Tag: Gift

Going for Gold – Tax-deferred investing for amateur athletes

At time of writing, the Sochi games are in full swing, and our Canadian contingent is showing well.

In the not-so-distant past, the Olympics were held out as the showpiece of amateur athletes strutting their stuff for the love of sport and spirit of competition.  With multi-millionaire professionals now stealing the spotlight, and this year’s venue bill coming in at something in excess of $50 billion, those halcyon days are behind us.

Still, for many athletes – especially those in the more obscure disciplines – the devotion of time and physical demands are punctuated by significant financial sacrifice.

Amateur athlete trust (AAT)

Our tax system is not unsympathetic to the challenges our athletes face.  In fact, the Income Tax Act provides explicit recognition for elite athletes, in the form of the amateur athlete trust.

Until 2008, this arrangement was only available to those whose international body required them to remain amateurs.  As many such bodies had dropped this constraint, qualification has been simplified to apply to an individual who is:

  • a member of a registered Canadian amateur athletic association;
  • eligible to compete, in an international sporting event sanctioned by an international sports federation, as a Canadian national team member; and
  • not a professional athlete.

The definition of ‘professional athlete’ is somewhat circularly defined as someone who receives income as compensation for activities as a player/athlete in a professional sport.  Presumably, this is sufficiently clear to keep out those multi-millionaires.

A qualifying athlete may direct income into an AAT without incurring tax.  This can include prize money, endorsements and even payments for public appearances and speeches, as long as they relate to participation in international sporting events.  Accounts may generally be opened through organizations that are qualified to offer trustee services, generally financial institutions, insurance companies and credit unions.

Investment income accumulates tax-deferred.  The individual is only taxed when income is distributed from the trust, which must occur no later than eight years after the athlete has left competition.

Budget 2014 – RRSP qualification of AAT income

To reiterate, income contributed to an AAT is exempt from income tax.  Accordingly, it does not fall within the definition of earned income that is used to calculate a person’s RRSP contribution room.  This drawback was recognized in the 2014 Federal Budget, with a proposal to make amendments to allow for such contributions to qualify as earned income beginning in 2014.

As proposed, the measure would also look back at contributions from 2011, 2012 and 2013, and allow for a recalculation of RRSP room for those prior years, carried forward to 2014.  To obtain this recalculation, the athlete must make an election in writing to the Canada Revenue Agency (CRA) no later than March 2, 2015.

Performance recognition

In addition to prize money earned elsewhere, the Canadian Olympic Committee recognizes athletes for top performances.  In a predecessor program, $5,000 was awarded to eligible athletes who finished in the top 5 at World Championships or Olympic Games.

In 2006, the program evolved into the current Athlete Excellence Fund (AEF), which operates on a four-year funding cycle:

  • Year 1: Top 5 at World Championships – $5,000
  • Year 2: Top 5 at World Championships – $5,000
  • Year 3: Top 4 at World Championships – $5,000
  • Year 4: Olympic Games:
  • Gold medal – $20,000
  • Silver medal – $15,000
  • Bronze medal – $10,000

Taxing medals?

Well, the medals themselves are not taxable, but the question obviously arises as to how our tax system treats the associated awards.

In the fall of 2012, two separate letters to the CRA argued that AEF awards received by successful Olympic athletes should be free from tax.  In order to obtain this treatment, an award would have to be a prescribed prize, defined under the Income Tax Regulations as “any prize that is recognized by the general public and that is awarded for meritorious achievement in the arts, the sciences or service to the public but does not include any amount that can reasonably be regarded as having been received as compensation for services rendered or to be rendered.”

In response, the Minister of National Revenue acknowledged the pride all Canadians feel for our Olympic athletes, but explained that AEF awards “are not awarded in recognition of service to the public” to be considered a prescribed prize.

She did point out however that, being prizes associated with competing in an international sporting event, AEF awards were qualified for contribution into an AAT.  And as of 2014, they will also give rise to RRSP contribution room.

Whether a gift to an executor is taxable compensation

At issue

Compensation received by an executor is income from an office, and thereby taxable.   

Where an individual is both named as executor and provided a legacy or bequest in the Will, there is a presumption that that gift is in lieu of compensation.  For distinction, a legacy is a dollar amount, whereas a bequest is an item of property.  Either way, the amount of compensation would be the fair market value of the gift.  Ironically in the case of a large single property bequest, an executor who lacks cash liquidity may have to dispose of the item in order to pay the corresponding tax bill.

The executor may rebut the presumption that a gift is compensation by offering evidence of the testator’s contrary intention, either through the Will or by surrounding circumstances.  

Boisvert v. The Queen, 2011 TCC 290

Guy Boisvert and a notary were named as liquidators (the proper term for executor in Quebec) of the estate of Marcel Sauvé.  The Will provided that as a “token of gratitude” for the services as liquidator, Mr. Boisvert would be bequeathed the deceased’s residence and contents.  In time, Mr. Boisvert was assessed for income from an office in the amount of $68,080, as quoted in the estate’s declaration of transmission.

On appeal, Mr.Boisvert testified that, despite the words in the Will, he had a very small role in the estate administration, deferring much to the notary.  In turn, the value of the property should be seen as disproportionately large to be characterized as remuneration.  

The court held that even if he played a small role, he “had accepted the office and the responsibilities that came with it” and therefore the presumption of compensation was not rebutted, and the tax assessment was upheld.

Re Hayes (Estate of), 2006 ABQB 427

This matter came before the court as a contested passing of accounts, opposed in part by the Public Trustee on behalf of minor beneficiaries who were grandchildren of the deceased.  Among the arguments offered, it was asserted that the gift of a residence to one of the executors constituted compensation, and therefore there should be no further claim for personal expenses of the executors.

After summarizing the arguments, the judge simply stated the view that “the gift to Delwin Hayes as Bert’s son was personal and therefore the presumption has been rebutted.”  Though this was not a tax case, the opposite finding would certainly not have been helpful to Mr. Hayes in dealing with his subsequent tax return. 

Capital Trust Corpn. Ltd. v. The Minister of National Revenue, [1937] S.C.R. 192

Joseph Mackenzie was one of a number of executors of the estate of his father, who died in 1923.  A Codicil to the Will provided that Mr. Mackenzie should be paid $500 monthly, which was to be in addition to any entitlement that “courts or other authorities may allow him in common with the other executors.”

For reasons unexplained, the monthly amount was not paid until a catch-up payment of $19,500 was made in 1927.  

Mr. Mackenzie’s argument that this constituted a gift was not successful as he would not have been entitled to it had he not accepted the appointment.  Furthermore, he was taxed on the full amount as received in 1927, and specifically was not allowed to allocate the amounts proportionately across the intervening years.

Practice points

  1. A testator should understand that where a gift is closely tied to an absence of compensation, it is likely that the executor will be taxed on that amount.  Bear in mind as well that it is often the case, especially with small and quickly administered estates, that there is little or no corresponding tax deduction to the estate, effectively resulting in a gratuitous windfall to the government.
  2. An executor who is a beneficiary of a bequest or legacy may wish to review the Will before accepting the appointment.  Depending on phrasing, this could bring a gift under tax scrutiny that might not have occurred had the individual been strictly a beneficiary.  On the other hand, if there is a direct connection between accepting executorship and the gift, a taxable gift is likely better than nothing at all.