How Non-Resident Pro Athletes Are Taxed

Introduction 

During a post-fight interview in June 2020, Ultimate Fighting Championship (UFC) welterweight contender "Platinum" Mike Perry expressed his frustration with international tax rules:

“It’s like I don’t even fight for minimum wage sometimes. Maybe we put it in the contract: the taxes are paid when Platinum is paid.”

While Perry was speaking about his own experiences as an American competing internationally, non-resident pro athletes who perform in Canada face similar challenges. Canada taxes non-residents—including professional athletes—on their Canadian-sourced income. For instance, when Perry fought on Canadian soil in 2017, the Canada Revenue Agency (CRA) ensured it took a share of his earnings.

This article provides a detailed guide to how Canada taxes non-resident pro athletes, the implications for income earned in Canada, and strategies to comply with CRA regulations while minimizing tax burdens.

How Canada Taxes Non-Residents

Canada taxes non-residents on income sourced from Canada. Relevant income categories include:

1. Employment income earned in Canada.
2. Business income generated in Canada.
3. Income from the disposition of Canadian property.
4. Passive income such as interest, dividends, rent, or royalties paid by Canadian residents (subject to withholding under Part XIII of the Income Tax Act).

Tax Treaties

Tax treaties, like the Canada-U.S. Tax Treaty, may reduce or eliminate Canadian tax obligations on certain types of income. However, treaty benefits depend on the specifics of the athlete’s activities and residency status.

Double Taxation Relief

When non-residents are taxed in Canada, their home country may also tax their worldwide income. Many countries provide a foreign tax credit to offset taxes paid to Canada, reducing the risk of double taxation.

Determining Employment Status: Employee vs. Independent Contractor

A key factor in how athletes are taxed in Canada is whether they are considered:

• Employees, working for a team or league, or
• Independent contractors, competing individually.

Factors to Determine Status

Canadian courts assess the following factors:

• Control: Who determines the athlete’s schedule, training, or participation?
• Ownership of tools: Does the athlete own their equipment or depend on a team?
• Chance of profit and risk of loss: Does the athlete share financial risk or receive guaranteed payments?
• Exclusivity: Is the athlete contracted exclusively to a single team or league?

Typical Classifications

• Employees: Athletes in team sports such as hockey (NHL), basketball (NBA), and baseball (MLB).
• Independent Contractors: Individual competitors such as golfers (PGA), mixed martial artists (UFC), and tennis players (Wimbledon).

Taxation of Non-Resident Employee Athletes

Filing Requirements

Non-resident employee athletes must:

1. File a Canadian income tax return.
2. Report all Canadian-sourced income, including salaries, performance bonuses, and signing bonuses (if deductible by the Canadian employer).

Tax Treaty Relief

Under the Canada-U.S. Tax Treaty:

• Canadian tax applies to U.S. athletes on income earned from performances in Canada.
• However, American athletes competing in leagues with regularly scheduled games in both countries (e.g., NHL, MLB) are taxed only if they are present in Canada for over 183 days in a calendar year.

Taxation of Non-Resident Independent Contractor Athletes

Filing Requirements

Independent contractor athletes must report all income earned from performances in Canada on a Canadian tax return.

Limited Treaty Benefits

Unlike employee athletes, independent contractors generally cannot benefit from the 183-day rule. For example, under the Canada-U.S. Tax Treaty, Canada can tax all income earned by independent contractors from Canadian performances, regardless of the time spent in Canada.

Expense Deductions

Independent contractors may deduct business expenses related to their performances, such as travel, lodging, and training costs. These deductions are typically unavailable to employee athletes.

Withholding Obligations for Payors

Canadian law requires entities paying non-residents to withhold and remit a portion of the payment to the CRA:

• For Employees: Employers must withhold income tax on salaries and bonuses related to Canadian performances.
• For Independent Contractors: Payors must withhold 15% of the payment for Canadian performances, regardless of the payor’s residency.

Refund Mechanism

If withholding exceeds the athlete’s actual tax liability, filing a Canadian tax return allows the athlete to claim a refund.

Compliance Challenges and Pro-Tax Tips

For Athletes

1. Understand Tax Residency and Treaty Rights:
   • Ensure accurate classification as an employee or contractor.
   • Leverage tax treaties to minimize liabilities.
2. Deduct Eligible Expenses:
   • Independent contractors should track all performance-related expenses to reduce taxable income.
3. File Tax Returns Promptly:
   • Avoid penalties and claim refunds for over-withholding.

For Payors

1. Adhere to Withholding Obligations:
   • Failure to withhold can result in the payor assuming liability for unpaid taxes.
2. Seek Professional Guidance:
   • Ensure proper classification of athletes to avoid disputes with the CRA.

FAQs

Do non-resident athletes need to file Canadian tax returns?

Yes, non-resident athletes must file a Canadian tax return if they earn Canadian-sourced income, regardless of their employment status.

Can athletes avoid Canadian taxes if they stay less than 183 days?

For employees in leagues with cross-border games, the 183-day rule may apply under tax treaties. However, independent contractors are taxed on all income from Canadian performances, regardless of the time spent in Canada.

What happens if withholding exceeds the actual tax liability?

Athletes can file a Canadian tax return to claim a refund for over-withheld taxes.

Conclusion

The taxation of non-resident pro athletes in Canada is a nuanced process influenced by residency, employment status, and treaty provisions. While employees in cross-border leagues may benefit from treaty exemptions, independent contractors face broader tax obligations. Proper planning, compliance, and professional guidance are essential to navigating Canadian tax rules effectively.

For assistance with tax filing or withholding obligations, consult an experienced Canadian tax professional to ensure compliance and maximize tax benefits.

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

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