Are You Eligible For A Canadian Amateur Athletic Trust?
There is unfortunately a lack of available information on amateur athletic trusts (trust us, we’ve looked). But these underutilized tools can be the key to an athlete’s financial success during and after their amateur career.
I. What is a Canadian Amateur Athletic Trust (“AAT”)?
These are specialized trusts permitted by the Canadian government since 2008 in order to provide a financial solution for amateur athletes who needed to maintain their amateur status for their athletic careers but also needed to plan for a financially viable future.
These trusts allow amateur athletes to defer the realization of qualifying income until after their amateur athletic careers in order to maintain their amateur athletic status while still creating tax-deferred investment income for the future.
II. Who is eligible for a Canadian Amateur Athletic Trust?
To be considered an ‘amateur athlete’ for the purposes of these trusts, and be eligible to create a trust, the athlete must meet all three of the following criteria defined in s 143.1(1) of the Income Tax Act (“ITA”):
- be a member of a registered Canadian amateur athletic association;
- have qualified to compete in an international sporting event sanctioned by an international sports federation as a member of a Canadian national team; and
- not be a professional athlete.
In practice, the first requirement means being a member of the right sporting club. Many private sporting clubs are also registered Canadian Amateur Athletic Associations. To see if your sporting club is registered, visit the Government of Canada website here for an up to date list of registered Canadian Amateur Athletic Associations.
The second requirement is more difficult to meet. It requires an amateur athlete to have already qualified to compete in a narrowly defined muster of sporting events sanctioned by an international sports federation. For reference, the international sports federations are international non-governmental organizations recognized by the International Olympic Committee (“IOC”) as administering one or more sports at the world level. For example, the International Golf Federation is the international federation recognized by the IOC as the world’s governing body for golf. To be eligible for an amateur athletic trust, you must first have qualified to compete in an international sporting event sanctioned by one of these federations.
Finally, the third requirement is somewhat circularly defined as necessitating an amateur athlete not to be a professional athlete. The ITA defines a professional athlete under s 143 as:
professional athlete means an individual who receives income that is compensation for, or is otherwise attributable to, the individual’s activities as a player or athlete in a professional sport.
But with this clear-as-mud definition, athletes can often be uncertain as to what money they can accept without jeopardizing their amateur status. The safest practice is to take a case by case approach and confirm that each source of income does not qualify as income from activities in a professional sport before you accept it.
III. What funds are eligible to go into a Canadian Amateur Athletic Trust?
It is important to note that the types of funds eligible to go into an AAT are quite limited. Income that will qualify to be placed into an AAT under the ITA is defined under s 143 as:
- is received by the individual in a taxation year in which
- the individual was, at any time, an amateur athlete, and
- the individual was not, at any time, a professional athlete;
- may reasonably be considered to be in connection with the individual’s participation as an amateur athlete in one or more international sporting events referred to in the definition amateur athlete; and
- is endorsement income, prize money, or income from public appearances or speeches.
In practice, this means only income that can be reasonably connected with participating in sporting events organized by international sports federations can qualify. These world level sporting events recognized by the International Olympic Committee, or their regional federations, are rigidly scheduled and difficult to enter, and what constitutes a reasonable connection to these events is not open to wide interpretation.
IV. Who can hold the trust money on your behalf?
An AAT can receive funds based on one of two types of arrangements outlined under s 143(1) of the ITA. In practice, athletes can either arrange a trust with their national sports organization or they can set up a trust independently with a qualifying financial institution. If the athlete organizes the AAT individually,
- an outside institution must be involved, usually a bank; and
- an arm’s-length party must be involved as a mandatory signatory on any payment from the account – this must be someone who is not related to the athlete and is not a close personal connection.
V. This seems like a lot of effort. Why should I want an Amateur Athletic Trust?
It is important to note that an AAT may not be for everyone. Athletes who are just breaking even with their expenses may not have a substantial amount of residual qualifying income to pay into a trust. In addition, there will be legal fees associated with setting up a trust as well as ongoing management fees. Amateur athletes looking into AAT’s should review their financial position to evaluate if it is financially advantageous at that time.
For those athletes who have income that exceeds their expenses, the ability to defer tax on income, interest, capital gains, and dividend income is a significant way to create wealth over the course of one’s amateur athletic career.
The main income tax benefits realizable when eligible income is contributed and retained within an AAT are:
- Deferral of income tax on income from endorsements, prize money, income from public appearances etc. for eight or more years;
- Deferral of income tax on investment income earned within the trust for eight or more years; and
- The ability to generate RRSP contribution room with respect to income contributed to the trust. This is as a result of changes to the ITA in 2014 which allow income contributed to the AAT to qualify as earned income of the athlete for RRSP purposes, even though those amounts are retained in the AAT.
It is important to note that deferral of tax on this income ends upon distribution of funds to the athlete. The funds in the amateur athletic trusts (contributions plus investment income) are included in income for tax purpose upon distribution to the athlete or, at the latest, eight years after the later of the last year in which the athlete competed as a Canadian national team member and the year in which the trust was created. If any property remains in the trust at the end of the eight-year period, it is deemed to have been distributed to the amateur athlete.
At Sotos LLP, our team of experts has been advising businesses and individuals in innovative estate planning for decades. For information on how you can financially plan for an amateur athletic career and what comes after please contact John Sotos (firstname.lastname@example.org or 416-977-9806).