Residency Rules

In most countries, including Canada, an individual is subject to tax on their worldwide income in the country in which they reside and as such individuals are required to determine their country of residence when filing their personal income tax returns. While determining residency is a simple process for many, it can be difficult for professional athletes due to the frequency with which they temporarily live abroad, own foreign personal property, or have family living internationally.

A taxpayer’s residency status can also be challenged by the Canada Revenue Agency (CRA) or other foreign government agencies. This is especially true for athletes purchasing foreign property or residing outside of Canada playing for a U.S. or overseas team. Different types of residencies may include unique tax obligations, and lack of understanding regarding residency status can leave athletes with unexpected tax consequences. Athletes and other relevant individuals must take appropriate measures to determine their country of residence to avoid these consequences.

Factual Residence

Under Canada’s domestic rules, an individual is considered a factual resident of Canada when they have significant residential ties to Canada. The CRA considers any of the following residential ties to be significant:

• You own or rent a home in Canada;
• Your spouse or common-law partner lives in Canada; and
• You have children or other dependents living in Canada.

For example, if a professional athlete spends a portion of the year in the U.S. playing with a U.S.-based team, but their family remains in their primary Canadian residence, in the eyes of the CRA, the athlete is likely a Canadian tax resident.

The CRA may also consider secondary ties, such as personal property, social and economic ties, a Canadian passport or driver’s license, or Canadian medical coverage when determining an individual’s residency status. No single secondary tie will bind someone to Canada, but these ties must be considered in determining residency status. The more secondary ties to Canada a player has, the higher the likelihood they are to be considered a Canadian resident.

Leaving Canada

To determine if an individual has ceased to be a resident of Canada, it is necessary to establish whether they have severed their significant residential ties. For instance, a Canadian resident athlete who signs a contract with a U.S.-based team does not automatically cease factual residency. However, if in the process of joining the U.S. team, the athlete purchases a property in the U.S. and either sells their Canadian residence or converts it into a rental property, they could potentially cease factual residency.

Immigrating to Canada

Similarly, when an athlete moves to Canada, their residency depends on whether they have established significant residential ties.

For example, a player who is traded from a U.S. team to a Canadian team, moves with their spouse and children to Canada, and purchases a new home, has established significant residential ties with Canada. Under Canada’s domestic rules, this athlete would likely be considered a resident of Canada.

Deemed Residence

An individual who is not a factual resident of Canada could still be considered a deemed resident if they spend 183 days or more in Canada in one year.

Tax Treaty

Where an athlete is considered a tax resident of two countries pursuant to each countries’ domestic rules (as a result of ties to both countries), the applicable tax treaty between the two countries should be reviewed to confirm which country has the right to tax the athlete’s worldwide income as a tax resident. If an athlete is a US citizen or has a US green card, additional complexities can arise which will need to be reviewed.

Provincial and State Tax Considerations

The province or state of taxation can also be a major consideration given the large differences in provincial and state tax rates across Canada and the US. It is also important to note that many US states do not respect tax treaties, so local state residency rules will need to be reviewed with care.

An individual’s residency status is determined on a case-by-case basis and is dependent on a variety of factors. For professional athletes, these factors need to be carefully considered, as cross-border movement, off-season homes, and foreign investments can make the determination of residency a complicated process. A professional athlete’s situation requires a thorough review of the facts and detailed analysis of diverse criteria. In the intricate world of tax residency, professional athletes can find clarity and peace of mind by consulting with Crowe Soberman’s Sports and Entertainment Group, ensuring their unique circumstances are expertly navigated.