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Olympic Tax?

We here at Moodys Gartner are caught up in the Olympic fever (Go Canada Go!)…but like always we are thinking about tax!  One controversial aspect is the tax that Olympic athletes pay on their prize money.  Yes, Canadian and American athletes are given prize money from their country’s Olympic governing committee for winning an Olympic medal.  In Canada, the Canadian Olympic Committee awards athletes with $20,000 for a gold medal, $15,000 for a silver medal and $10,000 for a bronze medal.  The Minister of National Revenue has disclaimed the right to tax the value of the medal itself.  Similarly, in the United States, Olympic athletes are awarded $25,000 for a gold medal, $15,000 for a silver medal and $10,000 for a bronze medal from the U.S. Olympic Committee.  Surprisingly, athletes in both Canada and the US are subject to taxation on this prize money at their own marginal tax rate.  In Canada, the prize money is subject to tax as it is not exempt by Regulation 7700 of the Regulations to the Income Tax Act (the “Act”).  In the US, the prize money is considered earned income abroad and at the federal level an athlete in the top tax bracket will pay close to $10,000 for a gold medal win.  Texas GOP Rep. Blake Farenthold has re-introduced the TEAM Act (Tax Exemptions for American Medalists Act) which would exempt US Olympic athletes from paying taxes on the medals and accompanying prize money.  Many countries do not tax athletes on their Olympic winnings, for example India, so why do we?

From a technical perspective, Regulation 7700 of the Act exempts certain prize money from taxation.  This provision was added to the Act so that Nobel Prize winner Dr. John C. Polanyi would not face tax on his prize.  The provision appears to have been added due to public sentiment. Is there not similar public sentiment for Olympic athletes?  Regulation 7700 only exempts those monies awarded in relation to meritorious achievement in the arts, sciences or service to the public, not sports.  Some have raised the point that Olympic athletes may provide a public service as they indirectly promote a sense of nationalism; however, that is not the current view of the Canada Revenue Agency (see CRA document 2008-0300071M4).

One argument could be that athletes are already getting money in the form of funding from the various levels of government.  The federal government provides about $62 million in annual funding to the Own the Podium program.  Provincial governments contribute varying amounts to sports programs, for example Quebec provided approximately $2.6 million to amateur sports in 2012-13 while Alberta provided only about $159,000.  In addition, Quebec provides a tax credit of $6,000 to carded athletes.  Given that many athletes devote their life to training and have numerous expenses such as equipment, coaches and the like, it is likely that if athletes were running a business, they would be bankrupt!  Not convinced this argument is very compelling.

Interestingly, Canada passed a provision in the Act, specifically subsection 115(2.3), that exempted income earned in Canada in connection with the 2010 Vancouver Olympic and Paralympic Winter Games for athletes from countries other than Canada, games officials and foreign media.  Why would Canada give up the right to tax income of non-residents earned in Canada but tax its own athletes on the nominal prize money?

How much tax is the Canadian fisc really losing?  In Vancouver, Canada won 26 medals, although granted some of these are team medals (i.e, hockey and curling), so for easy figuring let’s assume that there were 100 medals awarded to Canadian athletes at an average of $15,000 – that’s $1.5 million of revenue.  Most athletes are not fortunate enough to be a household name and a professional sports star like Sidney Crosby, so let’s assume they are on average in a middle tax bracket, say 22%, then the fisc is out approximately $330,000 – not a whole lot of money in the big scheme of things!

Oh well….Go Canada Go!