Canadian Tax Traps for Professional Athletes Entering, Leaving, or Playing in Canada: Tax-Planning Considerations for Cross-Border Professional Athletes

Introduction: Canadian Tax Planning for Professional Athletes

For professional athletes, life off the field or rink can be just as complex as it is on it, especially when it comes to understanding taxes. Canadian tax law, in particular, poses unique challenges for athletes who play in international leagues such as the National Hockey League (NHL), National Basketball Association (NBA), Major League Baseball (MLB), or Major League Soccer (MLS). From signing lucrative contracts to dealing with cross-border relocations, professional athletes often face tax obligations in multiple jurisdictions.

For instance, the National Hockey League has made efforts to grow its global reach, and as of the date of this writing, players from up to 18 different countries have signed with NHL teams. A key concern for these athletes is: What are the tax implications of moving to, living in, or leaving Canada? For cross-border professional athletes, the answer depends not only on Canada’s domestic tax laws but also on the domestic tax laws of the athlete’s home or destination country, and on the tax treaties, if any, between Canada and that other country.

A variable that often complicates a professional athlete’s Canadian tax situation is the level of compensation offered under many professional contracts. For example, the NHL’s minimum player salary increased from US$450,000 in 2006 to US$775,000 in 2023, with the average player salary for the 2023-24 season reaching US$3.5 million. Aware of these increases in player compensation, the Canada Revenue Agency may target professional athletes for tax audit, which consequently makes it all the more important for professional athletes—whether moving to, living in, or leaving Canada—to obtain tax-planning advice from a knowledgeable Canadian tax lawyer.

This article explores various Canadian tax implications that professional athletes in Canada must consider, offering insights into how they can manage their earnings, avoid pitfalls, and plan for long-term financial success while staying compliant with Canada’s tax rules. In particular, this article highlights a few key Canadian tax considerations and tax-planning opportunities that may arise over the course of a professional athlete’s career—from signing the initial player contract to being traded or planning for retirement. After reviewing these tax issues, this article concludes by providing pro tax tips from our esteemed Canadian tax lawyers.

Tax Residence: Canada’s Jurisdiction to Tax a Professional Athlete’s Worldwide Income

Canada’s jurisdiction to tax a person’s income turns on two connecting factors. The first is tax residence. Canada has the jurisdiction to tax a Canadian tax resident’s worldwide income. That is, a person who qualifies as a Canadian tax resident must file Canadian income-tax returns reporting all income that the person earned worldwide.

The second connecting factor is the source of income. This factor comes into play when the taxpayer doesn’t qualify as a Canadian tax resident. Canada only has the jurisdiction to tax a non-resident’s Canadian-sourced income. In other words, a person who doesn’t qualify as a Canadian tax resident is only liable to pay Canadian income tax on Canadian-sourced income. Canadian-sourced income includes income from employment in Canada, income from a business in Canada, income from disposing of a Canadian property, and income from Canadian investments—e.g., interest from a Canadian borrower, dividends from a Canadian corporation, or rent from a tenant in a Canadian rental property.

For a non-resident athlete earning income from a Canadian-based team or from performing in Canada, this means that the non-resident athlete must file Canadian income-tax returns reporting all Canadian-sourced salary, all Canadian-sourced fees, any performance-related bonuses relating to services rendered in Canada, and any signing bonuses relating to an agreement to perform in Canada.

Hence, the threshold tax issue for a professional athlete is whether or not the athlete qualifies as a Canadian tax resident. The first thing that an athlete should understand is that the notion of residence for tax purposes is distinct from the concept of residence for immigration purposes: A person can qualify as a Canadian tax resident even if that person has never obtained permanent residency or citizenship in Canada, and a Canadian citizen or Canadian permanent resident can fail to qualify as a Canadian tax resident.

Three tax rules bear on a professional athlete’s status as a tax resident in Canada. First, the athlete may be a Canadian tax resident under common law. Second, even if the athlete isn’t a common-law resident, the athlete may be a deemed Canadian tax resident under paragraph 250(1)(a) of Canada’s Income Tax Act. Third, if the athlete maintains sufficient economic or personal ties to a country with which Canada has a tax treaty, subsection 250(5) of Canada’s Income Tax Act may deem the athlete to be a non-resident of Canada.

We’ll briefly discuss each of these tax rules in turn.

Common-Law Tax Resident (i.e., Factual Resident)

Canada’s Income Tax Act uses the terms “resident” and “ordinarily resident,” but it doesn’t define either one. So, Canadian courts have defined what constitutes a “resident” for tax purposes. Because Canada predominantly subscribes to the common-law system, the judicial definition of tax residence is often called “common-law residence.” It’s also referred to as “factual residence” because the common-law test demands a comprehensive analysis of the taxpayer’s circumstances.

