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David Rotfleisch on the Tax Problems of Professional Athletes in Canada: Critical Tax Planning Tips for Cross-Border Athletes Entering, Leaving or Competing in Canada

posted 4 weeks ago

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Image alt text: Hockey player in full gear on the ice looking at the camera

Tax Planning in Canada for Professional Athletes – An Overview

For professional athletes, navigating life off the field, court, or rink can be just as challenging as excelling on it, especially when it comes to taxes. Canadian tax law presents unique complexities for athletes competing in international leagues like Major League Soccer (MLS), Major League Baseball (MLB), the National Basketball Association (NBA), or the National Hockey League (NHL). From negotiating high-value contracts to managing cross-border moves, these athletes often encounter tax obligations across multiple jurisdictions.

For example, the National Hockey League (NHL) has expanded its global presence, with players from up to 18 different countries signing with NHL teams as of this writing. A significant concern for these athletes is understanding the tax implications of moving to, living in, or departing from Canada. For cross-border professional athletes, the answer hinges on Canada’s domestic tax laws, the tax laws of their home or destination country, and any tax treaties in place between Canada and the other nation.

A key factor that often complicates a professional athlete’s Canadian tax situation is the high level of compensation in professional contracts. For instance, the NHL’s minimum player salary rose from US$450,000 in 2006 to US$775,000 in 2023, with the average salary for the 2023-24 season reaching US$3.5 million. These significant increases in earnings have drawn the attention of the Canada Revenue Agency (CRA), making professional athletes prime targets for tax audits. This highlights the importance of obtaining tax-planning advice from an experienced Canadian tax lawyer, whether the athlete is moving to, residing in, or leaving Canada.

This article examines the Canadian tax implications that professional athletes in Canada need to navigate, providing strategies for managing their earnings, avoiding common pitfalls, and ensuring long-term financial success while complying with Canada’s tax laws. It focuses on critical tax considerations and planning opportunities that may arise throughout a professional athlete’s career—from signing an initial player contract to being traded or preparing for retirement. The article concludes with pro tax tips from our highly-regarded Canadian tax lawyers.

Tax Residence: Canada’s Jurisdiction to Tax a Professional Athlete’s Global Earnings

Canada’s authority to tax an individual’s income is based on two key factors. The first is tax residence. Canada has the right to tax the worldwide income of a Canadian tax resident. This means that anyone who qualifies as a Canadian tax resident is required to file Canadian income tax returns and report all income earned globally.

The second connecting factor is the source of income, which applies when a taxpayer does not qualify as a Canadian tax resident. In such cases, Canada’s jurisdiction to tax is limited to Canadian-sourced income. This means that a non-resident is only subject to Canadian income tax on income earned within Canada. Canadian-sourced income includes income from employment in Canada, income from a business operating in Canada, profits from the sale of Canadian property, and income from Canadian investments, such as interest from a Canadian borrower, dividends from a Canadian corporation, or rent from a tenant in a Canadian property.

For a non-resident athlete earning income from a Canadian team or performing in Canada, this means he or she must file Canadian income tax returns to report all Canadian-sourced salary, fees, performance-related bonuses earned for services provided in Canada, and any signing bonuses tied to an agreement to perform in Canada.

The key tax issue for a professional athlete is determining whether he or she qualifies as a Canadian tax resident. It’s important to understand that tax residence differs from immigration residence. A person can be considered a Canadian tax resident without ever obtaining permanent residence or citizenship in Canada, and conversely, a Canadian citizen or permanent resident may not meet the criteria to be considered a Canadian tax resident.

Three key rules govern a professional athlete’s tax residence in Canada. First, the athlete may be considered a Canadian tax resident under common law. Second, even without common-law residence, the athlete could be deemed a Canadian tax resident under paragraph 250(1)(a) of the Income Tax Act. Third, if the athlete has strong economic or personal ties to a country that has a tax treaty with Canada, subsection 250(5) of the Income Tax Act may classify the athlete as a non-resident of Canada.

We will now briefly outline each of these tax rules.

