasonable for purposes of determining eligibility for the credit.

[ii] It is also possible to combine direct funding with a pure tax incentive approach through the use of matching grants, whereby the private donation is supplemented by a matching government grant.  See Daniel Sandler and Tim Edgar, “The Tax Expenditure Program for Charitable Giving: Kicking a Gift Horse in the Teeth”, (2003) 51 CTJ 2193, at 2194. 

[iii] See subsection 110.1(1). 

[iv] See subsection 118.1(1).

[v] Under subsection 248(1) registered Canadian amateur athletic association is defined as an organization that promotes amateur athletics nationwide.


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