When applying the common-law residence test to a professional athlete, Canadian courts and the Canada Revenue Agency will evaluate whether the athlete maintains any of the following ties to Canada:

• a dwelling place in Canada;
• a spouse or common-law partner living in Canada;
• a child or financially dependant relative living in Canada;
• personal property in Canada (such as furniture, clothing, automobiles, and recreational vehicles);
• social ties to Canada (such as memberships in Canadian recreational or religious organizations) to Canada;
• economic ties to Canada (such as employment with a Canadian employer and active involvement in a Canadian business, and Canadian bank accounts, retirement savings plans, credit cards, and securities accounts);
• immigration status or work permits in Canada;
• hospital or medical insurance coverage in Canada;
• a driver’s license in a jurisdiction in Canada;
• a registered vehicle in Canada;
• a seasonal dwelling or leased dwelling in Canada;
• a passport issued by Canada;
• memberships in unions or professional organizations in Canada; or
• other residential ties, including a mailing address, post office box, safety deposit box, personal stationery (including business cards), and telephone listings.

Not all of these jurisdictional ties are given equal weight. Canadian courts and the CRA consider the first three ties—dwelling, spouse, and dependent—as significant ties. That is, the presence of a professional athlete’s spouse, child, or dwelling in Canada will strongly suggest that the athlete is a Canadian tax resident under the common-law test.

In essence, no one factor emerges as singularly important for determining whether an individual is a factual resident in Canada. Typically, several factors in aggregate will determine the issue. As a result, the jurisprudence often appears to be inconsistent. In light of the nuanced legal analysis that the common-law test requires, professional athletes should consult a Canadian tax lawyer for an opinion on their tax residence status in Canada.

Deemed Resident (The Sojourner Rule): Paragraph 250(1)(a) of Canada’s Income Tax Act

Unlike a common-law resident, a deemed resident under the sojourner rule need not maintain jurisdictional ties to Canada. Paragraph 250(1)(a) deems a person “to have been resident in Canada throughout a taxation year if the person sojourned in Canada in the year for a period of, or periods the total of which is, 183 days or more.” Basically, the sojourner rule deems you to have been a Canadian resident for the entire tax year if you “sojourned” in Canada for 183 days or more in that year.

You sojourn if you visit. Hence, a sojourner is presumptively a non-resident under the common-law test. Paragraph 250(1)(a) therefore applies only if the professional athlete remained a non-resident in Canada throughout the relevant taxation year; it doesn’t apply if the athlete became or ceased to be a factual resident in Canada during that year.

The common-law test and the deemed-resident rule prove especially relevant to foreign professional athletes who play for Canadian teams. These athletes often spend over six months in Canada during the professional season before returning to their home country for the off-season. A foreign athlete in this situation may qualify as a Canadian tax resident, either under the common-law test or under the deemed-resident test.

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

Deemed Non-Residence: Subsection 250(5) of Canada’s Income Tax Act

Canada’s various tax treaties typically contain provisions dealing with the tax-residence status of cross-border taxpayers. The treaty’s residence provisions will initially defer to each treaty country’s domestic tax law. That is, the tax treaty will consider a person to be a tax resident in the country whose domestic tax laws claim that person as a resident. But if both country’s domestic tax laws make this claim, the treaty sets out tie-breaker rules to settle the issue.

Subsection 250(5) of the Income Tax Act deems a person to be a non-resident in Canada if a tax treaty says that the person is a tax resident of Canada’s treaty partner. By doing this, subsection 250(5) assures consistency between Canada’s domestic law and Canada’s tax treaties.

Moreover, subsection 250(5) overrides both the common-law residence test and the deemed-resident rule in paragraph 250(1)(a). In other words, if subsection 250(5) applies, then the taxpayer is a non-resident of Canada—even if the taxpayer would otherwise have been either a deemed resident under paragraph 250(1)(a) or a factual resident under the common-law test.

The deemed non-resident rule in subsection 250(5) may offer relief to foreign professional athletes who play for Canadian teams, spend significant time in Canada during the season, and come from a country which has a tax treaty with Canada.

Other Tax-Treaty Relief for Foreign Athletes Playing In Canada

Other provisions of Canada’s tax treaties may relieve foreign athletes from Canadian income tax liability. For example, consider a US-resident NHL player who earns employment income from game days in Canada. Because the NHL player exercises his employment duties in Canada, the income from Canadian game days constitutes Canadian-sourced income and is therefore taxable in Canada.