Factual Tax Resident (Common-Law Tax Resident)

Canada’s Income Tax Act references “resident” and “ordinarily resident,” but neither term is explicitly defined within the Act. Instead, Canadian courts have established the criteria for determining a “resident” for taxation purposes. In Canada’s common-law system, this judicial interpretation is known as “common-law residence” or “factual residence,” as it requires a thorough analysis of the taxpayer’s personal circumstances. When assessing whether a professional athlete qualifies as a common-law resident, Canadian courts and the Canada Revenue Agency (CRA) consider a range of ties to Canada, including:

  • Ownership or use of a dwelling in Canada;
  • A spouse or common-law partner residing in Canada;
  • Children or financially dependent relatives living in Canada;
  • Personal property in Canada (e.g., vehicles, furniture, clothing);
  • Social ties in Canada (e.g., memberships in recreational or religious organizations);
  • Economic ties to Canada (e.g., employment with a Canadian organization, active involvement in a Canadian business, or holding Canadian bank accounts, retirement savings plans, credit cards, or securities accounts);
  • Immigration status or work permits issued by Canada;
  • Canadian hospital or medical insurance coverage;
  • A Canadian driver’s license;
  • Registration of a vehicle in Canada;
  • Ownership or lease of a seasonal or secondary residence in Canada;
  • Possession of a Canadian passport;
  • Membership in Canadian unions or professional associations; or
  • Other residential connections, such as a Canadian mailing address, post office box, safety deposit box, personal stationery, or telephone listings

Not all jurisdictional ties carry the same weight in determining tax residence. Canadian courts and the CRA regard three ties—having a dwelling in Canada, a spouse, or a dependent—as the most significant. The presence of any of these connections strongly indicates that a professional athlete qualifies as a Canadian tax resident under the common-law test.

No single factor is decisive in determining whether an individual qualifies as a factual resident of Canada. Instead, the conclusion often depends on a combination of factors considered together. This multifaceted approach can lead to seemingly inconsistent case law. Given the complexity and nuance of the common-law test, professional athletes are advised to seek guidance from a Canadian tax lawyer to assess their tax residence status.

Deemed Resident Status: Understanding the Sojourner Rule in Paragraph 250(1)(a) of Canada’s Income Tax Act

Under the sojourner rule, a person can be deemed a Canadian resident without maintaining jurisdictional ties to Canada. According to paragraph 250(1)(a) of the Income Tax Act, an individual is considered a resident for the entire tax year if he or she “sojourned” in Canada for a total of 183 days or more during that taxation year. In other words, spending 183 days or more in Canada within a year is enough to establish deemed residence under this rule.

To “sojourn” means to visit or stay temporarily. As such, a sojourner is typically classified as a non-resident under the common-law test. Paragraph 250(1)(a) of the Income Tax Act applies only when the professional athlete remains a non-resident in Canada for the entire tax year; it does not apply if the athlete becomes or ceases to be a factual resident during that period.

The common-law test and the deemed-resident rule are particularly significant for foreign professional athletes playing for Canadian teams. These athletes frequently spend more than six months in Canada during the playing season and then return to their home country for the off-season. In such cases, the athlete may be classified as a Canadian tax resident under either the common-law test or the deemed-resident rule.

That said, a foreign athlete may qualify for relief under subsection 250(5) of Canada’s Income Tax Act if that taxpayer’s home country has a tax treaty with Canada.

Deemed Non-Residence: Subsection 250(5) of the Income Tax Act Explained

Canada’s tax treaties generally include provisions that address the tax-residence status of cross-border taxpayers. These provisions usually defer to each country’s domestic tax laws to determine residency. In other words, the treaty will consider a person a resident of the country whose laws recognize them as such. However, if both countries claim the individual as a resident, the treaty provides tie-breaker rules to resolve the conflict.

Subsection 250(5) of the Income Tax Act deems an individual to be a non-resident of Canada if a tax treaty designates that individual as a tax resident of Canada’s treaty partner. This provision ensures alignment between Canada’s domestic tax law and its international tax agreements.

Additionally, subsection 250(5) takes precedence over both the common-law residence test and the deemed-resident rule under paragraph 250(1)(a). In other words, if subsection 250(5) applies, the taxpayer is considered a non-resident of Canada, even if he or she would otherwise qualify as a deemed resident under paragraph 250(1)(a) or a factual resident under the common law test.

