The Olympians and the Taxman

A big high-five to all the outstanding Canadians who made us proud in Rio! Their Olympic renown can now take many of them on the journey from amateur to professional status.

Good tax and financial advice can be as critical to an athlete’s future as the coaching that got them to the Games in the first place; and it should begin when they are amateurs.

Here’s a synopsis of some of the provisions to discuss with athletes and their families in the journey from amateur to professional status:

Amateur Athlete Trust (AAT). Athletes who compete in international sporting events as members of the Canadian national team and who are members of the Registered Canadian Amateur Athletic Association, may contribute income from prize money, endorsements, speaking engagements or appearances to an AAT. This allows the athlete to exclude the income from these sources from their total taxable income and to earn tax-deferred income within the trust.

The income is then taxable only on distribution, which can be planned to occur periodically, in order to manage the marginal tax rate paid on the income.  Any residual deposits must be distributed to the amateur athlete at the eighth year after the last year in which the individual competed as a Canadian national team member.

RRSP Deductions. There is more good news. Starting in 2014, contributions made to an ATT qualify as earned income for RRSP purposes. (An election could have been made by the amateur athlete for ATT contributions to qualify as earned income for RRSP purposes in 2011, 2012 and 2013, but this opportunity expired in March 2015).

What this means for planning purposes is that after the eight-year deferral period has expired in the ATT, any remaining untaxed lump sum that must then be added to the athlete’s income can be further deferred from taxation. Done well, tax could be avoided if income was reported in an amount that did not exceed

a. The personal amounts the athlete qualifies for
b. The RRSP contribution room
c. Other deductions or credits available (such as medical expenses, for example)

Board and Lodging Expenses. Registered charities or non-profit organizations, such as the Registered Canadian Amateur Athletic Association, may exclude certain amounts paid to an athlete to cover room and board expenses that occur when the athlete must live away from their ordinary place of residence, as long as the athlete is under 21 years of age. For 2016 this eligible amount is $344 per month. Unfortunately, this allowance is not available for coaching, referring or other services provided to the team.

From Amateur to Professional. Athletes who become pros by virtue of their earnings from appearances, speaking engagements, endorsements and other ventures, have many options under the Income Tax Act to arrange their affairs to take advantage of tax preferences that help them minimize tax. Tax planning opportunities begin with understanding whether the athlete is employed or self-employed, and in the latter instance, incorporated or not.

Next, the amount of taxes paid on various sources of income will depend on province of residence and marginal tax rates applied to personal and corporate income. A tax specialist can help to develop the right plans to comply with the rules, and then recommend tax-efficient investment opportunities together with a financial advisor who understands the long-term strategic wealth plan.

So, while it may seem to some to be unnecessarily harsh that amateur athletes must pay taxes on pursuits that fund their dreams, especially given their lifetime of sacrifice and our national pride, there are many opportunities to defer and reduce taxable income with legitimate provisions. This will ensure fairness and equity with the tax system should Olympic glory turn into more lucrative financial pursuits.

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