Published: July 22, 2020
Last Updated: October 8, 2020
How Does Canada Tax Non-Resident Pro Athletes? – A Canadian Tax Lawyer’s Analysis
Introduction – International Taxation: The Plight of a Professional Athlete
During a post-fight interview in June 2020, Ultimate Fighting Championship (UFC) welterweight contender “Platinum” Mike Perry voiced his frustration about grappling with international tax rules. “I gotta talk to the tax folk and see if we can run that number down,” Perry explained. “I believe I paid out over $100,000 last year between a couple different countries—and then they hit me again at the end of the year. It’s like I don’t even fight for minimum wage sometimes.”
Perry thought that his tax affairs would be easier if tax withholding were a term in his fight contracts. “Maybe we put it in the contract: the taxes are paid when Platinum is paid. When I get paid, that’s it. That’s my money! Don’t give me money if you don’t want me to spend it!”
Perry is American, but when he fights abroad, his earnings are taxable by the host country. The situation is no different for non-resident pro athletes who compete in Canada. Canada taxes non-residents—including athletes—on their Canadian-sourced income. So, in 2017, when Perry fought on Canadian soil, you can bet that the CRA took a cut of Perry’s purse.
This article discusses the basics of Canadian income tax as it relates to non-resident professional athletes. It begins by discussing how Canada taxes non-residents generally. It then examines the two groups into which professional athletes might fall: 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 professional athletes.
Canadian Taxation of Non-Residents
Canada taxes a non-resident’s Canadian-sourced income. In other words, if an individual is not a Canadian tax resident, that individual must pay Canadian income tax on the following sources of income:
(1) income from employment in Canada;
(2) income from a business in Canada;
(3) income from the disposition of a Canadian property; and
(4) income from Canadian investments—e.g., interest, dividends, rent, or royalties that the non-resident receives from a Canadian tax resident. (Under Part XIII of Canada’s Income Tax Act, the Canadian payor must withhold Canadian income tax on the amount owing to the non-resident payee.)
The non-resident’s Canadian-sourced income then determines that person’s income tax rate. (Progressive income-tax rates only apply to individuals—i.e., natural persons—and to some trusts. A corporation’s income, for instance, is taxed at a fixed rate. This article only concerns taxation of natural persons.)
A tax treaty or tax convention may reduce the amount of Canadian tax that the non-resident must pay. A tax treaty or tax convention is basically an agreement between Canada and another country about how the two countries will divvy up tax jurisdiction for cross-border taxpayers.
Finally, the non-resident’s home country might tax the non-resident’s worldwide income—including any income that the non-resident earned in Canada. And tax treaties often give both countries the jurisdiction to tax certain sources of income. As a result, the non-resident’s Canadian-sourced income might incur double tax: once by Canada and again by the non-resident’s home country. To relieve the double tax, the non-resident’s home country might offer an income-tax credit that reduces its domestic tax by the amount of Canadian tax paid. (In Canada, this tax credit is called a “foreign tax credit.”)
Taxation of Athletes – Preliminary Question: Is the Athlete an Employee or an Independent Contractor?
When a non-resident athlete earns Canadian-sourced income, the Canadian tax rules vary depending on whether the athlete works as an employee or as an independent contractor.
The nature of some occupations makes it difficult to decide whether the worker is an employee or a contractor. Some sports offer this same challenge. When this distinction carries legal significance, Canadian courts consider various factors, including:
- The degree of control: The greater control that the service recipient exercises over manner of service, the more likely it is that the service provider is an employee. On the other hand, the service provider is more likely a contractor if the provider determines, say, the hours worked, when to deliver service, whether to hire an assistant, etc.
- The ownership of tools: If the service provider owns the tools required to provide the service, the more likely it is that the provider is an independent contractor. If the service recipient owns and supplies all the tools, the more likely it is that the provider is an employee.
- The chance of profit: If, regardless of performance, the service provider receives a fixed amount of remuneration, a court might lean toward deciding that the provider is an employee. But a court might decide that the service provider is a contractor if performance determines the amount of remuneration
- The risk of loss: A service provider is more likely an independent contractor if the provider bears the expenses and could thereby walk away from the job at a financial loss. If the provider is protected from financial loss, an employment relationship is more likely.