Subsection 250(5) of the Income Tax Act may benefit foreign professional athletes playing for Canadian teams, spending substantial time in Canada during the season, and coming from a country with a tax treaty with Canada by designating them as non-residents for tax purposes.

Other Tax-Treaty Relief: How Foreign Athletes Playing in Canada May Benefit

Other provisions in Canada’s tax treaties can help foreign athletes avoid Canadian income tax liability. For instance, a US-resident NHL player earning income from game days in Canada would have that income considered Canadian-sourced, as the player performs his or her duties in Canada, making it subject to Canadian tax.

Many Canadian tax treaties offer a limited exemption from Canadian tax on employment income earned by non-residents while working in Canada. For example, Article XV(2) of the Canada-US Tax Treaty prevents Canada from taxing a non-resident’s employment income if the individual spends no more than 183 days in Canada during the year, and the income is not paid by a Canadian-resident employer or a permanent establishment in Canada. Therefore, if the US-resident NHL player spends less than 183 days in Canada and receives income from a US-based team, Canada cannot tax that income.

This tax treaty provision also applies to cross-border professional athletes beyond NHL players, particularly those in sports leagues where athletes spend a significant part of their season in either Canada or the US. An example of this would be players in the new Professional Women’s Hockey League.

The Employee vs. Contractor Dilemma: Canadian Tax Implications for Professional Athletes Earning Employment Income vs. Business Income

A professional athlete’s Canadian income tax obligations depend on whether that athlete is classified as an employee or an independent contractor. For instance, if a US-resident athlete earns Canadian-sourced income as an employee, the Canada-US tax treaty allows Canada to tax that income, but only if the athlete spends more than 183 days in Canada during the year. However, this tax treaty relief does not apply if the athlete is an independent contractor. In such cases, the Canada-US tax treaty permits Canada to tax the entire income earned from playing in Canada, regardless of how many days the athlete spends in the country.

Under Canada’s Income Tax Act, taxpayers who earn business income have access to a broader range of tax deductions compared to those earning employment income. As a result, independent contractor athletes can typically deduct expenses that employee athletes cannot. Additionally, employee athletes’ pay cheques are subject to payroll source deductions, including income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) contributions. In contrast, professional athletes working as independent contractors are not subject to these source deductions on their pay.

In certain occupations, including some sports, it can be challenging to determine whether a worker is an employee or an independent contractor. To make this determination for a taxpayer, including a professional athlete, Canadian courts evaluate four key factors:

  • The level of control exercised by the employer,
  • Ownership of tools or equipment,
  • Opportunity for profit, and
  • Exposure to risk of loss.

Generally, athletes who play for professional sports teams in major leagues are considered employees. This includes players in leagues such as Major League Baseball (MLB), the National Hockey League (NHL), the National Football League (NFL), Major League Soccer (MLS), the Canadian Football League (CFL), the Federation Internationale de Football Association (FIFA), and the National Basketball Association (NBA).

In contrast, athletes who compete individually are typically classified as independent contractors. This includes professional athletes in sports such as tennis, golf (e.g., PGA or LIV Golf), boxing, mixed martial arts (e.g., UFC), auto racing, and wrestling (e.g., WWE).

These are general guidelines, and the outcome in individual cases will ultimately depend on the terms of the athlete’s contract and the application of the four common-law factors.

Canadian Tax Planning for Signing Bonuses: Key Considerations

Tax planning for signing bonuses is essential for professional athletes playing for North American sports teams, particularly those in cross-border leagues like Major League Soccer (MLS), National Hockey League (NHL), National Basketball Association (NBA), and Major League Baseball (MLB).

Cross-border tax planning for signing bonuses relies on paragraph 4 of Article XVI in the Canada-US tax treaty. This provision stipulates that the athlete’s home country cannot impose a tax rate higher than 15% on a signing bonus received from a league in the other country. Specifically, the provision states:

“Notwithstanding the provisions of Articles VII (Business Profits) and XV (Income from Employment), an amount paid by a resident of a Contracting State to a resident of the other Contracting State as an inducement to sign an agreement relating to the performance of services of an athlete (other than an amount referred to in paragraph 1 of Article XV (Income from Employment) may be taxed in the first-mentioned State, but the tax so charged shall not exceed 15 percent of the gross amount of such payment.”

