Is your daughter enrolled in hockey? Does your son need a math tutor? Do you take public transit?
If so, you could benefit from hundreds of dollars of tax credits if Andrew Scheer’s Conservatives form the next government after October’s federal election. This week, Scheer announced his intention to reintroduce three credits, albeit with slightly updated names: the Children’s Fitness Tax Credit, the Children’s Arts and Learning Tax Credit and the Green Public Transit Tax Credit.
A quick calculation shows that a Toronto commuter who uses a monthly transit pass ($151) and has a couple of kids under 16 may reap tax savings of more than $700 annually should the kids qualify for both the fitness and arts and learning credits.
If this sounds like a case of déjà vu all over again, that’s because these three credits were eliminated by the current Liberal government back in 2016 and 2017, for a variety of reasons, but mainly, because of the view that they don’t really change people’s behaviour. In other words, road congestion isn’t being reduced and our kids aren’t any fitter.
These credits all fall under the cute catchphrase favoured by tax wonks of “boutique credits,” as they describe government spending to promote certain programs or target certain segments of the population, such as commuters or parents. Proponents of boutique credits argue that if a particular tax credit nudges a taxpayer into socially beneficial behaviour — taking public transit or staying fit — then it’s warranted.
Others, such as Neil Brooks, a law professor who taught tax law and policy at Osgoode Hall Law School at York University in Toronto for over 35 years, is not a fan of such credits. In a 2016 paper, Brooks wrote that these credits “impair the legitimacy of the tax system and hobble it in the pursuit of its primary functions — raising revenue and redistributing income … (and) … violate almost every criterion of a well-designed spending program.”
Beyond the question of whether governments should be using the tax system versus direct spending to achieve desired outcomes is the simple fact that these credits are complicated to administer and even to enforce. In many cases, the effort needed by taxpayers for a successful claim can outweigh the value of the tax credit being sought. Indeed, regular readers of this column may recall this author’s ten-month ordeal, involving several back-and-forth volleys with the Canada Revenue Agency, to get my $112 transit credit approved, back in 2016.
Nonetheless, as the credits have been proposed, let’s take a brief look at each of them and whether previous experience shows they are effective at changing behaviour.
Fitness and arts and learning credits
The proposed fitness credit would allow parents of children under the age of 16 to claim a 15 per cent tax credit on up to $1,000 per child, per year, for expenses related to fitness or sports activities. This is a refundable credit, meaning lower-income Canadians who don’t pay tax are able to get back up to the $150 maximum.
An eligible fitness expense will be defined as a fee paid for the kids to participate in a physical activity program which contributes to cardio-respiratory endurance and to one or more of muscular strength, muscular endurance, flexibility, and balance.
The arts and learning credit, also at 15 per cent and refundable, will allow parents to claim up to $500 per child, translating to a maximum credit of $75, for arts-related expenses or other extracurricular educational activities.
But does giving parents a $75 annual tax break towards the cost of weekly piano lessons, which can easily exceed $1,500 annually, really influence most parents’ decisions?
A 2017 Department of Finance study, which was released after the Liberals had already announced plans to eliminate the previous iteration of the fitness and arts credits, concluded that while the credits had relevant policy objectives, there were “significant shortcomings in terms of their effectiveness, fairness and efficiency.”
“Overall, it is assessed that the effective price effects that resulted from the (credits) 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,” the study said.
Another concern was also raised with respect to fairness, as both of these credits were primarily used by high-income families. The study concluded 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.”
As proposed, the transit credit would be a 15 per cent tax credit for the purchase of public transit passes. Eligible expenses will include monthly transit passes, as well as weekly passes and electronic fare cards when used for an extended period. To be eligible, the transit passes must allow for unlimited travel within Canada on local buses, streetcars, subways, commuter trains and buses or local ferries.
According to the Conservatives’ backgrounder, the transit credit will “reduce congestion on our roads and cut commute times for Canadians so that everyone can get home faster at the end of the work day.”
Sounds good in theory, but does is it work?
While a 2011 Department of Finance report found “evidence that the key conditions for the credit to be effective are present,” a 2015 paper by Vincent Chandler, a professor at the industrial relations department at the Université du Québec en Outaouais, was less optimistic. Chandler found “no evidence that the (prior) credit has had the intended effect on ridership.” He suggested that if the government does indeed want to “ease traffic congestion and improve the environment,” a stated goal behind the original transit credit, the government could simply transfer funds to the various transit corporations across the country and let them increase the speed of transit and improve the schedule of buses.
“In spite of this potential gain in efficiency, governments may see a political benefit in the public transit tax credit that enters into their calculation to keep it,” concluded Chandler.
Or in the context of the present election campaign, to reinstate it.
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Financial Planning & Advice Group in Toronto.