Canadian and US taxation of
professional athletes
It’s no slam dunk!
The globalization of the marketplace has been
accompanied in recent years by a steady
increase in the number of foreign players on
professional sports teams in Canada and the
United States. Consider the National Hockey
League (NHL) where many teams not only
contain both American and Canadian players,
but also players from Russia, Sweden, the Czech
Republic, etc. In addition, the existence of
Canadian franchises in professional sports
leagues such as the NHL, Major League
Baseball (Toronto Blue Jays) and the National
Basketball Association (Toronto Raptors)
results in players in these leagues spending
considerable amounts of time during the regular
and playoff seasons in both Canada and the
United States, especially players on the
Canadian teams. Given these facts, how do
Canada and the United States tax professional
athletes on professional sports teams? It can be
quite complex and the related issues are too
numerous to discuss here, but let’s have a look
at some of the major issues for consideration.
Factors for consideration
The major factors to consider as to where and
how a professional athlete is taxed are: the
residence of the player (and citizenship in the
United States), source of income, how much
time the player spends in a country in any given
year, and whether the player is an employee or
an independent contractor. Canadian residents
are subject to Canadian tax on their worldwide
income. Non-residents are only taxed on
Canadian source income (i.e., games played in
Canada by a US resident). Determination of
Canadian residency is a question of fact and
depends on the extent of so-called primary and
secondary ties to Canada. 1
Major determinants of US tax liability are
residence status and citizenship. US citizens and
green-card holders (lawful permanent residents)
are taxed on their worldwide income regardless
of where they live. 2 Non-resident, non-citizens
are considered to be non-resident aliens by the
US and they are required to pay US tax on US
source income only (i.e., games played in the
United States by a Canadian-resident hockey
player).
When an individual is considered to be a
resident of two countries (i.e., Canada and the
United States) under the two countries’
respective domestic legislation, the residence is
ultimately determined according to the tiebreaker clause(s) in the relevant income tax
treaty between the two countries. An income
tax treaty between Canada and another country
overrides each country’s respective domestic tax
legislation.
1
A primary tie would consist of ownership or lease of a
home in Canada, or whether a spouse or dependents
continue to live in Canada while an athlete is outside of
Canada. Secondary ties would include such factors as
holding a Canadian driver’s license, and ownership of a
seasonal dwelling.
2
Most countries use residency as the basis for
establishing tax liability.
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Professional athletes who are members of a
professional sports team are generally
considered to be employees for tax purposes
(and not independent contractors) and can only,
therefore, deduct expenses that other
employees can deduct which is quite limited for
Canadian tax purposes and somewhat less
limiting for US tax purposes.
Athletes who participate in a professional sports
league with regularly scheduled games in both
Canada and the US can get tax relief under the
Canada–US income tax treaty 3 which exempts
most players on US based franchises from
Canadian tax for games played in Canada
provided that the athlete is present in Canada
for no more than 183 days in any 12-month
period. The same holds true in the reverse
situation vis-à-vis US tax. However, most nonresident athletes employed by franchises located
in Canada will be subject to Canadian tax on the
portion of their salary attributable to services
performed in Canada. How is this allocation
determined?
Consider a US citizen who plays for the
Toronto Maple Leafs and spends considerable
amounts of time playing in both Canada and the
United States during the regular hockey season.
The allocation of salaried income between
Canada and the United States for Canadian tax
purposes is based on the percentage of games
played in Canada. A similar approach is used
vis-à-vis US tax purposes.
There are issues that are unique to professional
sports teams that must be considered from a tax
perspective, as follows:
3
Article XV of the Treaty.
Signing bonuses
In Canada, a signing bonus is considered to be
part of the athlete’s total employment income
and is therefore taxable as such (when received
if the athlete is a Canadian resident). Nonresidents who receive a signing bonus are
taxable in Canada to the extent that the bonus
relates to employment duties performed in
Canada and to the extent that it is deductible by
the employer from Canadian taxable income.
Where a US club pays a Canadian resident a
signing bonus, the Canada-US income tax treaty
limits the US tax payable on this bonus to 15%
(and vice versa). In general, the taxation of
signing bonuses differs depending on whether
the player is a Canadian resident, a US resident,
or has dual-resident status.
Legal and agent’s fees
Legal fees are generally embedded within
agent’s fees. Legal fees incurred in the
negotiation of player contracts are not
deductible in Canada. In order to be deductible
by the employee, such fees must be incurred in
order to collect salary or wages owed by an
employer. Agent’s fees often represent a
significant expense for players, but these fees
are generally not deductible in Canada. In the
United States, such fees are generally
deductible, subject to certain limitations.
Compensation planning
A professional athlete’s career is usually limited
to a few key years compared to other careers
and, therefore, tax-efficient compensation
planning for post-retirement is a key issue for
consideration. For example, Retirement
Compensation Agreements (RCAs) can be very
useful for athletes who are formerly residents of
a country other than Canada, but who plan to
return to that country at the completion of their
careers. RCAs are designed to provide benefits
upon or after retirement. Employee
contributions to an RCA plan are deductible to
the extent that they are required as a condition
of employment and that such contributions do
not exceed the employer’s contributions.
Assuming that an RCA is structured and set up
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properly for a professional athlete, amounts
received from an RCA after ceasing to be a
Canadian resident are subject to a 25%
Canadian withholding tax. In some cases, this
rate can be reduced to 15% (i.e., for US
residents under the Canada-US income tax
treaty for a series of periodic payments that are
made for at least 10 years). In many cases, no
further tax is payable by the non-resident in the
foreign jurisdiction as the foreign country
regards the distributions to be on account of
capital.
In conclusion, the taxation of professional
athletes can be quite complex and has
increasingly involved cross-border tax
considerations.
For more information, please contact
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contained herein is
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