Marie-France Dompierre of Davies Ward Phillips & Vineberg LLP discusses how Canada taxes professional athletes who aren't Canadian residents.
This transcript has been edited for length and clarity.
David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: athlete taxes, eh? With the Stanley Cup Finals underway, we're taking a look at athlete taxes, specifically those applied in Canada.
And to help us learn more about this, we're joined by our resident Canadian-American chief correspondent, Stephanie Soong Johnston. Stephanie, welcome back to the podcast.
Stephanie Soong Johnston: Hey, thanks for having me back, eh?
David D. Stewart: So you recently spoke to someone about athlete taxes. Could you tell us about your guests and what sort of issues you got into?
Stephanie Soong Johnston: So I spoke with Marie-France Dompierre. She is a partner in the tax practice of Davies Ward Phillips and Veinberg LLP in Montreal or Montréal, as we say in Canada. She wrote an article for us published in April called, "An 'Expensive' Trade? Taxation of Nonresident Professional Athletes Playing in Canada."
It was an interesting overview about how Canada treats a taxation of nonresident professional athletes with a particular focus on those playing in North American sports leagues, like the National Hockey League (NHL) and the National Basketball Association (NBA). She regularly advises pro and nonresident pro athletes.
We discussed some of the intricacies that these athletes face in Canada. I think the general consensus among sports fans is that Canada has a very hard time attracting athletes because of its very high tax rates, its complicated tax system, and the Canada Revenue Agency's laser focus on these athletes' income just as soon as they set foot in the country.
The conversation mostly focused on income, personal income tax, allocation of income, taxation of nonresident employees, Canada's tax treaties, and how that complicates how these athletes are treated.
David D. Stewart: All right, let's go to that interview.
Stephanie Soong Johnston: Bonjour. Thank you so much for joining us for this conversation today. It's always a pleasure to speak to a fellow Canadian about tax, so thank you again.
Marie-France Dompierre: Thank you for having me.
Stephanie Soong Johnston: We're here to talk about your great article that you wrote for us about the taxation of nonresident athletes in Canada. It was a great article, really fun to read and I learned something new. What inspired you to write about the taxation of nonresident athletes in Canada?
Marie-France Dompierre: Well, to be honest, I spent most of my youth going with my grandparents to see the Expos in Montreal when they were there. We had some hope recently that they might come back, but that's been dashed. I've always kind of been around sports and all of that.
But to be honest, I've been working a lot with professional athletes in the past few years and with respect to their tax disputes, mostly with the CRA and Revenue Quebec. It's something that a lot of people find interesting, but they don't necessarily know a lot about, but I thought it might be interesting to just give a summary overview and do an article on it.
Stephanie Soong Johnston: That's really cool. My friends who are big sports fans, they always complain: "Oh, our Canadian teams are not so great because of our tax system here; we have high taxes." It's sort of complicated as far as how their income is treated, and maybe it's a deterrent for attracting top athletes.
Let me just define something: so you mentioned in your article, the Royal Winnipeg Ballet case (Royal Winnipeg Ballet v. MNR) where ballet dancers that had full season contracts were found to be independent contractors by the CRA, not employees. How does Canada define athlete?
Marie-France Dompierre: Well, it really does depend, right? Normally they'll either be employees and that would be most athletes that play in regular sports leagues, like the Minor League Basketball Association, the NBA, and the NHL. Those are normally considered to be employees and then you'll have the independent contractors, which are usually tennis players, golf players, boxers, and all that. Those are usually independent contractors.
It really does depend. In Canada we have a bijural legal system. We have both French Civil Law and English Common Law. French Civil Law is Quebec based. And so tax, being a ancillary kind legal system, you have to look at the private law system in the province you're in.
So usually, they'll look at either the Civil Code of Quebec or common law factors in the other provinces. But I would say the most common denominator is going to be the control. The control that is exercised by the payor, so an employer or payer, depending on what is asked of the athlete. But as I said, usually there's going to be some disputes about that, but usually it's pretty easy, especially for players in leagues.
Stephanie Soong Johnston: That sort of touches on my next question. What are some of the challenges that athletes face when playing a sport in Canada if they're a nonresident?
Marie-France Dompierre: I think we all know that Canada probably has one, if not the highest tax rates for individuals now. We're a little bit over 53 percent in some provinces. That is a challenge for clubs to get talent into Canada. And as I mentioned, there's the whole aspect of being a bijural jurisdiction where you have the federal tax authority, which is the CRA, and then you'll have some provinces like Quebec who have their own tax agency, which is Revenue Quebec.
