Professional Sports industry is a multi-billion dollar industry. Hockey, Baseball, Basketball, etc., has a huge following in North America and millions of fans follow their favourite sports teams religiously. With a global sports industry, there are many athletes playing in different countries playing for organization such as the Cleveland Cavaliers, Pittsburgh Pirates, Chicago Cubs, etc. Interestingly enough, tax matters impact the athletes playing for these professional organizations and we want to highlight some useful information for our Canadian athletes in particular. So, let’s explore some key concepts pertaining to taxes in Canada and the USA.
Resident for Canadian Tax Purposes
The starting point in determining the tax situation for any individual, including athletes, is the concept of residency. Any individual who is a resident in Canada is taxed on their worldwide income in Canada. Residency is determined based on the facts such as dwelling place, how long the individual is residing in Canada or USA, where spouse and dependents reside, personal property, and other primary ties. There are other secondary ties such as where bank accounts are, memberships, etc.
Resident for USA Tax Purposes
1) US Citizen
Unlike Canada, if you are a US Citizen, you are subject to tax on your worldwide income with some exemptions that may apply.
2) Green Card Test
This generally applies to foreigners who move to USA as an immigrant under the immigration laws of the USA. Immigrants to the USA are subject to tax on their worldwide income.
3) U.S. Substantial Presence Test
These rules can deem a professional Athlete to be resident in the USA for tax purposes if the following conditions are met. If the athlete is present in the USA for:
(a) All the days you were present in USA in the current year – Year 1
(b) 1/3 of the days of the previous year you were present in USA – Year 2
(c) 1/3 of the days of the 2nd previous year you were present in USA – Year 3
If you meet this test, a Canadian will be considered resident in the USA and taxed on your worldwide income in the USA.
Two Classifications for Canadians Working in the USA
Based on the above, there are two classifications for Canadians Athletes who do not have a US citizenship:
Resident Aliens: Canadians who are not US Citizens that have moved to the USA for work or business purposes temporarily, and taxed on their worldwide income in the USA
Non-Resident Aliens: Canadians who are not US Citizens that do not reside in the USA and will be taxes on their US source income, such as employment income, interest, dividends, etc.
What This Means for Athletes?
As mentioned, taxes are based on residency and certain tests such the Substantial Presence Test rules noted above which will deem an individual to be resident in either the USA or Canada for tax purposes.
In most instances, Canadian athletes would be classified as non-resident aliens, may be a resident of Canada (and not meeting the substantial presence test) and would be subject to US tax on their USA sourced employment income. Also, there is an exemption to the Substantial Presence Test known as the Closer Connection Exemption which will require you to fill out Form 8840, Closer Connection Exemption Statement. This essentially allows you to claim you are a non-resident alien.
As such, Canadian athletes that are employed by sports franchises based in the USA would be subject to taxes in the USA based on their US sourced salary earned attributable to the USA only. This usually done using an allocation using the number of games played in the season and determining how many game are played in Canada and the USA. Based on the percentage of games played in the USA, the salary earned from the USA franchise is attributed to the USA and the remainder to Canada. The same holds true for a US athlete playing in Canada.
For more information and assistance required around this subject matter, feel free to contact MP Group for more information.