Yet many Canadian tax treaties provide a limited exemption from Canadian tax for employment income that a non-resident earns when carrying out employment duties in Canada. Article XV(2) of the Canada-US Tax Treaty, for example, bars Canada from taxing the non-resident’s employment income if the non-resident “is present in [Canada] for a period or periods not exceeding in the aggregate 183 days in that year and the remuneration is not borne by an employer who is a resident of [Canada] or by a permanent establishment or a fixed base which the employer has in [Canada].” In other words, if the US-resident NHL player spends less than 183 days in Canada during the year in which he earned the income and received the income directly from a US-based team, then Canada cannot tax that income.

Of course, this tax-treaty provision affects cross-border professional athletes other than NHL players. It will prove especially relevant to sports leagues in which athletes spend a significant portion of their season in either Canada or the US—players in the new Professional Women’s Hockey League, for instance.

The Employee/Contractor Issue: Canadian Tax Implications of Professional Athletes Earning Employment Income vs. Professional Athletes Earning Business Income

A professional athlete’s Canadian income-tax obligations vary depending on whether the athlete is an employee or an independent contractor. For example, suppose that a US-resident athlete earns Canadian-sourced income as an employee. As mentioned above, the Canada-US tax treaty permits Canada to tax the employment income that the US earns from playing in Canada, but only if the athlete spends over 183 days in Canada during the year. Yet this tax-treaty relief doesn’t apply if the US-resident athlete earned Canadian-sourced as an independent contractor. The Canada-US tax treaty permits Canada to tax an American independent-contractor athlete on all income earned from playing in Canada, regardless of the number of days that the athlete spends in Canada.

Moreover, under Canada’s Income Tax Act, taxpayers who earn business income enjoy a greater range of tax deductions than taxpayers who earn employment income. Thus, independent-contractor athletes can typically deduct expenses that employee athletes cannot. And the paycheques of employee athletes will typically be subject to payroll source deductions for income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) contributions. Professional athletes who work as independent contractors won’t incur source deductions on their pay.

The nature of some occupations makes it difficult to decide whether a worker is an employee or a contractor. Some sports offer this same challenge. To determine whether a taxpayer, including a professional athlete, is an employee or contractor, Canadian courts consider four elements:

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

Generally speaking, athletes who play in a league for a professional sports team are employees. This group includes players signed with 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), and Major League Soccer (MLS).

By contrast, athletes who compete individually will typically qualify as independent contractors. This group includes professional athletes who compete in tennis, in golf tournaments such as the PGA or LIV Golf, in boxing, for mixed-martial-arts competitions such as the UFC (Ultimate Fighting Championship), in auto racing, and as wrestlers for the WWE (World Wrestling Entertainment).

These are generalizations. Ultimately, the result in specific cases will depend on the terms of the athlete’s contract and the four common-law factors.

Signing Bonuses: Canadian Tax-Planning Options

Signing-bonus tax planning is a must for professional athletes who play for North American sports teams, especially those who play for cross-border leagues, such as the National Hockey League (NHL), National Basketball Association (NBA), Major League Baseball (MLB), and Major League Soccer (MLS).

Cross-border tax planning for signing bonuses hinges on paragraph 4 in article XVI of the Canada-US tax treaty. This provision mandates that the athlete’s home country cannot charge more than 15% tax on a signing bonus that the athlete receives from a league in the other country. In particular, the provision states the following:

“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 per cent of the gross amount of such payment.”

The 15-percent tax limit applies to signing bonuses, which the treaty provision describes as “an inducement to sign an agreement relating to the performance of services of an athlete.” But the provision does not apply to “an amount referred to in paragraph 1 of Article XV” of the treaty. The excluded amounts basically relate to the base salary that the athlete earns for game days within the other treaty country. In other words, the 15-percent treaty rate applies only to the signing bonus (i.e., the “amount paid” as “an inducement to sign” the player contract), but it doesn’t apply to the salary that the player receives under the contract.

Professional cross-border athletes—especially US-resident athletes who sign with Canadian-based teams—can enjoy significant overall tax savings as a result of the treaty’s 15-percent tax limit on signing bonuses. For example: A US-resident athlete could save over $1 million in Canadian-US income-tax liability by receiving a $1.5 million annual salary with a $10 million signing bonus than by receiving the entire $11.5 million as an annual salary with no signing bonus.

