11 August 1998 9819311 - TAX ON SIGNING BONUS - NON-RESIDENT ATHLETE

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Taxation of signing bonuses paid to non-resident athletes

Position: See issue sheet

Reasons: See issue sheet

G. Middleton
									File #981931
Aug. 11, 1998

TAXATION OF SIGNING BONUSES PAID TO
NON-RESIDENT ATHLETES

What is a Signing Bonus?

In general, a true signing bonus is an amount paid simply to induce an athlete to sign a player contract. In other words, the signing bonus is to induce the athlete to sign, and to become bound by, a player contract to play for the team paying the bonus and, by doing so, the athlete agrees not to enter into a player contract with any other team. The payment of the signing bonus should not be dependent on the athlete actually playing for the team and it should not be subject to conditions other than the signing of the player contract.

Tax Treatment under the Act

In the Explanatory Notes for the amendments to section 180.2 of the Act to introduce the claw back of OAS benefits paid to non-residents in July of 1995, the Department of Finance stated the following.

“It should be noted that, under the scheme of the Act, the provisions of Division B of Part I (Computation of Income) apply to require both residents and non-residents to calculate their incomes in the same manner. Non-residents may be entitled to certain deductions under Division D in arriving at taxable income.”

Another way to describe this which more closely follows the provisions of Division D is that residents and non-residents calculate their income under section 3 of the Act in the same manner but in the case of non-residents only certain amounts of income are included in the computation of “taxable income earned in Canada” (TIEC) under Division D of the Act.

Thus, in the case of a signing bonus received by a non-resident athlete to enter into an employment contract to play for a Canadian team (e.g. an NHL team), the signing bonus is deemed “to be remuneration for the payee’s services rendered ....... during the period of employment“ pursuant to the provisions of subsection 6(3) of the Act and is included in the athlete’s income under section 3 of the Act as income from employment. In computing the non-resident athlete’s TIEC under Division D of the Act, the signing bonus is included in the athlete’s TIEC pursuant to the provisions of subparagraphs 115(2)(c.1)(i), 115(2)(e)(v) and 115(1)(a)(v) of the Act, to the extent the signing bonus is not otherwise included in computing the non-resident athlete’s TIEC.

Signing Bonus paid to a Non-Resident Athlete by a Canadian team to play games both inside and outside Canada

In a case where the athlete’s employment contract with a Canadian team requires services to be performed both inside and outside Canada (e.g. games in both Canada and the U.S.), the main question then becomes how much of the signing bonus is to be included in the athlete’s TIEC pursuant to subparagraphs 115(2)(c.1)(i), 115(2)(e)(v) and 115(1)(a)(v) of the Act.

While it has been argued that paragraph 115(2)(c.1) could be used to tax the full amount of a signing bonus, there does not seem to be any rationale from a tax policy perspective for wanting to tax the signing bonus any differently than the salary earned under the employment contract (i.e. Salary earned under such an athlete’s employment contract is apportioned on the basis of the services rendered by the athlete for the Canadian team both within and outside Canada and the portion of the salary which relates to services rendered in Canada is included in the athlete’s TIEC). The words “where any such service is to be performed in Canada” in subparagraph 115(2)(c.1)(i) of the Act and the words “for services to be performed in Canada” in subparagraph 115(2)(c.1)(ii) of the Act also indicate that the taxable amount of such a signing bonus should be determined on a reasonable basis which reflects the portion of services expected to be rendered by the non-resident athlete in Canada. In this regard, where a signing bonus was paid to enter into a contract to perform services inside and outside Canada, it is also reasonable to regard a portion of this signing bonus to apply to the services to be performed outside Canada.

Thus, it is our position that paragraph 115(2)(c.1) applies only to the portion of the signing bonus that can reasonably be considered to be attributable to services to be performed in Canada. This position is consistent with the tax policy in the Dependent Personal Services article of Canada’s income tax conventions (“Conventions”) with other countries where Canada only preserves its first right to tax an employment of a resident of the other contracting state, only if the employment is exercised in Canada and only to the extent of the income derived from such employment in Canada.

It is our understanding that the U.S. would tax such a signing bonus in the same manner under the Internal Revenue Code (the “Code”)i and as indicated in the 1982 U.S. Tax Court Reportsii (copy attached). The provisions in the Code which deal with the taxation of signing bonuses are no clearer on the issue of allocating a signing bonus than the provisions of paragraph 115(2)(c.1) of the Act. In the U.S. court case referred to, Ken Linseman, a resident of Canada, received a non-refundable signing bonus to sign a standard WHA player’s contract with the Birmingham Bulls, a U.S. hockey team which would play games in the U.S. and in Canada. The Court held that the signing bonus was taxable in the U.S. but only to the extent that it related to services to be performed in the U.S. (i.e. a reasonable allocation of the signing bonus was made on the basis of the games the Bulls contemplated playing within and without the U.S. during a regular season).

The calculation for the portion of a signing bonus that is reasonably attributable to services to be rendered in Canada and taxable under paragraph 115(2)(c.1) of the Act should be done on a reasonable and consistent basis. Our suggestion for calculating the portion of a signing bonus to be included in TIEC is to multiply the signing bonus by the “general formula rate” for the Canadian team making the payment. See the “Attachment” for further details for calculating the “general formula rate for a team”.