All of those intricacies and those different things come into play when a player might be considering coming into Canada as a nonresident. You'll also have all these residency issues, even for Canadian athletes, who will maybe want to leave the country. There's been a lot of scrutiny on that in the past few years.
I have to say that it's been a hot debate around the world, really. You think about tennis players settling in Monaco and things like that. That's something that is a challenge for Canada because we do have that high tax rate. a lot of Canadian athletes might want to relinquish it and then getting those long residents in, that's going to be a challenge also. And there's the interplay with all our tax treaties.
It's complex and it's something that really has to be considered from the outset. There are ways of mitigating and there are things that are interesting about being in Canada and playing in Canada. We have great teams.
But all of that to say, there's a lot of challenges. Even if you are, for example, someone who's playing for the Blue Jays. There's going to be this question of allocation between Canada and the United States, for the Blue Jays, it's the allocation of time, you start paying income tax in Canada on the first dollar you earn in Canada as a nonresident.
It's really about services performed as an employee, or business income earned in Canada. But with my Blue Jays example, usually the allocation will be 60/40. A Blue Jay player will earn 60 percent of his income in the States, and then 40 percent in Canada. And that really kind of has that kind of component where, there's going to be a lot of debate about that allocation.
There's been a lot of administrative positions come out based on different kind of methods of allocation. All of those things are quite challenging sometimes. It is something that players have to keep in mind. I think that the whole prospect of the take home salary — the term that's really used — that's something that has to be considered. It's something that teams have to keep in mind when they're trying to get that talent and attract those players.
Stephanie Soong Johnston: You briefly mentioned advising clients on CRA disputes. What kind of attention does the CRA give to athletes? Is it disproportionate in your view? How do they treat them?
Marie-France Dompierre: I don't know if it's disproportionate. There's a special unit at the CRA. There's a few auditors assigned, almost a 100 percent of their time, to these types of audits. It's called a Special Examination Unit at the CRA based in Ottawa. There's a lot of scrutiny to returns.
As soon as you start earning in income in Canada, you have to file those income tax returns and they're being scrutinized from the outset. Right? You'll have questions, even now with the whole question of the bubbles, that skewed the method of allocation I was talking about earlier, that's all been skewed a little bit.
Even for players that didn't even have to think about that before. Because if you think about the NHL bubbles for the Stanley Cup Playoffs a few years ago, you had 24 teams coming to Canada, playing in Ontario, Toronto, and Edmonton. The teams that would not have played would not have stayed in a bubble for that amount of time, which then skews that normal allocation.
It's not just the players; it's the team themselves. It's the employees, the coaches, the personnel, it's a big retinue of people that have to think about that. All of those things gets scrutinized very early on and sometimes as soon as you file your income tax return. Some mitigation strategies are put in place and those are scrutinized also. So disproportionate, probably not.
I mean, we do have a lot of scrutiny on tax issues in Canada, probably as the IRS in the States. I mean, athletes are employees, right? The ones playing in major leagues and in the States. They get a paycheck like everybody else, maybe with a few more zeros than others. But yeah, they get that scrutiny, probably a bit more than other employees would in Canada.
Stephanie Soong Johnston: The point about the bubbles was interesting because I understand bubbles to mean that everyone couldn't leave the bubble and they had to basically play, train, and live there basically for the season. Isn't that right?
Marie-France Dompierre: Well, I think it depends. If I'm not mistaken, the NBA were playing part of the season in Florida, which is great, because there's no state tax. From a tax perspective, that's more beneficial than the Stanley Cup Playoffs in Toronto, where we have that 53 percent or so tax rate at the top bracket.
Stephanie Soong Johnston: The CRA hasn't really come out with much guidance at this point?
Marie-France Dompierre: Not really. They don't really issue that much guidance about athletes. There's a few administrative positions about allocations and the methods of allocation, but they were a bit contradictory.
Sometimes it was based on percentage of games and also even if you earn a bonus. Is a bonus salary? And then treated as such for the allocation purposes? Or this is in theory a bonus could be earned in one jurisdiction and not in both, right? It's been a bit contradictory and there's not been that much guidance.
They have an open dialogue though, because when you represent those athletes, you get to know the people at CRA. You can ask questions and it is cordial and you do have those exchanges, but there's nothing really official that has been given.
