Extra Points: The Game of Canadian Taxation for Athletes

Denis Grigoras

Denis is a lawyer who draws on his background in complex legal disputes and transactions to problem-solve for his clients.

How does Canadian tax law impact professional athletes? To understand this, we need to think about multiple scenarios, and consider the athlete's residency, their affiliations with Canadian or foreign-based teams, and the ever-changing political landscape surrounding the taxation of sports franchises in Canada.

Canadian Tax on Professional Athletes

How does Canadian tax law impact professional athletes? To understand this, we need to think about multiple scenarios, and consider the athlete’s residency, their affiliations with Canadian or foreign-based teams, and the ever-changing political landscape surrounding the taxation of sports franchises in Canada.

First, consider residency. Residency is a critical determinant of an athlete’s tax obligations. This is especially relevant when evaluating tax liabilities across borders, given Canada’s relatively high-income tax rates compared to … well … every other country in the world. Various factors, such as a player’s family connections in Canada, their time spent here, and property ownership, play a part in deciding their residential status as an individual. (Meanwhile, if considering corporations, their tax obligations are influenced primarily by the location of their central management and control.) If an athlete spends at least 183 days in Canada, they are usually deemed a resident. These definitions can create tax planning opportunities for athletes to potentially reduce their tax burden.

An interesting consideration here is the situation of Canadian athletes playing for U.S.-based teams. By establishing U.S. residency and discontinuing Canadian residency, they may benefit from lower taxes, assuming that U.S. tax rates are less onerous for residents than for non-resident aliens under comparable circumstances.

The next aspect of unpacking is the tax obligations for Canadian resident athletes playing for a Canadian team. Canadian law differentiates between income derived from employment and business. Employment income typically comes with fewer deductions and tax withholding at source.

In this situation, athletes’ income comprises salary, bonuses, deferred compensation, awards, promotional activity fees, allowances, free use of automobiles, honoraria, and payments made by the team on the player’s behalf or to the player’s agent. Deductions from taxable employment income are identical to those available to other employees, barring certain exceptions like contract negotiation fees, personal fines, taxes, and gear costs.

One point to consider, which is seldom used, is the potential use of corporations for income and tax deferment. In some cases, athletes can incorporate a corporation to offer their services, which could result in lower tax payments due to the generally lower corporate income tax rates. It’s rarely used, and its effectiveness is contingent on leaving money within the corporation over time, but it can be a game-changer.

When examining the tax implications for a Canadian resident athlete playing for a foreign-based team, remember that Canada taxes its residents on all income, whether earned domestically or overseas, which could lead to double taxation. However, the Canadian tax law does provide a foreign tax credit to mitigate such occurrences.

Non-resident athletes playing for Canadian teams have their own set of tax rules. The tax rates applicable to them may be influenced by tax treaties between Canada and their home country. The Canada-U.S. Tax Convention, for example, generally grants Canada the right to tax U.S. residents earning income from employment in Canada, with a few exceptions.

Interestingly, athletes who are non-residents playing for foreign teams are often exempt from Canadian tax, thanks to the Canada-U.S. Tax Convention. Provided they spend less than 183 days in Canada within a 12-month period, and their compensation is paid by a U.S.-based team, such athletes typically do not face Canadian tax obligations for earnings from games played in Canada.

Lastly, the taxation of Canadian professional sports franchises has emerged as a contentious political issue in recent years. The issue has been heightened by the economic struggles of Canadian teams to compete with American franchises, and a weakened Canadian dollar adding to their woes. The government has made efforts to mitigate this through various measures, one being the suggestion of a professional sports stabilization program to grant tax breaks to Canadian sports franchises.

Yet, this proposal faced substantial opposition. For example, critics argued that directing national financial resources towards sports, while areas like health care were in desperate need of additional funding, was a misallocation of resources. One notable instance was a proposal made in early 2000 by then-federal Minister of Industry, John Manley, offering federal financial support to sports franchises. The plan was met with such public backlash that it was promptly withdrawn.

In the midst of this debate, Gary Bettman, the NHL Commissioner, has voiced his belief in several public forums that the newly implemented programs within the NHL Collective Bargaining Agreement will offer a lifeline to “smaller market” teams. These teams, which include many Canadian NHL franchises, have struggled to remain competitive due to financial constraints.

This development came following an earlier parliamentary intervention in 1998. A federal subcommission, led by Member of Parliament Dennis Mills, sought feedback from the six Canadian NHL franchises on the economic difficulties they faced in staying competitive. By December of that year, the Mills Commission had proposed nearly 70 recommendations with the overarching goal of strengthening sports in Canada (see “Sport in Canada: Leadership, Partnership and Accountability,” Sub-Committee on the Study of Sport in Canada, House of Commons, Canada (November 1998)”). One such recommendation was the implementation of a professional sports stabilization program offering tax breaks to Canadian sports franchises, including teams from NHL, NBA, and Major League Baseball.

The taxation of professional athletes in Canada is a complex issue with numerous factors at play, such as the athletes’ residency and the teams they represent. It’s also crucial to recognize the broader political context within which these tax rules exist, as they have been—and continue to be—shaped by wider debates about the fair distribution of national resources. These tax laws carry significant implications not only for the athletes themselves, but also for the teams they play for, the leagues they compete in, and the broader economic landscape of professional sports in Canada. The political debate surrounding the taxation of Canadian professional sports franchises reflects the ongoing tension between supporting Canada’s sports culture and prioritizing other pressing national needs. As such, navigating this intricate taxation landscape requires careful thought and planning, both from the athletes and the franchises themselves.

Are you a professional athlete navigating the complexities of Canadian tax law? Unsure about how your residency, team affiliations, and broader political debates might impact your financial future?

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