Tag: Taxable benefit

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.

Tax treatment of crowdfunding receipts

At issue

You don’t have to be a resident of Toronto to be familiar with the media scrums surrounding its current mayor.  Worldwide interest was piqued midyear 2013 when a gossip website sought to gather funds from the public to purchase an alleged video purportedly showing his worship engaged in compromising activities. No video purchase ultimately resulted, and the gathered funds are apparently headed to charity.

Politics and voyeurism aside, this has brought to the public consciousness an emerging mode of sourcing funds for projects ranging from innovative product ideas to movies and music, known as “crowdsourcing” or “crowdfunding”.  The idea is to collect relatively small amounts from a large number of contributors, generally through social media and the internet.

On the regulatory side, the Ontario Securities Commission conducted a consultation ending in early 2013 to determine how to approach this fast-developing field.

Until recently there has been little guidance on the tax implications of this activity, but by the end of 2013, the Canada Revenue Agency (CRA) had waded in to provide a bit more clarity.

2013-0484941E5 (E) – Crowdfunding

Issued in August, 2013, this CRA technical letter considered a project such as a recording by a musical group or a project relating to developing a product for market.  Each contributor would receive an incentive gift such as a copy of the finished product (for example, a musical recording) or a promotional item such as a T-shirt.  Contributors would not receive any equity.

The author opined that amounts received in this manner would likely be considered business income under ITA s.9(1).  Reference is also made to paragraph 4 of Interpretation Bulletin IT-334R2 Miscellaneous Payments, which states CRA’s view that voluntary payments are taxable when received while carrying on a business.

As quid pro quo, expenses related to crowdfunding efforts, including those incentive gifts, may (depending on the facts) be deductible under ITA s.18(1)(a).

2013-0508971E5 (E) – Crowdfunding, 2013-0509101E5 (E) – Crowdfunding

These two CRA letters, issued within days of one another in October 2013, were penned by the same official with virtually identical content.

The content recounts the nature of crowdfunding, including reference to the fact that some Canadian securities regulators are considering changes to existing rules that may better facilitate the raising of equity funds by way of crowdfunding.  As a given arrangement could represent a loan, capital contribution, gift, income, or a combination thereof, the author states that the CRA would have to review the facts, circumstances and documentation to provide an opinion.

Still, some insight is offered into the (un)likelihood that crowdfunding receipts would be treated as non-taxable windfalls.  Per IT-334R2, a windfall requires at least (1) that the recipient has made no organized effort to receive the payment and (2) that the recipient has neither sought nor solicited the payment.

Practice points

  1. As securities regulators have not yet provided a clear set of rules for crowdfunding, would-be money-raisers should be aware that their actions could at some point be subject to review and possibly sanctions.  This applies doubly-so for investment professionals licensed through some of those same regulatory bodies.
  2. As the general principles approach outlined in the CRA letters suggest, it is likely that many types of receipts obtained through crowdfunding activities will be taxable.  Good records will assist in identifying those sources when required, and in reinforcing claims for associated expense deductions.
  3. There do not appear to be tax issues of any substance for crowdfunding contributors, at least not at this point.  Enjoy the T-shirt.