The 15% tax limit applies to signing bonuses, which the treaty defines as “an inducement to sign an agreement relating to the performance of services of an athlete.” However, this provision does not apply to amounts described in paragraph 1 of Article XV of the treaty. These excluded amounts primarily refer to the athlete’s base salary earned for game days in the other treaty country. In other words, the 15% treaty rate is applicable only to the signing bonus (i.e., the “amount paid” as an “inducement to sign” the player contract) and does not apply to the salary received under the contract.

Professional cross-border athletes, particularly US-resident athletes signing with Canadian-based teams, can benefit from significant tax savings due to the treaty’s 15% tax limit on signing bonuses. For instance, a US-resident athlete could save over $1 million in Canadian-US income tax by receiving a $1.5 million annual salary and a $10 million signing bonus, compared to receiving the entire $11.5 million as an annual salary with no signing bonus.

Professional cross-border athletes should consult with an experienced Canadian tax lawyer to ensure their contracts align with the criteria for the treaty’s 15-percent tax limit. On July 14, 2022, the Canada Revenue Agency (CRA) issued a technical interpretation suggesting that tax auditors may reject the treaty’s 15-percent tax limit if the athlete’s contract requires additional conditions beyond simply signing. For example, if the athlete must actually play for the team, the CRA would argue that the payment isn’t considered “an inducement to sign” the contract. Consequently, it would not qualify for the 15-percent tax limit. Similarly, the CRA contends that the 15-percent tax rate would not apply if the signing bonus is in any way refundable under the terms of the athlete’s contract.

The CRA’s technical interpretation also suggests that tax auditors may refuse the 15-percent treaty rate if the signing bonus is disproportionately higher than the player’s base salary. This was the case when the CRA denied the treaty rate for NHL All-Star and Toronto Maple Leafs captain John Tavares. For further details on Tavares’s tax appeal with the Tax Court of Canada, check out our article on Tavares v. The King, 2024-212(IT)G.

Given these considerations, professional cross-border athletes should consult an expert Canadian tax lawyer to review their contracts, assess the potential tax risks if the CRA were to initially deny certain tax claims, and suggest alternative or additional contractual terms to prevent issues with the Canada Revenue Agency’s tax auditors.

Retirement Compensation Arrangements (RCAs): Key Insights

In Canada, a retirement compensation arrangement (RCA) is a unique tax-deferred savings plan often used by employers to provide retirement benefits, particularly for high-income employees. An RCA is a non-registered retirement plan designed to offer pension benefits that exceed those available through registered plans like a registered retirement savings plan (RRSP) or the National Hockey League Players’ Association pension plan.

Under a retirement compensation arrangement (RCA), an employer, former employer, or, in some cases, the employee, makes contributions to a custodian who holds the funds in trust with the intention of distributing them to the employee upon retirement or employment termination. When the employer contributes to an RCA, half of the contribution is paid to the CRA and added to the plan’s refundable tax account (RTA). The other half can be invested in a non-registered investment account. Income generated by the assets in this investment account is subject to the same treatment, with half of the income also remitted to the CRA and included in the RTA. When the RCA pays retirement benefits to the employee, the benefits are refunded from the RTA at a rate of $0.50 for every $1.00 of benefit paid. Essentially, the CRA refunds 50% of the tax in proportion to the employee’s payout.

Retirement compensation arrangements are commonly used in retirement and tax planning by many Canadian athletes across various professional sports. Given that most professional athletes have relatively short careers, they often accumulate only a modest pension during their playing years. As a result, RCAs offer a way to provide enhanced pension benefits, helping athletes secure a more substantial retirement income.

Retirement compensation arrangements also provide several benefits to both employers and employees. For employers, RCAs offer at least three key advantages: First, they allow the employer to claim a tax deduction for contributions made to the plan. Second, because provincial pension regulations do not apply to RCAs, employers enjoy greater flexibility in designing the plan. Third, RCAs can function as a valuable tool for employee retention.