Professional cross-border athletes should consult with an expert Canadian tax lawyer to ensure that their contracts satisfy the criteria for the treaty’s 15-percent tax limit. On July 14, 2022, the Canada Revenue Agency released a technical interpretation suggesting that the CRA’s tax auditors will deny the treaty’s 15-percent tax limit if, under the terms of the athlete’s contract, the signing-bonus payment requires the player to satisfy additional conditions other than simply signing the contract—e.g., a condition that the player must actually play for the team. According to the Canada Revenue Agency’s interpretation of paragraph 4 in article XVI of the Canada-US tax treaty, these additional conditions mean that the player hasn’t received the purported signing bonus as “an inducement to sign” the contract, and therefore the payment wouldn’t qualify for the treaty’s 15-percent tax limit. Likewise, the CRA contends that the treaty’s 15-percent tax limit won’t apply if, under the terms of the athlete’s professional contract, the signing bonus is in any way refundable.

The CRA’s technical interpretation also suggests that the CRA’s tax auditors may deny the 15-percent treaty rate if the player’s signing bonus substantially exceeds the player’s base salary. Indeed, for this very reason, the Canada Revenue Agency’s tax auditors denied the treaty rate claimed by NHL all-star and Toronto Maple Leafs captain John Tavares. For more about Tavares’s tax appeal with the Tax Court of Canada, read our article on Tavaras v. The King, 2024-212(IT)G.

For all these reasons, professional cross-border athletes should engage a knowledgeable Canadian tax lawyer to review their contracts, conduct a tax-risk assessment on the likelihood of success should the CRA initially deny various tax claims based on the contract, and recommend alternative or additional contractual terms to pre-empt potential problems with the Canada Revenue Agency’s tax auditors.

Retirement Compensation Arrangements (RCAs)

In Canada, a retirement compensation arrangement (or RCA) is a special type of tax-deferred savings plan typically used by employers to provide retirement benefits for employees, particularly high-income earners. An RCA is a non-registered retirement plan aiming to bestow pension benefits beyond those available through registered plans, such as a registered retirement savings plan (RRSP) or the National Hockey League Players Association pension plan.

Under a retirement compensation arrangement, an employer or former employer (or, in some cases, an employee) makes contributions to a custodian, who holds those funds in trust with the intent of eventually distributing them to the employee when the employee retires or loses employment. When the employer contributes to an RCA, one-half of the contribution is remitted to the CRA and included in the plan’s refundable-tax account (also called an RTA). The other half of the contribution can be invested in a non-registered investment account. Half the income generated by the assets in the investment account is also remitted to the CRA and included in the RCA’s refundable-tax account. When the RCA’s retirement benefits are ultimately paid to the employee, the benefits are refunded from the refundable-tax account to the RCA at the rate of $0.50 for each $1.00 of benefit paid. In other words, the Canada Revenue Agency refunds the 50% tax in proportion to the employee’s payout.

Retirement compensation arrangements often play a role in retirement planning and tax planning for many Canadian athletes across a range of professional sports. Many professional athletes typically have short careers and thereby accumulate only a modest pension during those years of service. As a result, RCAs comprise a means of providing enhanced pension benefits for an athlete.

Retirement compensation arrangements offer various advantages to employers and employees. From an employer’s perspective, an RCA offers at least three advantages: First, the employer can claim a tax deduction for contributions to the RCA. Second, provincial pension regulations don’t apply to RCAs, and this brings greater flexibility in designing a plan. Third, RCAs may serve as an employee retention tool.

For the employee, an RCA also offers several advantages:

• RCA contributions don’t affect the employee’s RRSP contribution room.
• An RCA increases the employee’s tax-deferred retirement savings.
• The RCA contributions aren’t subject to payroll taxes until the employee receives payments from the plan.
• The funds in the RCA aren’t locked in, and an RCA doesn’t mandate any retirement date (Granted, the RCA plan typically does contain conditions about the timing of benefit payments from the RCA.).
• The RCA retirement benefits allow for income splitting. The RCA may serve as a means of creditor protection.
• A wide range of investment vehicles and investment accounts can qualify for an RCA.
• Although the contributions held in the refundable-tax account don’t generate income, the employee enjoys some tax deferral because the employee would otherwise have had to pay income tax on the set-aside amount.
• An RCA creates an opportunity for income-tax-rate arbitrage—for example, an employee whose tax bracket exceeds the 50% refundable-tax rate when the RCA receives contributions and whose tax bracket is less than the 50% refundable-tax rate when the RCA pays out the retirement benefits to the employee.