- Durability and exclusivity: If the service provider performs work over a long period of time and has no other clients, courts are more likely to find an employment relationship.
When evaluating these factors, courts assign much greater weight to the substance of the relationship than to its form. The parties’ conduct can outweigh a written agreement entitled “employment contract.”
Generally, however, an athlete who plays in a league for a professional sports team is considered an employee. This group might include:
- basketball players in the National Basketball Association (NBA)
- hockey players in the National Hockey League (NHL)
- baseball players in Major League Baseball (MLB)
- football players in the National Football League (NFL) or in the Canadian Football League (CFL)
- soccer players who play for Federation Internationale de Football Association (FIFA) or for Major League Soccer (MLS)
- cricketers who play for Indian Premier League
In contrast, athletes who compete individually are typically considered independent contractors. This group might include:
- tennis players competing in Wimbledon, in the U.S. Open, in the Australian Open, or in the French Open
- golfers on the PGA Tour
- NASCAR drivers and Formula 1 drivers
- mixed martial artists signed with the Ultimate Fighting Championship (UFC) or with Bellator MMA
- professional wrestlers signed with World Wrestling Entertainment (WWE)
- professional boxers
Granted, these are generalizations. Should the Canada Revenue Agency challenge the relationship, the outcome will depend not only on the terms of the athlete’s contract but also on the common-law factors listed above.
How does Canada Tax Non-Resident Employee Athletes?
Under Canada’s domestic tax law, if the non-resident athlete is an employee, the athlete must file a Canadian income-tax return reporting all salaries, fees, and performance-related bonuses for services rendered in Canada. If the non-resident athlete received a signing bonus for performing in Canada, the athlete must report the bonus to the extent that the payor claimed the bonus as a deduction on the payor’s Canadian income-tax return.
The athlete may find some relief from Canadian tax under a tax treaty. For instance, the Canada-US Tax Treaty generally allows Canada to tax US athletes on income earned from a performance in Canada. But this rule doesn’t 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 (e.g., Major League Baseball players and National Hockey League players). For those athletes, 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 in that year. 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.
How does Canada Tax Non-Resident Independent-Contractor Athletes?
Like a non-resident employee athlete, a non-resident independent-contractor athlete must report all Canadian-sourced income. Unlike their employee counterparts, however, independent-contractor athletes generally don’t 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 time that the athlete spent in Canada. In other words, there’s no 183-day test for non-resident athletes who work as independent contractors.
That said, as a result of earning business income, independent-contractor athletes can deduct expenses that employee athletes can’t. Canada’s Income Tax Act prohibits most employment expenses yet allows most business expenses.
Income-Tax Compliance Mechanism: Withholding Obligations on Those Who Pay Non-Resident Athletes
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 income-tax filing only if he or she has no taxes payable in Canada. This means that most non-resident professional athletes must file a Canadian income-tax return.
The Income Tax Act also 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 Canada Revenue Agency. 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 the CRA for that amount. That is, the Canada Revenue Agency may enforce payment against the payor.
The withholding obligation serves as a compliance mechanism by encouraging the non-resident to file a Canadian income-tax return.
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 income-tax return.
Like all taxpayers carrying on business in Canada, the non-resident independent-contractor athlete is expected to self-assess and file a Canadian income-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 income-tax return.
Of course, in the latter case, the athlete might decide to forego filing because his or her Canadian tax payable exceeds the 15% withheld. 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.
Still, an athlete who resides in a non-treaty country might dodge some of the CRA’s collection efforts. Generally, a non-treaty country will not cooperate with Canadian tax authorities. Yet 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 Pro 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 the CRA’s Voluntary Disclosures Program (VDP), which provides qualifying taxpayers with relief from monetary penalties and criminal prosecution. A Canadian taxpayer must satisfy several—often demanding—conditions to qualify for relief under the Voluntary Disclosures Program. And you may typically only apply once—that is, you only get one shot to make your case. As a result, your application must be carefully drafted and prepared. Our Canadian tax lawyers have helped countless taxpayers avoid sanctions through 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.
Disclaimer:
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."
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