For the employee, an RCA provides several benefits:

  • RCA contributions do not impact the employee’s RRSP contribution room.
  • An RCA enhances the employee’s tax-deferred retirement savings.
  • RCA contributions are not subject to payroll taxes until the employee begins receiving payments from the plan.
  • The funds in an RCA are not locked in, and the plan does not require a specific retirement date (though conditions on when benefits are paid may apply).
  • RCA retirement benefits allow for income splitting. An RCA may offer creditor protection.
  • A broad range of investment vehicles and accounts can qualify for an RCA.
  • While contributions in the refundable-tax account do not generate income, the employee benefits from tax deferral, as they would have otherwise been taxed on that amount.
  • An RCA presents opportunities for income-tax-rate arbitrage, such as when an employee is in a higher tax bracket at the time of contribution and in a lower tax bracket when the retirement benefits are paid out.

Retirement compensation arrangements have unique features and complex tax rules, which can be difficult for many taxpayers to navigate. Here is a summary of some key aspects of RCAs:

  1. Purpose: RCAs are primarily used to fund retirement benefits, severance payments, or deferred compensation, particularly for employees whose retirement savings are limited by RRSP or pension contribution caps.
  2. Contributions: Contributions to an RCA can be made by either the employer or the employee, with the unique condition that a 50% refundable tax is levied on the contributions, unlike the tax treatment for RRSPs or pension plans.
  3. Refundable Tax: Both contributions to the RCA and any investment income earned within the plan are subject to a 50% refundable tax. The CRA monitors this tax through a refundable tax account, and it is refunded when benefits are paid out, based on the amount of the payout.
  4. Taxation of Benefits: When benefits are distributed to the employee, they are treated as taxable income for that year. The employee must report and pay tax on the income received.
  5. Investment Growth: The RCA allows for tax-deferred growth of the assets, meaning no tax is paid on investment income as long as it remains within the RCA. However, 50% of any income generated is transferred to the refundable tax account.
  6. Flexibility: RCAs are particularly beneficial for high-income employees or executives, as they offer a way to provide additional retirement income beyond the limits of RRSPs or pension plans.
  7. Typical Use: RCAs are often utilized for high earners, such as key executives or professional athletes, to provide retirement compensation beyond the standard retirement savings options available to most employees.

Employers can assist their high-income employees in saving for retirement in a tax-efficient manner by establishing a retirement compensation arrangement (RCA). However, it’s important for all interested taxpayers to be aware of the complexity and refundable tax requirements that distinguish RCAs from traditional retirement savings options, such as registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs).

To avoid potential tax problems with the tax auditors of the Canada Revenue Agency (CRA), Canadian professional athletes and sports teams should seek guidance from a knowledgeable Canadian tax lawyer. The CRA has challenged the validity of RCAs for former Toronto Blue Jays players Josh Donaldson and Russell Martin. The CRA argued that the arrangement was not a legitimate RCA, claiming it was designed to defer salary rather than provide retirement benefits. The Tax Court released the results of the appeals in December 2024 and found in favour of the taxpayer athletes.

Given the possibility of CRA tax audits, professional athletes or teams should consult with a Canadian tax lawyer before establishing, or considering the establishment of, a retirement compensation arrangement (RCA).

Canadian Tax Pitfalls for Professional Athletes: Alternative Minimum Tax (AMT), Luxury Tax, Foreign Reporting, and Underused Housing Tax (UHT)

High-net-worth professional athletes in Canada should consult legal experts to navigate the specific Canadian tax challenges they face. Key tax pitfalls include the alternative minimum tax (AMT), Canada’s luxury tax, foreign-reporting requirements, and the underused-housing tax (UHT). Furthermore, both Ontario and British Columbia have implemented laws imposing a surcharge of more than 20% on foreign buyers purchasing real estate in those provinces.

Section 127.51 of Canada’s Income Tax Act establishes an alternative minimum tax (AMT), designed by the federal government to target high-income individuals who, due to specific tax incentives, end up paying little or no income tax. The AMT operates alongside the regular income tax calculation for individuals, disallowing certain deductions, exemptions, and tax credits that are typically allowed under the standard tax rules. One area where the AMT may significantly impact cross-border professional athletes is in the calculation of departure tax. When an individual ceases to be a Canadian tax resident, Canada imposes a departure tax, which is subject to AMT considerations.