Application of the Dependent Personal Services Article of Canada’s Income Tax Conventions

As noted above, the income of a resident and non-resident are computed in the same manner under the Act and a signing bonus would be included in either person’s income as income from employment by virtue of subsection 6(3) of the Act and, consequently, the signing bonus constitutes salary or wages for the purposes of the Act pursuant to the definition of “salary or wages” in subsection 248(1) of the Act. As the words “salary or wages” are not defined in Canada’s Conventions, these words have the same meaning for the purposes of the Dependent Personal Services Article of the Conventions as they do under the Act by virtue of the General Definitions Article in the Conventions or section 3 of the Income Tax Conventions Interpretation Act (the “ITCIA”). Therefore, a signing bonus received by a non-resident athlete is “salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment” for the purposes of paragraph 1 of the Dependent Personal Services Article in the Conventions. Where the employment is exercised in Canada, the remuneration derived from the employment exercised in Canada includes the portion of the signing bonus that can reasonably be considered to relate to services to be performed in Canada. The signing bonus is in respect of an employment and, in those cases involving employment with Canadian teams, such employment is exercised mostly in Canada. (If there was no employment, there wouldn’t be any such signing bonus.) The word “derived” is broad enough to include more than just the amounts paid for the actual performance of services.

In addition, it should be noted that, where paragraph 115(2)(c.1) applies, the non-resident athlete “shall be deemed to be employed in Canada in the year” for the purposes of subsection 2(3) of the Act; and thus, arguably, for the purpose of the Act. If the athlete is deemed to be employed in Canada for the purpose of the Act, it may be argued that the employment would be considered to be exercised in Canada for the purposes of the Dependent Personal Services Article pursuant to the General Definitions Article and section 3 of the ITCIA.

The decision and analysis in the court case John Hale v. The Queen 92 DTC 6473 are in line with and give support to the above position.

Paragraph 4 of Article XVI of the Canada-U.S. Income Tax Convention (the “U.S. Convention”)

The Dependent Personal Services Article of the U.S. Convention does not apply to a true signing bonus paid by a resident of Canada to a resident of the U.S. Instead, paragraph 4 of Article XVI of the U.S. Convention applies and it does not matter for the purpose of this paragraph where the services are performed or are to be performed. However, as noted above, our position is that, under the Act, only the portion of the signing bonus that is reasonably regarded as relating to services to be rendered in Canada is included in a non-resident athlete’s TIEC under Division D of the Act. The net effect of paragraph 4 of Article XVI is merely to limit the amount of the Canadian tax payable on such portion of the signing bonus so that it does not exceed 15% of the entire gross amount of the signing bonus. It is our position, and that of the Department of Finance, that the 15% limit applies to both federal and provincial taxes. Sample computations can be found in the attached memos re File #963793 and 961358.

The provisions of paragraph 4 of Article XVI of the U.S. Convention apply notwithstanding the provisions of Article XV (Dependent Personal Services) and should be interpreted in a manner that is consistent with the “Technical Explanation” of the U.S. Convention regarding this paragraph. That is, to merely limit the amount of Canadian tax payable on a signing bonus to 15% of the gross amount of the signing bonus. If a meaning is required to be given to the bracketed words in paragraph 4 of Article XVI “(other than an amount referred to in paragraph 1 of Article XV (Dependent Personal Services))”it should be interpreted as meaning all other salary and wages of the athlete but not the signing bonus itself. The Technical Explanation also indicates that paragraph 4 of Article XVI of the U.S. Convention was to maintain the same rate of tax on signing bonuses as under the 1942 U.S. Convention. It should be noted that Articles VII and XVIII A of the 1942 U.S. Convention dealt with compensation for personal services (i.e. the dependent personal services provisions in the 1942 U.S. Convention) but those provisions were not worded broadly enough to include a signing bonus. The limit of 15% on signing bonuses was imposed under Article XI of the 1942 U.S. Convention which applied to income not otherwise dealt with in that Convention.

Artistes and Athletes (or Sportsmen) Article in Canada’s Income Tax Conventions

A signing bonus paid by a Canadian team to a non-resident athlete does not fall under the provisions of paragraphs 1 or 2 of the Artistes and Athlete’s Article of Canada’s Conventions. The reason for this is because the signing bonus is not considered to be income of the athlete “from his personal activities as such exercised in the other Contracting State.”

Attachment

General Formula Rate for a Team

A = General Formula Rate for a Team
B

Where

“A” represents the number of days that a regular member of the team is expected to be present in Canada during the team’s regular season (including pre-season). Any part of a day during which such an athlete is expected to be present in Canada on the day of a game or between games represents a day in Canada for the numerator.

“B” represents the total number of days in a team’s season for the period beginning with the first day of pre-season and ending on the day of the team’s last scheduled game of the season.

(There is no need to determine the number of days in the play-offs for “A” or “B”.)

i Sections 861, 862 and 863 of the Code, in particular, section 863(b) thereof.

ii Ken Linesman v. Commissioner of Internal Revenue - Docket No. 23315-81

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