Many taxpayers struggle to understand the unique features and complex tax rules surrounding retirement compensation arrangements, so we’ve summarized some key features of RCAs:

1. Purpose: An RCA is designed to fund retirement benefits, termination payments, or other forms of deferred compensation for employees, especially those whose retirement savings are capped by RRSP or pension contribution limits.
2. Contributions: Contributions to an RCA can be made by either the employer or the employee. Yet unlike RRSPs or pension plans, the contributions to an RCA are subject to a 50% refundable tax.
3. Refundable Tax: The 50% refundable tax applies to both contributions to the RCA and any investment income earned within the RCA. The Canada Revenue Agency (CRA) tracks the tax for each RCA in a refundable-tax account. When benefits are ultimately paid out to the employee, the CRA refunds this 50% tax in proportion to the payout.
4. Taxation of Benefits: Payments or withdrawals from the RCA constitute taxable income for the employee in the year that the employee receives the payment. The employee must therefore report the income and pay income tax on it.
5. Investment Growth: The assets in the RCA can grow tax-deferred, meaning no taxes are paid on investment earnings while the funds remain within the RCA, but 50% of that investment income goes towards the RCA’s refundable tax account.
6. Flexibility: RCAs are particularly useful for high-income employees or executives whose retirement savings in other registered plans are subject to contribution limits. RCAs provide a way for companies to supplement the retirement income of such employees.
7. Typical Use: RCAs are commonly used for key executives, professional athletes, or other high earners where companies want to provide additional retirement compensation beyond what’s allowed through regular pension plans or RRSPs.

By setting up a retirement compensation arrangement (or RCA), employers can help their high-income employees save for retirement in a tax-efficient way, but all interested taxpayers should note the complexity and refundable-tax requirements that make RCAs different from traditional retirement savings vehicles, including tax-registered vehicles such as registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs).

To avoid potential tax problems with the Canada Revenue Agency’s tax auditors, Canadian professional athletes and professional sports teams should obtain Canadian tax guidance from a knowledgeable Canadian tax lawyer. The Canada Revenue Agency has notably contested the validity of an RCA for the Toronto Blue Jays’ former right fielder and third baseman, Jose Bautista. The CRA alleges that the arrangement wasn’t a valid RCA because it aimed to defer salary, not to provide for retirement. In 2022, Bautista’s Canadian tax-litigation lawyer filed a notice of appeal with the Tax Court of Canada (see: Bautista v HMK, court file number 2022-2718(IT)G). As of the date of this article, the Tax Court has yet to hear the appeal, and the dispute remains unresolved.

In light of the potential tax audits by the CRA, professional athletes or professional teams should seek advice from a Canadian tax lawyer if they want to establish, or are considering establishing, a retirement compensation arrangement (RCA).

Various Canadian Tax Traps for Professional Athletes: Alternative Minimum Tax (AMT), Luxury Tax, Foreign Reporting & Underused-Housing Tax (UHT)

High-net-worth professional athletes in Canada should seek legal advice on the various Canadian tax traps that particularly affect them. Some of the most notable Canadian tax traps include the alternative minimum tax (also called the AMT), Canada’s luxury tax, Canada’s foreign-reporting obligations, and Canada’s underused-housing tax (or UHT). In addition, some Canadian provinces of Ontario and British Columbia have each enacted legislation imposing over 20% in additional tax on foreigners who purchase real property in those provinces.

Section 127.51 of Canada’s Income Tax Act imposes an alternative minimum tax (AMT), which Canada’s federal government introduced to target high-income individuals who ended up paying little or no income tax because of certain tax incentives. The minimum-tax calculation works in parallel to the standard income-tax calculation for individuals. The alternative minimum tax precludes certain deductions, exemptions, and tax credits that the ordinary income-tax rules permit. One area where the AMT rules may particularly affect cross-border professional athletes is the calculation of departure tax. Canada’s Income Tax Act imposes a departure tax on an individual taxpayer who ceases being a Canadian tax resident.

When it applies, Canada’s departure tax deems the individual taxpayer to have disposed of all qualifying assets at fair market value. As a result, the taxpayer must report the resulting capital gain on the taxpayer’s income tax return for the year that the taxpayer ceased to be a Canadian tax resident. This tax rule allows Canada to tax the value that accrued on capital assets that the taxpayer owned while residing in Canada. The potential issue for cross-border professional athletes is that the alternative-minimum-tax rules may increase the Canadian tax liability that they would otherwise have realized from departure tax. As a result, cross-border professional athletes should seek advice from a Canadian tax lawyer about how the AMT rules may bear on the athlete’s contract negotiations and investment-planning decisions.

