Taxation of Non-Resident Athletes in Canada

Taxation of Non-Resident Athletes in Canada – Canadian Tax Lawyer Analysis

When Jose Bautista swings a bat on Canadian soil, Canada gets a cut. Canada taxes non-residents—including athletes—on their Canadian-sourced income. This tax analysis discusses the basics of Canadian income tax as it relates to non-resident athletes. It begins by discussing taxation of non-residents generally. Next, it discusses the two categories that athletes may fall into: employees or independent contractors. Afterwards, it explains the tax implications that each category entails. Finally, it explores the withholding obligations on those who pay non-resident athletes.

Canadian Taxation of Non-Residents

Under subsection 2(3) of Canada’s Income Tax Act, Canada may tax a non-resident person if that person has:

• been employed in Canada,
• carried on a business in Canada, or
• disposed of a taxable Canadian property.

In other words, a Canadian non-resident must pay Canadian tax on Canadian-sourced income. The portion of the income that the non-resident earned from a Canadian source thus forms that person’s Canadian taxable income, which is used to determine that person’s income tax rate. (Progressive income tax rates only apply to individuals—i.e., natural persons—and some trusts. Canada does not apply progressive tax rates to corporate income tax. This article only concerns taxation of natural persons.)

In addition, an income tax treaty or convention—an agreement between two countries on how to divvy up tax jurisdiction and taxable income —may reduce the non-resident’s Canadian tax liability. Further, the non-resident’s home country will usually offer an income tax credit for any income that both countries have taxed.

Taxation of Athletes: Employee or Independent Contractor?

The Canadian taxing regime applying to the non-resident athlete’s Canadian-sourced income varies depending on whether the athlete is an employee or an independent contractor.

The nature of some occupations makes it difficult to decide whether a worker is an employee or contractor. Some sports offer this same challenge. When this distinction carries legal significance, Canadian courts consider four elements:

• the degree or absence of control exercised by the employer,
• the ownership of tools,
• chance of profit, and
• risk of loss.

Generally, however, athletes who play in a league for a professional sports team are considered employees. These athletes include those who play for:

• the National Basketball Association (NBA)
• the National Hockey League (NHL)
• Major League Baseball (MLB)
• the National Football League (NFL)
• the Canadian Football League (CFL)
• Federation Internationale de Football Association (FIFA)
• Major League Soccer (MLS)

In contrast, athletes who compete individually are typically considered independent contractors. This group includes those who compete in the following sports:

• tennis
• golf
• boxing
• mixed martial arts
• auto racing
• skiing

Still, these are generalizations. Ultimately, the terms of the athlete’s contract and the four common-law factors will determine specific cases.

Canada’s Taxation of Non- Resident Employee Athletes

Under Canada’s domestic tax rules, non-resident employee athletes must file a Canadian tax return and report all salaries, fees, and performance-related bonuses relating to services rendered in Canada. In addition, the non-resident athlete must report a signing bonus relating to an agreement to perform in Canada. More specifically, the athlete must report the bonus to the extent that a Canadian taxpayer can deduct that payment from its income.

But a tax treaty may provide relief from Canadian tax. For instance, the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital ( (the “Canada-US Tax Treaty”) generally allows Canada to tax US athletes on income earned from a performance in Canada. But this rule does not apply to the employment income of an American athlete who competes in a league with regularly scheduled games in both Canada and the United States. In this case, the Canada-US Treaty applies a 183-day test: The non-resident athlete pays Canadian tax on his or her employment income only if his or her presence in Canada exceeds 183 days. So, whether a non-resident league athlete pays Canadian tax generally depends on whether he or she is employed by a Canadian- or US-based franchise.

Canada’s Taxation of Non- Resident Independent-Contractor Athletes

Like a non-resident employee athlete, a non-resident, independent-contractor athlete must report all of his or her Canadian-sourced income. Unlike their employee counterparts, however, non-resident independent-contractor athletes generally do not enjoy potential treaty relief. The Canada-US Tax Treaty, for instance, permits Canada to tax American independent-contractor athletes on all income earned from a performance in Canada, regardless of the athlete’s time in Canada.

In addition, as a result of earning business income, independent-contractor athletes may avail themselves of deductions that employee athletes do not enjoy. Canada’s Income Tax Act generally prohibits employee expense deductions unless expressly listed. In contrast, the Tax Act generally allows business deductions unless expressly denied.

Withholding Obligations of Those Who Pay Non-Resident Athletes & Tax Administration and Compliance Obligations

Subsection 150(1) of the Income Tax Act requires all taxpayers—whether resident or non-resident with Canadian source income—to file a tax return. Generally, an individual may forego tax filing only if he or she has no taxes payable in Canada (150(1.1)(b)). So, most professional, non-resident athletes must file a Canadian tax return. To this end, the Act imposes withholding obligations on those who pay non-residents. Those who pay non-resident athletes must withhold and remit a certain portion of the payment to the Canadian government. The details of the withholding requirement turn on whether the non-resident athlete is an employee or an independent contractor. But, in both cases, if the payor fails to withhold and remit, the payor becomes liable to CRA for that amount. That is, the Canada Revenue Agency may enforce payment against the payor.

For employee non-resident athletes, the employer (whether resident or non-resident) must withhold the athlete’s tax payable on the portion of salary owing to the games that the athlete played in Canada. And, if the employer over-withholds, the athlete can receive a refund by filing a Canadian tax return.

Like others carrying on business in Canada, the non-resident independent-contractor athlete is expected to self-assess and file a Canadian tax return. As a compliance mechanism, anyone who pays the athlete for the performance in Canada must withhold 15% of the athlete’s payment. This applies regardless of whether the payor is a Canadian tax resident, but it does not apply when the payment relates to employment income. Again, if the withheld amount exceeds the athlete’s actual tax payable, the athlete receives a refund by filing a Canadian tax return.

Of course, in the latter case, the athlete might decide to forego filing because his or her Canadian tax payable exceeds the withheld 15%. How does Canada collect the full tax owing? Generally, tax treaties provide the solution. In most treaties, each treaty country agrees to collect taxes on behalf of the other. For instance, under the Canada-US Treaty, the Canada Revenue Agency can ask the Internal Revenue Service to collect on an American’s Canadian tax debt.

An athlete who resides in a non-treaty country, however, may dodge some of the CRA’s collection efforts. Generally, a non-treaty country will not cooperate with Canadian tax authorities. Still, the CRA has several avenues for recourse. For instance, if the non-resident athlete receives payments from a Canadian resident, the CRA can intercept that payment in satisfaction of the non-resident’s tax debt. Likewise, if the athlete receives payments from a treaty-country resident, the CRA—with the help of the treaty-country’s tax authorities—can achieve a similar result.

Non-Resident Athletes Tax Tips

If you’re a non-resident athlete, you still have an obligation to file a Canadian tax return. If you failed to do so, you could face penalties or prosecution. One avenue for relief is Voluntary Disclosures Program, which provides qualifying taxpayers with relief from penalties and prosecution. Our Canadian tax lawyers have helped countless taxpayers avoid sanctions with the Voluntary Disclosures Program. To find out whether you qualify—or your options if you don’t—consult one of our Canadian tax lawyers today.

Likewise, if you pay non-resident athletes—or non-residents in general—you must be aware of your withholding obligations. If you fail to withhold and remit the required amount, you may assume personal liability. If you wish to avoid liability—or discuss your options upon becoming liable—consult one of our expert Canadian tax lawyers.