Canada’s departure tax treats the individual taxpayer as though that taxpayer has disposed of all qualifying assets at fair market value when he or she ceases to be a Canadian tax resident. This means the taxpayer must report any resulting capital gains on his or her income tax return for the year the taxpayer terminates Canadian residency. This rule allows Canada to tax the appreciated value of capital assets owned during the individual’s time as a Canadian resident. The challenge for cross-border professional athletes is that the alternative minimum tax (AMT) may increase their Canadian tax liability from the departure tax. Therefore, athletes should consult with a Canadian tax lawyer to understand how AMT could impact their contract negotiations and investment planning.

Certain professional athletes may face unexpected tax liabilities due to Canada’s luxury tax. The Select Luxury Items Tax Act, effective September 1, 2022, targets high-income individuals who can afford luxury goods, as noted in a Department of Canada news release. This tax applies to the purchase or importation of non-exempt new cars, new aircraft, and new vessels that exceed specified price thresholds. For cars and aircraft, the threshold is set at $100,000, while for vessels, it is $250,000. If the sale price surpasses the relevant threshold, the buyer is required to pay the luxury tax at the time of purchase. The luxury tax is calculated as the lesser of two amounts: (1) 20% of the portion by which the sale price exceeds the threshold, or (2) 10% of the total retail price of the car, aircraft, or vessel.

Canada’s foreign-reporting rules may also impact unsuspecting professional athletes relocating to Canada. Under Section 233.1 of the Income Tax Act, every Canadian tax resident must file a T106 form if he or she engages in a business transaction with a related non-resident. Section 233.2 mandates the filing of a T1141 form if the resident transfers or loans property to a non-resident trust or similar entity. Additionally, Section 233.3 requires the filing of a T1135 form if the resident owns or has an interest in “specified foreign property,” which commonly includes assets like cryptocurrency, with a total tax cost of $100,000 or more.

Under Section 233.4 of Canada’s Income Tax Act, Canadian tax residents must file a T1134 form if they hold a significant interest in a “foreign affiliate”—a private corporation incorporated outside Canada. Section 233.6 requires the filing of a T1142 form if the resident is a beneficiary of a non-resident trust and receives a distribution from it. Professional athletes who are Canadian residents and fail to file any of these forms may face hefty penalties. A failure to file can lead to a fine of up to $2,500 (plus interest) per year for each unfiled form. If the failure is due to gross negligence, penalties may increase to $12,000 per year per form. Furthermore, an additional 5% penalty may apply if the foreign-reporting form is late by more than 24 months.

Finally, due to Canada’s competitive housing market, several housing-specific taxes have been introduced. Professional athletes moving to Canada should consult a Canadian tax lawyer to understand the implications of these taxes.

Canada’s Underused Housing Tax Act, effective January 1, 2022, imposes a tax on vacant or underused residential real estate owned, directly or indirectly, by a “non-Canadian.” This term refers to individuals who are neither Canadian citizens nor permanent residents under the Immigration and Refugee Protection Act. For the purposes of the underused housing tax (UHT), “residence” is defined according to immigration law rather than tax law. Therefore, a professional athlete who isn’t a Canadian citizen or permanent resident may be subject to UHT liability, even if the athlete is considered a Canadian tax resident.

Affected property owners must file an annual UHT return, paying the applicable tax or claiming an exemption. If the owner doesn’t qualify for an exemption, the UHT liability is 1% of the property’s “taxable value” as of December 31 of the previous year. The taxable value is the higher of (1) the property’s assessed value for property tax purposes or (2) the most recent sales price of the property at year-end. Failure to file UHT returns, or filing them late, results in substantial penalties under Canada’s Underused Housing Tax Act.

Additionally, two Canadian provinces, British Columbia and Ontario, have implemented taxes targeting foreign individuals who purchase real estate within their jurisdictions. Ontario enforces the non-resident speculation tax (NRST), while British Columbia applies the foreign buyer’s tax. The tax rules in both provinces function similarly.

Ontario’s non-resident speculation tax (NRST) imposes an additional 25% tax on foreign nationals who, directly or indirectly, purchase or acquire an interest in residential real estate within the province. According to Ontario’s Land Transfer Tax Act, a “foreign national” is defined as an individual who is neither a Canadian citizen nor a permanent resident under Canada’s Immigration and Refugee Protection Act. Similar to Canada’s Underused Housing Tax Act, the NRST is based on immigration status, not tax residency. As such, a professional athlete who isn’t a Canadian citizen or permanent resident may be required to pay the NRST, even if that citizen or permanent resident is considered a Canadian tax resident.

