18 November 1998 GST/HST Interpretation HQR0001174 - GST/HST Status of Sponsorship Agreements for Amateur Athletes

Dear Sir:

Thank you for your letter of October 17, 1997 (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to revenues earned by an amateur athlete from the supply of services to a sponsor. We are in receipt of the following documents that were forwarded as part of your submission:

1. A copy of XXXXX[.]

2. A copy of a letter of agreement between XXXXX & XXXXX and XXXXX[.]

3. A copy of a sponsorship agreement between XXXXX and a company named as XXXXX[.] The personalized particulars are omitted.

The basic duties and obligations of XXXXX are summarized below:

In return for an agreed upon commission, XXXXX undertakes to be XXXXX exclusive world wide marketing agent. As part of this commitment, XXXXX will solicit for new sponsorship, media exposure and public relations opportunities. XXXXX at their own expense, will give services and support to all sponsors and provide XXXXX with written progress summaries.

It is agreed that all revenues from XXXXX sponsorship and promotional activities will be placed in his XXXXX and that XXXXX will pay XXXXX directly for their commissions. XXXXX is a self employed individual and XXXXX is not responsible for any claim that may be made against his income.

The personal services agreement between XXXXX outlines that XXXXX is in the business of selling personal and health care products and that XXXXX is an Olympic athlete and celebrity who wishes to provide services as an independent contractor to XXXXX or a fee under the terms of the agreement.

The agreement states that in return for the agreed upon compensation, XXXXX will, for a period of XXXXX perform the following services:

1. make a total of XXXXX appearances;

2. wear his XXXXX track suit whenever possible;

3. allow XXXXX to use his likeness in XXXXX has exclusive rights to tape, broadcast, record, reproduce or otherwise make use of, any likeness, personal appearance or promotion of XXXXX own use as they see fit.

XXXXX receives a sum (unspecified) of money for his services. XXXXX assumes responsibility for travelling expenses for one person. Travel time is not paid for. XXXXX receives from XXXXX at no charge, all products in such quantity that is reasonable for his use. The agreement further specifies that XXXXX assumes all responsibilities for withholding and remitting all taxes that are incumbent upon an independent contractor.

All monies earned (over and above XXXXX Canadian) by an amateur athlete must be deposited with Athletics Canada's XXXXX if an athlete is to retain his/her amateur status with Athletics Canada and the XXXXX[.] The athlete is basically entitled to receive remuneration of XXXXX per month Canadian with increases available on written application for certain excess expenditures. If an athlete turns professional or is otherwise declared ineligible for amateur status, all funds remaining in the trust (less any administration fees) are the property of, and will be paid out to the athlete.

Interpretation Requested

Does an amateur athlete need to collect the GST/HST on sponsorship agreements?

Interpretation Given

Based on the information provided, the supply of services by an amateur athlete under a sponsorship or personal services agreement as indicated in the information provided, constitutes a taxable supply made in the course of a commercial activity of the athlete. The supply is subject to the GST/HST at either 7% or 15% pursuant to subsections 165(1) and (2) of the Excise Tax Act (ACT]) when it is made by a registrant.

A person is a registrant for purposes of the Act if they are required to register for the GST/HST, i.e. if total gross revenues exceed the small supplier threshold of $30,000, or if the person registers voluntarily.

The primary obligations and entitlements of registration are that the person is obligated to collect and remit GST/HST on all taxable supplies. The person, is able to claim Input Tax Credits (ITCs) for GST/HST paid on any eligible expenses related to that commercial activity. There are more obligations and entitlements associated with the registration process including the right to register for the GST/HST voluntarily at any level of commercial activity. You can obtain more information on GST/HST registration from your local Tax Services Office.

Explanation

On April 1, 1997, the harmonized sales tax (HST) replaced the goods and services tax (GST) and the provincial sales tax (PST) in the three participating provinces of Nova Scotia, New Brunswick and Newfoundland with a harmonized tax rate of 15%. For supplies made in the participating provinces, to the extent that they are taxable supplies (which are not zero-rated), tax must be collected at the harmonized rate.

