Jasmine Blackett & Eric Beaton, CPA
A look at the Amateur Athlete Trust
This week we sat down (virtually) with our client and Olympic gold medalist, Brady Leman, to discuss Amateur Athlete Trusts. These trusts are a lesser-known tax planning tool that can be used to help athletes’ budget for training and manage their tax liabilities. When used properly, they can be effective at deferring and reducing tax.
Amateur Athlete Trust
As an amateur athlete, you may be earning endorsements or award income that is inconsistent from year to year. As Brady Leman puts it, “…making a career in sport often means navigating a feast or famine income situation. Some years, sponsorships seem to come in waves, good results mean some prize money. However, a difficult season or an injury can quickly see those income streams dry up.” This creates what tax advisors refer to as lumpy income. Lumpy income—or income that is inconsistent from year to year—can increase the total amount of tax you pay by under-utilizing your lower tax brackets in low-income years.
An Amateur Athlete Trust (“AAT”) is a type of trust that allows qualifying athletes who earn endorsement or award income to better manage their taxable earnings. The trust accepts, on behalf of the athlete, the athlete’s performance income which is then deferred for tax purposes until such time that funds are distributed from the trust to the athlete. This provides a degree of control that can allow athletes to smooth income and reduce tax.
For Brady, the trust means he can worry less about his finances and more on training: “The trust has been great for managing the amount of tax I have to pay upfront and allows me to control my income level by managing how much money can be withdrawn from the account. It gives me an edge financially.”
In addition to the tax deferral on performance income, the AAT allows these funds to be invested and grow inside of the trust on a tax deferred basis. This means the funds can be invested inside of the trust and grow tax-free until distributed, allowing for tax-free compounding. As Brady puts it, “the investment income earned in the trust takes some of the financial pressure off each year. It’s nice to know the money is growing and earning income and will be there if, and when, I need it.”
It is important to note that there are time limits on the use of the AAT. Essentially, these trusts can have a maximum life of eight years depending on when it was established and when the athlete has stopped competing, at which point any remaining assets are included in the athlete’s personal income. To avoid triggering large unintended tax at the end of a trust’s life, careful planning is essential. Notably, Canadian track icon Donovan Bailey faced a large tax liability in the final year of his trust. With effective planning, athletes can avoid this pitfall and still reap the benefits of the trust.
Conditions for an Amateur Athlete Trust
Proper use of the AAT is conditional on an athlete being an amateur athlete and earning qualifying performance income, as defined by the Income Tax Act under section 143.1(1).
To meet the definition of an amateur athlete, the athlete must:
- Be a member of a registered Canadian athletic association,
- be eligible to compete internationally as a Canadian national team member, and
- not be a professional athlete.
The distinction between a professional athlete and an amateur athlete may not be immediately obvious. Essentially, whereas a professional athlete is compensated for their individual performance in a professional league, an amateur athlete must be a member of a Canadian athletic association and be eligible to represent their country internationally.
Once the definition of amateur athlete is met, the earned income must be considered qualifying performance income to be eligible. This is restricted to income that is:
- Received in a year in which the athlete is an amateur athlete, and not a professional athlete,
- is connected to the athlete’s participation as an amateur athlete, as defined above, and
- the income itself is endorsement income, prize money, or income earned from public appearances/speeches.
Depending on where the athlete is in their career, qualifying for an AAT may mean tapping into a significant tax planning opportunity. In Brady’s case, qualifying to use the AAT is not an issue as he competes on the international stage in freestyle skiing for Team Canada and receives prize money and endorsements that can be accepted by the trust.
Trust in Action
As an example of an AAT in action, an amateur athlete performs well at the 2021 Tokyo Summer Olympics and receives $250,000 in endorsements during the remainder of the 2021 calendar year. These endorsements were received in relation to the athlete’s participation as a member of Team Canada at the Olympics.
This athlete has a modest lifestyle and would like to have these endorsements support their training until the next Olympic games, which would require $45,000 (after-tax) for four years – a total of $180,000. Typically, these endorsements would be included in the athlete’s taxable income in the year received and would be taxed as high as 54% depending on their province or territory of residence. Assuming the athlete is a resident of British Columbia for tax purposes, without the use of an AAT they would be left with around $155,000 after paying tax on the $250,000 received. This would only cover 3.44 years of training and would prove insufficient for their needs. They would likely require alternative sources of income to support their training, such as part-time work. Given an athlete’s strict travel and training schedule, this could prove to be a challenge.
Alternatively, if this athlete established an AAT in 2021 prior to the Olympics, they could defer taxes on the endorsements as they were needed. To satisfy their training and living requirements, they would require annual pre-tax withdrawals of $60,000 over the next four years, which would leave them with the $45,000 in after-tax income required. At the end of the four years, they would have sufficient after-tax income and still hold $10,000 inside of the AAT, not including any interest or investment income earned. By smoothing income, the athlete can continue to train and live off their 2021 endorsement without the need for part-time employment.
In terms of total tax dollars paid – without the use of a trust – the athlete would pay $95,000 on the endorsement income received compared with $60,000 in tax with the use of the AAT. That’s a tax savings of $35,000 in this scenario. Keep in mind that other factors are typically present, but this helps demonstrate the power of the tax deferral, smoothing income, and the trust.
For Brady, the AAT has been more about peace of mind in planning for the future, “I treat my tax savings from the AAT as a kind of a first retirement savings plan. As a ski racer, it’s not a huge money sport. I’m not going to make millions of dollars and just put my feet up once I’m done with racing, there’s going to be a second career after sport for me. The money I’ve saved utilizing the AAT gives me a bit of a buffer for that transition.”
If you are considering an AAT for yourself or a client, there are two types of accepted arrangements – the trust can be set up either through a national sports organization, or established independently.
Many larger athletic associations have advisors to assist in administering athletic trusts. However, there are also situations where an athletic association does not have this capacity, or simply does not wish to accept the risk of investing the athlete’s funds – negating one of the trust’s major benefits. The independent athletic trust may be the right solution when this is the case.
Establishing an Independent Athletic Trust
To set up an AAT, certain steps need to be followed:
- The account itself must be established with an outside institution, typically a Canadian financial institution,
- an arm’s length party, such as a lawyer, must be involved as a mandatory signatory on any payment from the account,
- no amounts may be deposited other than qualifying performance income, and
- the account cannot be an RRSP or TFSA.
The AAT is an important tool to consider when developing a athlete’s financial plan. While the tax rules may seem daunting, the right team can ensure the process is seamless. Brady pointed out that he was able to lean on his network for some help to make the process more straight-forward, “The team at Cascade Accounting was a huge help, making sure that we were in compliance with the tax laws around the AAT, registering the account and ensuring that the money I’ve managed to save up is working for me has taken a lot off of my plate.” He added, “Once the trust is set up, it’s fairly low maintenance, and hasn’t taken much of my time… knowing that you have some money saved up, and sheltered from some taxes, allows you to focus on competing and racing, not worrying about paying the bills.”
If you or your client are interested in exploring an AAT as a tax planning solution, Cascade Chartered Professional Accountants LLP works with a team of certified professionals in delivering AAT solutions to Canadian athletes. We are happy to discuss the specifics of your situation and work with your current advisors to determine whether an AAT is appropriate for you.
For the list of registered Canadian amateur athletic associations, please click here for an official government listing.
The above is for general information purposes only and should not be considered tax advice. The Income Tax Act has many nuances and exceptions; we strongly encourage you reach out to a Chartered Professional Accountant regarding the specifics of your situation to obtain professional advice. The Income Tax Act and its interpretation is subject to change, and so information made available at this date may no longer be accurate in the future.