Good afternoon. We are very pleased to have this opportunity to appear before the House of Commons Standing Committee on Health representing the tax policy branch of the Department of Finance.
The role of the tax policy branch is to develop and evaluate federal taxation policies and legislation in the areas of personal income tax, business income tax, and sales and excise taxes. We understand that the committee is currently studying childhood obesity and that witnesses appearing later this afternoon will discuss a range of issues pertaining to the potential use of economic instruments to affect health and lifestyle choices, including diet and physical activity.
Our appearance before the committee will allow us to provide some information on taxation initiatives that have been taken to date, and also to provide a sense of the process by which any future initiatives might be considered or evaluated. We will be pleased to answer any questions from the committee at the end of our presentation, and we look forward to remaining in the audience to hear the ideas that are advanced by other witnesses scheduled to appear later this afternoon.
Our presentation this afternoon will cover two main items. First, with respect to specific taxation-based initiatives designed to address the issues of health and fitness of Canadians, we will provide an overview of and update on the children's fitness tax credit, which was proposed by the government in budget 2006, as well as provide a brief overview of other credits related to medical expenses in the personal income tax system. Secondly, on a more general note, we will provide an overview of the analytical framework and the key parameters that are used to evaluate and consider diverse proposals for taxation-based economic instruments.
Turning to the children's fitness tax credit, budget 2006 proposed a new measure to promote physical fitness among children. Studies show that regular fitness activity has a positive effect on children, including balanced growth and development and improved physical fitness. At the same time, the escalating cost of organized sports makes it difficult for many families to afford these activities. Accordingly, budget 2006 proposed a tax credit of up to $500 on eligible fees for programs of physical activity for each child under the age of 16. This credit will begin in taxation year of 2007.
At the time of budget 2006, a working definition of an eligible program of physical activity was established. It is as follows: “An ongoing program suitable for children in which substantially all of the activities undertaken include a significant amount of physical activity that contributes to one or more of cardio-respiratory endurance, muscular strength, muscular endurance, flexibility and balance.”
On July 31, 2006, the government appointed a small panel of experts in health and physical fitness to provide advice on the definition of programs of physical activity that should qualify for the credit. The definition needs to reflect the broad range of activities that are engaged in by children in the pursuit of physical fitness, while at the same time ensuring that eligible programs meaningfully contribute to children's fitness. In particular, the expert panel is considering whether an eligible program should necessarily include an element of instruction or supervision and whether any changes in the eligibility criteria are required to accommodate programs for children with disabilities. The expert panel will also need to ensure that the definition is clear and sufficiently comprehensive to provide guidance to the Canada Revenue Agency in determining the eligibility of specific programs and activities.
The panel consulted extensively throughout Canada with national, provincial, and grassroots organizations and has received considerable feedback. The panel is currently reviewing submissions and is expected to report back to the Minister of Finance later this month in order to have the credit implemented on January 1, 2007.
More generally, the personal income tax system has a number of credits that reflect a person's reduced ability to pay tax because they have incurred non-discretionary expenses. The purpose of these credits is not to create disincentives or incentives. Although no credits are specially targeted to reduce child obesity in this context, there are certain credits that could be claimed under particular circumstances on behalf of obese children.
For example, the medical expense tax credit recognizes the effect of above-average, specific, itemizable medical and disability expenses on an individual's ability to pay income tax. Eligibility for the METC is limited to expenses for prescribed items that are designed for and used exclusively by persons with a medical condition. Certain expenses may be claimed on behalf of obese children under certain circumstances.
In the same way, the disability tax credit improves tax fairness by providing tax relief to individuals who, due to the effect of one or more severe and prolonged impairments in mental or physical function, are markedly restricted in their ability to perform a basic activity of daily living or would be markedly restricted were it not for extensive therapy to sustain a vital function. This needs to be certified by a qualified medical practitioner. Similar to the METC, the DTC may be claimed on behalf of obese children, but we would expect that to be under very limited circumstances.
That, in a nutshell, provides an overview of one specific tax measure, as well as a broad description of how health-related costs are treated in the personal income tax system. I hope it also highlighted some of the considerations that shape policy and legislation, especially in regard to the fitness tax credit. There are certainly many more ideas that have been advanced around the globe concerning diet, health, and activity.
What we would like to do now is provide the committee with an overview of the framework and some of the key factors that we would use within the Department of Finance to evaluate taxation-based economic instruments.
In order to do so, I will turn the microphone over to my colleague Alex Lessard.