Certain professional athletes may also face unanticipated tax liability stemming from Canada’s luxury tax. Canada’s Select Luxury Items Tax Act came into effect on September 1, 2022. According to a Department of Canada news release, Canada’s luxury tax intends to target Canadian taxpayers “who can afford to buy luxury goods.” The luxury tax applies to those who buy or import non-exempt new cars, new aircraft, and new vessels exceeding the target price threshold. For cars and aircraft, the price threshold is $100,000, and for vessels, the threshold is $250,000. If the final sale price exceeds the relevant price threshold, the buyer must pay the luxury tax at the point of purchase. The amount of the luxury tax equals the lower of the following two amounts: (1) 20% of the amount by which the retail sale price exceeds the relevant price threshold; and (2) 10% of the retail sale price of the subject vehicle, aircraft, or vessel.

Canada’s foreign-reporting rules may also affect unsuspecting professional athletes who move to Canada. Section 233.1 of Canada’s Income Tax Act requires every Canadian tax resident to file a T106 form if the resident entered a business transaction with a related non-resident. Section 233.2 requires every Canadian tax resident to file a T1141 form if the resident transferred or loaned property to a non-resident trust or similar entity. Section 233.3 requires every Canadian tax resident to file a T1135 form if the resident owns or has an interest in “specified foreign property,” which will typically include cryptocurrency, with an aggregate tax cost of $100,000 or more.

Section 233.4 requires every Canadian tax resident to file a T1134 form if the resident owns a sufficient stake in a “foreign affiliate”—that is, a private corporation incorporated in any jurisdiction outside Canada. Section 233.6 requires every Canadian tax resident to file a T1142 form if the resident is a beneficiary of—and receives a distribution from—a non-resident trust. A Canadian-resident professional athlete who fails to file any of these forms will incur stiff tax penalties. A simple failure to file can result in a penalty of up to $2,500 (plus interest) per year per form. And if the failure to file constitutes gross negligence, the maximum penalty can reach $12,000 per year per form. Moreover, an additional 5% penalty may apply if the foreign-reporting form is over 24 months late.

Finally, Canada’s tight housing market has given rise to several housing-specific taxes, about which all professional athletes entering Canada should seek advice from a Canadian tax lawyer.

Canada’s Underused Housing Tax Act came into effect on January 1, 2022. The underused-housing tax (or UHT) applies to any vacant or underused residential real estate owned, directly or indirectly, by a “non-Canadian,” which refers to an individual who isn’t a Canadian citizen or a Canadian permanent resident as defined under Canada’s Immigration and Refugee Protection Act. In other words, for the purposes of the UHT, the relevant notion of “residence” is residence for the purposes of immigration law, not residence for the purposes of tax law. As a result, a professional athlete who isn’t a Canadian citizen or permanent resident may incur UHT liability—even if that athlete qualifies as a Canadian tax resident.

Each affected owner must file an annual UHT return and either pay the owner’s underused-housing tax or claim an exemption. If the owner doesn’t qualify for a UHT exemption, the owner’s underused-housing-tax liability amounts to 1% of the “taxable value” of the property as of December 31 of the previous year. The taxable value equals the greater of (1) the property’s assessed value for property tax purposes and (2) the property’s most recent sales price at year-end. Canada’s Underused Housing Tax Act imposes steep monetary penalties upon affected owners who fail to file UHT returns or who fail to file them on time.

In addition, two Canadian provinces, British Columbia and Ontario, have enacted taxes that apply to foreign individuals who purchase real property in either of those provinces. Ontario has the non-resident speculation tax (or NRST), while British Columbia has the foreign buyer’s tax. Each regime’s tax rules work similarly.

Ontario’s NRST results in an additional 25% tax for any foreign national who, directly or indirectly, buys or acquires an interest in a residential real property located anywhere in Ontario. For the purpose of the non-resident speculation tax, Ontario’s Land Transfer Tax Act defines a “foreign national” as an individual who is neither a Canadian citizen nor a Canadian permanent resident under Canada’s Immigration and Refugee Protection Act. Like Canada’s Underused Housing Tax Act, Ontario’s non-resident speculation tax depends not on tax residence but on residence for immigration purposes. So, a professional athlete who isn’t a Canadian citizen or permanent resident may need to pay non-resident speculation tax—even if that athlete qualifies as a Canadian tax resident.

British Columbia’s foreign-buyer tax applies in a similar fashion when a foreign national buys a residential real property in British Columbia. BC’s foreign-buyer tax requires the buyer to pay an additional 20% tax, which is based on the property’s value or sale price.