British Columbia’s foreign-buyer tax operates similarly to Ontario’s NRST, applying when a foreign national purchases residential real estate in the province. The tax requires the buyer to pay an additional 20% based on the property’s value or sale price.

Ontario’s NRST and British Columbia’s foreign-buyer tax both impose an additional 25% or 20% tax on foreign-national home buyers, on top of the standard land-transfer taxes in these provinces. As a result, foreign-national NHL players signing with the Toronto Maple Leafs or Vancouver Canucks may face unexpected tax liabilities when purchasing a home in Ontario or British Columbia.

Tax Pro Tips: Establishing a Professional Athlete’s Status as a Canadian Tax Resident

As the value of professional athletes’ contracts grows, they, along with their tax planning strategies and income tax filings, face increased scrutiny from the Canada Revenue Agency. With Canada’s tax laws becoming more intricate, particularly with the introduction of new rules targeting high-net-worth individuals, professional athletes must seek experienced advisors, such as a Canadian tax lawyer, who are well-versed in the unique tax considerations that athletes in Canada encounter.

Tax residence status is a key Canadian tax issue that professional athletes must navigate. If an athlete misinterprets his or her tax-residence status, that athlete may mistakenly under-report or over-report his or her Canadian taxable income. Under-reporting can lead to penalties, while over-reporting may result in paying more tax than necessary.

Professional athletes may consider using the Canada Revenue Agency’s residence-determination process for guidance. By submitting a residence-determination request using Form NR73 (Determination of Residency Status – Leaving Canada) or Form NR74 (Determination of Residency Status – Entering Canada), athletes can receive an administrative opinion from the CRA regarding their status as a Canadian tax resident.

There are some drawbacks to the CRA’s residence-determination process. The CRA’s opinion is based solely on the information you provide, and it may not always align with Canada’s tax law. Therefore, your application should not only present the relevant facts but also highlight case law that supports your position. Without this, the CRA agent reviewing your application may issue a decision based on the CRA’s stance, potentially overlooking legal precedents that favour your case.

Additionally, the CRA’s residence-determination forms (NR73 and NR74) ask detailed and personal questions regarding a taxpayer’s finances and assets. Given this, high-net-worth professional athletes with substantial contracts should carefully consider whether they want to voluntarily disclose such sensitive financial information to the Canada Revenue Agency.

Professional athletes looking for guidance on their Canadian tax residency status should consult our expert Canadian tax lawyers. We can assess whether the Canada Revenue Agency’s residence-determination process is suitable for your situation. If it is, we will prepare your application with the necessary factual and legal analysis. If not, we will explore other options that best meet your needs.

FAQs (Frequently Asked Questions)

What Canadian tax considerations should a non-Canadian professional athlete take into account when deciding whether to join a Canadian team?

This is a complex question with many factors to consider. A non-Canadian athlete must evaluate various Canadian tax rules and their implications, which can differ greatly based on the athlete’s unique situation. Key considerations include whether the athlete will become a Canadian tax resident or remain a non-resident, whether the athlete will be classified as an employee or an independent contractor, and whether the athlete’s home country has a tax treaty with Canada, among others. For tailored tax advice, the athlete should consult one of our expert Canadian tax lawyers, who can create a personalized tax plan and provide strategies to minimize tax liability based on the athlete’s specific circumstances and objectives.

I’m a professional athlete. Does it matter from a Canadian tax perspective whether I’m an employee or an independent contractor? How do I determine which one I am?

Yes, your Canadian income tax obligations depend on whether you are classified as an employee or an independent contractor. For example, suppose a US-resident athlete earns Canadian-sourced income as an employee. In that case, the Canada-US tax treaty allows Canada to tax that income, but only if the athlete spends more than 183 days in Canada during the year. However, this relief does not apply if the athlete earns Canadian-sourced income as an independent contractor. In that case, Canada can tax the income earned from playing in Canada regardless of the number of days spent in the country.

Additionally, under Canada’s Income Tax Act, independent contractors have access to a broader range of tax deductions compared to employees. Independent-contractor athletes can typically deduct expenses that employee athletes cannot. Furthermore, employee athletes’ paychecks are subject to payroll deductions for income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) contributions, while independent contractors do not face these deductions on their earnings.