Stephanie Soong Johnston: I hear you talking about income tax and the issues these present. But as far as athletes and their images and stuff, that's a whole other issue. Do you also advise clients on the income they get from their images being used?
Marie-France Dompierre: Yeah, well endorsements, the right to use public images. Usually that's not going to be employment income. That's going to be business income. Some athletes will decide to earn that income in corporations and that brings other intricacies. You'll have also a lot of scrutiny on having offshore corporations earning income in Canada and having those satellite kind of corporations.
We do advise — and those are getting scrutinized also. That's something that's happening all over the world now with the OECD and pillar 1 and pillar 2, but it is something that is prevalent here also.
Stephanie Soong Johnston: That'd be a very interesting article too, because I feel like pillar 1 and pillar 2 have been written about to death at this point, but not from the athlete perspective.
You mentioned briefly mitigation measures and strategies. What would you recommend to an athlete considering playing Canada and why?
Marie-France Dompierre: Obviously, there's different ways of minimizing the tax implications of playing in Canada, of earning income in Canada. The Supreme Court of Canada rendered a decision recently, not at all in any respect with athletes or anything like that, but it reaffirmed the principle that we have in Canada, which is that a taxpayer is entitled to mitigate and arrange his or her affairs in a way that is going to be the most efficient from a tax perspective.
It's called the Duke of Westminster Principle, which comes from English Common Law, but it's a very old decision and principle, but it was reaffirmed. There are ways to mitigate. Obviously, one of the things that might be interesting is earning bonuses. There's been administrative positions as to what constitutes a bonus. And usually it's something that is an inducement to play and to perform services. For example, for a club in Canada.
Let's say, you have a $2 million salary, but you get a $1 million bonus. Well, obviously under the tax treaty, tax treaties do afford a reduced rate for bonuses. Instead of being 53 percent, it's going to be 15 percent, which is quite interesting.
Obviously, you have to think about it has to be a bonus and that's something to keep in mind. But it is something that is done and that's a way for clubs and players to negotiate. That might be a way of mitigating the implication.
Another really interesting and sometimes underused vehicle is the retirement compensation arrangements. It's really a Canadian construct. It's a pension plan in essence. It's not only used for athletes. It can be used also for high earners, nonresidents coming to work in Canada. But what it is, in essence, it's a trust that's created.
There's an agreement that's drafted between an employer and a player. You can allocate a portion of your salary into this retirement compensation arrangement, this trust that's created. And to do that, it has to be on a reasonable basis. So from that perspective, it is very important. You can't allocate the whole of your income into the retirement compensation arrangement trust, but getting an actuarial report is probably the best strategy to determine what is reasonable based on a player's salary.
But let's say you were earning $20 million a year and you can put $2 million — the employer contributes $2 million into this RCA — the Retirement Compensation Arrangement. Well, first of all, in the year you received that $20 million, well you're not being taxed. The $2 million is not being taxed in that year. There's a 50 percent refundable tax that's levied on that $2 million that is put in a separate trust account that is created with CRA. Any investment income that is earned on anything is also 50 percent put into that account.
That is kind of waiting there until there's either a retirement, a loss of employment, or substantial change to the employment. And then you can withdraw and you get that 50 percent refundable tax back. What's interesting about that, especially for any professional athletes that don't want to stay in Canada, for example, after retirement or loss of employment or that substantial change, is because instead of being 53 percent, there's a withholding tax of 25 percent. Sometimes that's even reduced depending on the treaty in the country you're in when you get those amounts.
Even if you decide to stay in Canada, depending where you're living, if it's not Ontario or Quebec, there's interesting strategies from that point of view. That's an interesting vehicle that can be used. You have to negotiate it obviously from the outset with the club and they have to agree and it has to be an employer contribution. It has to be that kind of structure, but that's something that's quite interesting also.
Stephanie Soong Johnston: Sounds like if you're going to be an athlete in Canada, you should get yourself a really good tax lawyer, such as yourself.
Marie-France Dompierre: Well, I mean, it's important to have those advisors and I'm sure it's the same in the States, right? It's better to anticipate something than to have to deal with, for example, a dispute about it.
Stephanie Soong Johnston: Thank you so much. I've learned so much. This is very interesting.
Marie-France Dompierre: Thank you very much for having me again. And hopefully we chat again soon.