For purposes of the ETA, the following definitions are referred to in this case:

Person

"means an individual, a partnership, a corporation, the estate of a deceased individual, a trust, or a body that is a society, union, club, association, commission or other organization of any kind;"

Supply

"means, subject to sections 133 and 134, the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition;"

Section 133 of the ETA states that an agreement to enter into a supply is a supply and any property or service provided under the agreement is part of that supply and not a separate supply. Section 134 of the ETA deals with the transfer of a security interest in property for purposes of securing a debt or obligation and is not relevant to this case.

Commercial Activity of a person

"means

(a) a business carried on by the person (other than a business carried on without a reasonable expectation of profit by an individual, a personal trust or a partnership, all of the members of which are individuals), except to the extent to which the business involves the making of exempt supplies by the person,

(b) an adventure or concern of the person in the nature of trade (other than an adventure or concern engaged in without a reasonable expectation of profit by an individual, a personal trust or a partnership, all of the members of which are individuals), except to the extent to which the adventure or concern involves the making of exempt supplies by the person, and

(c) the making of a supply (other than an exempt supply) by the person of real property of the person, including anything done by the person in the course of or in connection with the making of the supply;"

Taxable Supply

"means a supply that is made in the course of a commercial activity;"

Firstly, it is established that XXXXX, in the sample information provided, is acting as a self employed contractor of his services. This is stated to be the case in both the agency agreement with your company and also in the personal services agreement with XXXXX[.] The foregoing is important in order to establish that we are not dealing with an employer employee relationship.

The above definition of commercial activity does not include a business carried on by an individual without a reasonable expectation of profit. XXXXX as stated in the contract with XXXXX desires to provide his services for a fee XXXXX is also paying the majority of his expenses and providing him with certain goods free of charge. In addition, as his agent XXXXX is only taking a percentage of his income and, therefore, it follows that it is not the majority of his earnings. He has engaged XXXXX to actively pursue other opportunities for endorsements. In our opinion this indicates that there is an expectation of profit on his part.

The agreement with XXXXX refers to XXXXX providing his services in return for remuneration. This is a supply for consideration under the ETA and there are no exempting or zero-rating provisions available for the services being provided which means that the supply will attract the GST/HST at 7% or 15% if XXXXX is a registrant.

The sponsorship contract provided is between XXXXX[.] Clearly, it is XXXXX who is making the supply to XXXXX  in the example given. The fact that the monies received from the sponsors under these agreements must be deposited into a XXXXX fund on the athlete's behalf does not affect the tax status of the supply, nor does it have any bearing on who is making the supply.

Section 269 of the ETA provides that a distribution of property from a trust is a supply of the property made by the trust to the beneficiary for consideration equal to an amount determined under the Income Tax Act (ITA). However, the definition of property, contained in subsection 123(1) of the ETA does not include money. Therefore, for GST/HST purposes, the payments coming out of theXXXXX trust fund in favour of the athlete will not be subject to GST/HST as a supply made by the trust.

Also the athlete is not making a supply to the trust. There is no provision of a good or service being made to the trust in return for the monthly monetary payments. This interpretation does not impact on, nor is it affected by the provisions of the ITA with respect to the GST/HST treatment of the supplies in question.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Department with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-9700.

Yours truly,

Fred Adair
Services and Intangibles Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate

Analysis

The athlete engages an agent to solicit opportunities for sponsorship agreements and manages his/her affairs for a commission. The athlete's income (above XXXXX has to be paid into XXXXX and he/she can only receive XXXXX per month plus certain approved expenses from the fund in order to maintain their amateur status.

Conclusion

The athlete is engaged in a commercial activity that attracts the GST/HST at either 7% or 15% if the person is a registrant. There are no tax consequences to the income received from the fund as section 269 of the Act deals with a distribution of property as consideration for a supply and the definition of property in subsection 123(1) excludes money. The athlete is not receiving a supply from XXXXX and there are no GST/HST consequences to the funds being lodged in the trust.