To determine whether you are an employee or independent contractor in Canada, courts look at four key factors: (1) the level of control the employer has over the work, (2) ownership of tools and equipment, (3) the chance of profit, and (4) the risk of loss.

Generally, athletes who play for a professional sports team in a league are considered employees. This includes players in leagues such as the National Football League (NFL), Major League Soccer (MLS), the National Hockey League (NHL), and the Canadian Football League (CFL). On the other hand, athletes who compete individually, such as those in boxing, tennis, auto racing, mixed martial arts (UFC), PGA or LIV golf, and World Wrestling Entertainment (WWE), are typically considered independent contractors. These are broad classifications, and the specific determination depends on the athlete’s contract terms and the application of the four common-law factors. For more personalized advice, it’s recommended to consult with one of our skilled Canadian tax lawyers.

I’ve heard that American professional athletes playing in Canada can benefit from certain provisions in the Canada-US tax treaty. Is that correct?

Yes, that’s correct, and the same applies to Canadian professional athletes playing in the United States. For instance, paragraph 4 of Article XVI in the Canada-US tax treaty limits the home country’s tax on a signing bonus to no more than 15% if the athlete receives it from a league in the other country. This provision can lead to significant tax savings for professional athletes, particularly for US-resident athletes playing for Canadian teams. For example, a US-resident athlete could save over $1 million in tax liability by receiving a $1.5 million salary with a $10 million signing bonus, compared to receiving the entire $11.5 million as an annual salary without a signing bonus.

However, cross-border athletes should consult with a qualified Canadian tax lawyer to ensure their contracts meet the treaty’s criteria for the 15% tax limit on signing bonuses. The Canada Revenue Agency (CRA) may deny this tax benefit if the contract terms suggest that the payment isn’t genuinely an “inducement to sign” the contract. Additionally, the CRA may deny the 15% tax rate if the signing bonus is significantly higher than the base salary. To navigate these issues, it’s important for professional athletes to have a Canadian tax lawyer review their contracts, assess potential tax risks, and suggest contract adjustments to avoid any complications with the CRA’s tax auditors.

What is retirement compensation arrangement (RCA) all about?

A retirement compensation arrangement (RCA) is a special tax-deferred savings plan in Canada, typically used by employers to provide retirement benefits for high-income employees. Unlike registered retirement plans, such as a Registered Retirement Savings Plan (RRSP) or the National Hockey League Players Association pension plan, an RCA is a non-registered retirement plan designed to offer pension benefits beyond the limits of those registered plans.

In an RCA, the employer or former employer (and in some cases, the employee) makes contributions to a custodian, who holds the funds in trust with the goal of distributing them to the employee upon retirement or loss of employment. When the employer contributes to an RCA, half of the contribution is paid to the Canada Revenue Agency (CRA) and added to the plan’s refundable tax account (RTA). The other half is invested in a non-registered investment account. Any income earned on these assets is subject to the same tax treatment, with half of the income also remitted to the CRA and added to the RTA. When the RCA benefits are eventually paid out to the employee, the refundable tax is returned to the RCA at a rate of $0.50 for every $1.00 of benefits paid. Essentially, the CRA refunds the 50% tax in proportion to the benefits the employee receives.

Is it true that the CRA’s tax auditors may sometimes question the validity of a retirement compensation arrangement?

Yes, this is indeed the case. The CRA has, in certain instances, disputed the validity of retirement compensation arrangements (RCAs). A notable example is the case involving former Toronto Blue Jays players Josh Donaldson and Russell Martin. The CRA contested the RCA, arguing that it was intended to defer salary rather than provide retirement benefits. In response, their Canadian tax litigation lawyer filed an appeal with the Tax Court of Canada. The Tax Court released the results of the appeals and found in favour of the taxpayer athletes. Professional athletes and teams who are looking to set up an RCA, or who have faced challenges from the CRA regarding the validity of their RCA, should seek expert advice from a Canadian tax lawyer. Our top-notch tax lawyers can assist in handling audits, filing objections, and representing you in tax litigation if necessary, including before the Tax Court of Canada.

DISCLAIMER: “This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the articles. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.”

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