Ontario’s NRST and British Columbia’s foreign-buyer tax each require foreign-national home buyers to pay the 25% or 20% tax in addition to the standard land-transfer taxes that these provinces impose. Thus, Ontario’s NRST or British Columbia’s foreign-buyer tax may result in additional unanticipated tax liability for foreign-national NHL players who sign to the Toronto Maple Leafs or Vancouver Canucks and buy a home in Ontario or British Columbia.

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

As professional athletes’ contracts continue to increase in value, these athletes, their tax-planning arrangements, and their income-tax returns draw greater scrutiny from the Canada Revenue Agency’s tax auditors. In light of Canada’s increasingly complicated tax legislation, including new tax rules targeting high-net-worth individuals, professional athletes require competent advisors, such as a Canadian tax lawyer, who understands the unique tax issues that professional athletes in Canada face.

Tax-residence status is the threshold Canadian tax issue that professional athletes confront. A professional athlete who misconstrues tax-residence status may erroneously under-report or over-report Canadian taxable income. Under-reporting taxable income may lead to monetary penalties, while over-reporting may result in excessive Canadian tax liability.

The Canada Revenue Agency’s residence-determination process is one avenue that professional athletes might consider for guidance. You can submit a residence-determination request to the Canada Revenue Agency using Form NR73 (Determination of Residency Status – Leaving Canada) or Form NR74 (Determination of Residency Status – Entering Canada). In response, the CRA will provide an administrative opinion on your status as a Canadian tax resident.

The CRA’s residence-determination process comes with a few disadvantages, however. The CRA’s opinion is only as reliable as the details you provide. And the CRA’s administrative view doesn’t always correspond with Canada’s tax law. As a result, your residency-determination application must not only frame the relevant facts but also bring attention to the case law favouring your position. Otherwise, the CRA agent appraising your residence-determination application might render an unfavourable decision that follows the CRA’s view yet ignores the law.

Moreover, the CRA’s residence-determination forms (i.e., the NR73 and NR74 forms) ask rather intrusive questions about a taxpayer’s finances and assets. As a result, high-net-worth professional athletes with lucrative contracts should seriously consider whether they want to send detailed financial information to the Canada Revenue Agency unprompted.

Professional athletes seeking advice on their status as a Canadian tax resident should consult our experienced Canadian tax lawyers. We can discuss whether the Canada Revenue Agency’s residence-determination process is appropriate in your circumstances. If so, we can prepare your residence-determination application so that it contains the requisite factual and legal analysis. If not, we can discuss other alternatives to suit your needs.

Frequently Asked Questions

What Canadian tax issues should a non-Canadian professional athlete consider when deciding whether or not to sign for a Canadian team?

This is a very broad question. A non-Canadian professional athlete will need to consider numerous Canadian tax rules and their tax consequences, which will vary considerably depending on that athlete’s specific situation. For example, the Canadian tax implications will depend on (amongst other things) whether the athlete becomes a Canadian tax resident or remains a non-resident of Canada for tax purposes, whether the athlete performs as an employee or independent contractor, whether the athlete comes from a country with which Canada has a tax treaty, and so forth. For personalized tax-law advice, the athlete should consult with one of our expert Canadian tax lawyers, who can develop a tax plan and offer tax-reduction strategies that fit the athlete’s own circumstances and goals.

I’m a professional athlete. From a Canadian tax perspective, does it make a difference whether I’m an employee or an independent contractor? How do I determine whether I’m an employee or an independent contractor?

Yes, a professional athlete’s Canadian income-tax obligations vary depending on whether the athlete is an employee or an independent contractor. For example, suppose that a US-resident athlete earns Canadian-sourced income as an employee. The Canada-US tax treaty permits Canada to tax the employment income that the US earns from playing in Canada, but only if the athlete spends over 183 days in Canada during the year. Yet this tax-treaty relief doesn’t apply if the US-resident athlete earned Canadian-sourced income as an independent contractor. The Canada-US tax treaty permits Canada to tax an American independent-contractor athlete on all income earned from playing in Canada, regardless of the number of days that the athlete spends in Canada. Moreover, under Canada’s Income Tax Act, taxpayers who earn business income enjoy a greater range of tax deductions than taxpayers who earn employment income. Thus, independent-contractor athletes can typically deduct expenses that employee athletes cannot. And the paycheques of employee athletes will typically be subject to payroll source deductions for income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) contributions. Professional athletes who work as independent contractors won’t incur source deductions on their pay.

