Speaking Notes for Lindsay Tedds
Associate Professor of Economics
School of Public Administration, University of Victoria
Appearance Before the House of Commons Standing Committee on Finance
In Relation to its Study of Part 1 of Bill C-43
November 17, 2014, 3:30PM-5:00PM EST
Good afternoon, my name is Dr. Lindsay Tedds and I am an Associate Professor of Economics in the School of Public Administration at the University of Victoria. My primary area of expertise is Canadian tax policy, particularly the design and implementation of tax policy. I have written a number of peer reviewed journals articles, book chapters, and technical reports, as well as two books in this field.
I would like to thank the Committee for providing me with the opportunity to share my views on two tax policy measures included in Bill C-43, namely:
- Permitting income contributed to an amateur athlete trust to qualify as earned income for Registered Retirement Savings Plan contribution limit purposes; and
- Doubling the Children’s Fitness Tax Credit to $1,000 and making it refundable.
Amateur Athlete Trust Changes
Under Canadian tax rules, Canadian athletes must claim all athletic prize money, as well an income from endorsements and other remuneration related to their athletic endeavors, as taxable earned income. Amateur athletes can defer paying tax on this earned income by placing it in an Amateur Athletic Trust. Tax on this earned income is then paid when the trust distributes the funds back to the athletes.
While the athletic money is considered to be earned income and eligible for determining RRSP contribution room, this recognition does not occur if the income is instead placed in an Amateur Athletic Trust. That is, the money is not treated as earned income, either at time of placement in the trust or upon disbursement. As a result, the athletic money never qualifies towards determining the athlete’s annual RRSP contribution limit.
Through Bill C-43, the federal government is changing the rules to ensure that the earned income placed in an Amateur Athletic trust is recognized as such and included for the purposes of determining the athlete’s annual RRSP contribution limit in the year it is earned. It is eliminating a penalty these athletes unwittingly incurred when using a government-sanctioned tax deferral vehicle and recognizing the importance for everyone to be able to garner RRSP room from the income they earn from their endeavors.
Children’s Fitness Tax Credit
The Children’s Fitness Tax Credit was introduced in 2007 with the stated goal of increasing enrolment in children’s sport. This tax credit has been shown (here, here, and here) to be ineffective at achieving this goal. Notably, only approximately 15% of parents agree that this tax credit enables them to enroll their children in a program when they would not otherwise have been able to do so. As a result, tax credit does little more than subsidize behaviour that would normally otherwise occur. It has also been shown that that subsidy disproportionately goes to high-income households: about 50% of households that claim the tax credit earn more than $100,000 annually. This regressivity will not be undone by making the tax credit refundable, and this is due to the fact that the size of the CFTC claim increases with income, meaning that high-income households obtain greater benefit from the credit.
Economists have long been calling for an end to these types of boutique tax credits as they are poorly targeted and ineffective in achieving their goals. The goal of a tax system is to: raise the most revenue, with the least distortions, in a progressive manner, and minimizes administration and compliance costs. These boutique tax credits mean that statutory tax rates are higher than they would have to be otherwise, distorting work and other effort, revenue is sacrificed that could be used more effectively, progressivity is compromised, and time and money is wasted on administering the program and complying with the rules. If you really want hard working Canadians to keep more of what they make, whether they be families or otherwise, eliminate the wasteful boutique tax credits and instead cut tax rates. Doing that respects the principles of efficiency, equity, and economic growth all while reducing administrative costs.
In closing, I want to thank you for providing me with this opportunity to provide you with my views on these two measures contained in Bill C-43. I look forward to your questions.