Being a professional athlete takes a lot of talent, drive and dedication and those who excel in their chosen sports are richly rewarded.
But being exempt from taxes is not one of those rewards.
You probably never thought of it when you saw any of our Canadian athletes on the podium at the Winter Olympics, but they have to pay their income tax just like anyone else.
Like many of the rest of us, many professional athletes are employees, hired by professional sports clubs to participate in leagues and play regularly scheduled games.
As such, their employment income is taxed – and that employment income includes things such as:
- any bonuses the player has received, such as signing bonuses or bonuses for good performance,
- fees paid for promotional activities,
- awards, including cash and the fair market value of bonds, automobiles and other merchandise, and
- payments made by a club on a player’s behalf that would otherwise be a non-deductible expense to the player, such as agents’ fees, legal fees, income taxes, fines, etc.
And that’s not all. Commuting expenses, the free use of automobiles, even living and travelling allowances are all considered to be part of a professional athlete’s income and taxed accordingly – except for a player’s “properly vouchered” (Canada Revenue Agency) travel expenses incurred for away-from-home games or other bona-fide club business or the value of dining and dormitory facilities provided during training and tryout periods.
This also means that players only have the same deductions from employment income that any other employees have.
However, professional athletes do have some tax advantages that many other employees don’t have.
1) Deferring Income
A professional athlete can defer some of his income if there’s a deferrment clause in his contract of employment, which could significantly reduce his employment income for the year, because the deferred income wouldn’t “count” tax-wise until the player actually received it.
2) Personal Services Business
Another way an athlete can decrease his Canadian tax burden is by acting through a corporation. So rather than employing a player directly, the sports organization retains the athlete’s services through a corporation that engages the player through a personal service contract.
So instead of the income the player receives being personal income, it becomes income from a personal services business carried on by the corporation and is taxed at corporate income tax rates instead of personal ones.
Personal service corporations are only allowed to claim certain tax deductions:
(a) the remuneration and the cost of other benefits or allowances provided to an “incorporated employee”,
(b) certain expenses of the corporation associated with selling property or negotiating contracts that are ordinarily deductible from employment income, and
(c) amounts paid for legal expenses incurred by the corporation in collecting amounts owing for services rendered (Canada Revenue Agency).
While corporations that are deemed to be personal services businesses are not eligible for many of the tax deductions that other corporations enjoy, having income taxed at the corporate rather than the personal rate could still provide considerable tax savings.
But Then There Are Endorsements
We all know, though, that endorsements are where the big money is for successful professional athletes.
Money from endorsements and public appearances is business income and just like anyone else who earns business income, an athlete can declare and claim his business income on his T1 return as personal income or set up a corporation (where the money would be active business income and perhaps qualify for the small business deduction).
Either way, he’ll be able to claim all the usual business expenses, such as office expenses, travel expenses and accounting fees.
You can see why so many professional athletes hire managers to manage their financial affairs so they can concentrate on their performance!