To determine whether a taxpayer, including a professional athlete, is an employee or contractor, Canadian courts consider four elements: (1) the degree or absence of control exercised by the employer, (2) the ownership of tools or equipment, (3) chance of profit, and (4) risk of loss.

Generally speaking, athletes who play in a league for a professional sports team are employees. This group includes players signed with 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), and Major League Soccer (MLS). By contrast, athletes who compete individually will typically qualify as independent contractors. This group includes professional athletes who compete in tennis, in golf tournaments such as the PGA or LIV Golf, in boxing, for mixed-martial-arts competitions such as the UFC (Ultimate Fighting Championship), in auto racing, and as wrestlers for the WWE (World Wrestling Entertainment). These are merely generalizations, however. Ultimately, the result in specific cases will depend on the terms of the athlete’s contract and the four common-law factors. Consult with one of our top Canadian tax lawyers for specific advice.

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

Yes, it’s true. The same is true for Canadian professional athletes playing in the USA. For example, paragraph 4 in article XVI of the Canada-US tax treaty mandates that the athlete’s home country cannot charge more than 15% tax on a signing bonus that the athlete receives from a league in the other country. Professional cross-border athletes—especially US-resident athletes who sign with Canadian-based teams—can enjoy significant overall tax savings as a result of the treaty’s 15-percent tax limit on signing bonuses. For example: A US-resident athlete could save over $1 million in Canadian-US income-tax liability by receiving a $1.5 million annual salary with a $10 million signing bonus than by receiving the entire $11.5 million as an annual salary with no signing bonus.

But professional cross-border athletes should consult with an expert Canadian tax lawyer to ensure that their contracts satisfy the criteria for the treaty’s 15-percent tax limit. The Canada Revenue Agency’s tax auditors will deny this tax advantage if the terms of the athlete’s contract indicate that the payment wasn’t really “an inducement to sign” the contract. The CRA may also deny the 15-percent treaty rate if the player’s signing bonus substantially exceeds the player’s base salary. For all these reasons, professional cross-border athletes should engage a knowledgeable Canadian tax lawyer to review their contracts, conduct a tax-risk assessment on the likelihood of success should the CRA initially deny various tax claims based on the contract, and recommend alternative or additional contractual terms to pre-empt potential problems with the Canada Revenue Agency’s tax auditors.

What is a retirement compensation arrangement (or RCA)?

In Canada, a retirement compensation arrangement (or RCA) is a special type of tax-deferred savings plan typically used by employers to provide retirement benefits for employees, particularly high-income earners. An RCA is a non-registered retirement plan aiming to bestow pension benefits beyond those available through registered plans, such as a registered retirement savings plan (RRSP) or the National Hockey League Players Association pension plan.

Under a retirement compensation arrangement, an employer or former employer (or, in some cases, an employee) makes contributions to a custodian, who holds those funds in trust with the intent of eventually distributing them to the employee when the employee retires or loses employment. When the employer contributes to an RCA, one-half of the contribution is remitted to the CRA and included in the plan’s refundable-tax account (also called an RTA). The other half of the contribution can be invested in a non-registered investment account. Half the income generated by the assets in the investment account is also remitted to the CRA and included in the RCA’s refundable-tax account. When the RCA’s retirement benefits are ultimately paid to the employee, the benefits are refunded from the refundable-tax account to the RCA at the rate of $0.50 for each $1.00 of benefit paid. In other words, the Canada Revenue Agency refunds the 50% tax in proportion to the employee’s payout.

I’ve heard that the CRA’s tax auditors may sometimes challenge the validity of a retirement compensation arrangement. Is this true?

Yes. It’s true. The CRA has, for instance, notably contested the validity of an RCA for the Toronto Blue Jays’ former right fielder and third baseman, Jose Bautista. The CRA alleges that the arrangement wasn’t a valid RCA because it aimed to defer salary, not to provide for retirement. In 2022, Bautista’s Canadian tax-litigation lawyer filed a notice of appeal with the Tax Court of Canada (see: Bautista v HMK, court file number 2022-2718(IT)G). As of the date of this article, the Tax Court has yet to hear the appeal, and the dispute remains unresolved. Professional athletes and professional teams should seek advice from a Canadian tax lawyer if they want to establish, or are considering establishing, a retirement compensation arrangement (RCA). Likewise, if the Canada Revenue Agency’s tax auditors challenge the validity of your RCA, our esteemed Canadian tax lawyers can represent you during the tax audit, advance your dispute by filing a tax objection on your behalf, and serve as your tax-litigation counsel 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 article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.