Principal Issues: [TaxInterpretations translation] (1) How should the Canada Revenue Agency treat a sponsorship of $XXXXXXXXXX received in XXXXXXXXXX by an athlete?
(2) Can that athlete claim a business loss arising from her sporting activity?
Position: (1) In this case, the sponsorship is not taxable.
(2) No.
Reasons: Since there appears to be a personal aspect to the athlete's activity, it is necessary that the activity be carried on in a sufficiently commercial manner. If this is not the case, the Canada Revenue Agency cannot conclude that there is a source of income.
March 28, 2006
XXXXXXXXXX Tax Services Office Headquarters XXXXXXXXXX François Bordeleau 946-0067
2005-010976
Request for technical interpretation - Sponsorship received by an athlete
This is in response to your email of December 21, 2004, in which you requested our opinion on the above subject. We have taken into account the additional information you have provided to us by email and telephone conversations. We apologize for the delay in responding to your request.
FACTS
Your request for a technical interpretation states the following facts:
The taxpayer is an athlete belonging to XXXXXXXXXX.
In addition to her sports activities, the taxpayer is a student XXXXXXXXXX. Depending on her training and competition schedule, she studies either full-time or part-time. For example, XXXXXXXXXX when training predominates, she can devote more time to her studies.
From XXXXXXXXXX, the taxpayer incurred significant expenses amounting to almost $XXXXXXXXXX annually, almost half of which were directly related to training and competition. In order to meet her obligations, she relied primarily on her family and on the provincial tax credit of $XXXXXXXXXX that she received through XXXXXXXXXX. In addition, she has received support from sponsors for the past several years to help defray some of her expenses. In XXXXXXXXXX, she obtained a sponsorship of $XXXXXXXXXX XXXXXXXXXX
XXXXXXXXXX
QUESTIONS
You wish to have the following two questions answered:
(1) What tax treatment should the Canada Revenue Agency ("CRA") accord to the $XXXXXXXXXX sponsorship received by the taxpayer in XXXXXXXXXX?
(2) Can this taxpayer claim a business loss from her sporting activity?
ANALYSIS
(1) How should the Canada Revenue Agency ("CRA") treat the $XXXXXXXXXX sponsorship received by the taxpayer in XXXXXXXXXX?
We could conclude that the amount received by the taxpayer as a sponsorship was taxable if it represented employment income, business income or a reward for outstanding work in the taxpayer's usual field of activity. It is the nature of the payment, rather than the name given to it, that determines the taxation of the amount paid by the taxpayer's sponsor in this case.
A. Is there employment income?
Employment income results from a contract of service between an employee and an employer. In such a case, the services are rendered primarily for the benefit of the employer and the amounts paid represent the consideration for the services rendered and usually take into account the time spent providing the services and the value of the services. According to the jurisprudence in this area1, a four-part test is normally applied for the purposes of that determination, namely the degree of control exercised by the employer, the potential for profit and the risk of loss assumed by the employee, the ownership of the tools used in the employee's work, and the employee's integration into the employer's operations. In this case, we have no information that would lead us to believe that the taxpayer and her principal sponsor are bound by an employment contract.
B. Is there business income?
In the context of this analysis, it must be determined whether the taxpayer's sports activities constitute a source of income for the purposes of section 9 of the Income Tax Act (the "Act"). To do so, it is necessary to refer to the Supreme Court of Canada's decision in Stewart2, which provided the following test:
- Is the activity of the taxpayer undertaken in pursuit of profit, or is it a personal endeavour?
As stated by the Supreme Court, that issue should only be analyzed if the activity in question has a personal or recreational aspect. Where an activity is clearly commercial, there is no need to analyze the taxpayer's decisions since there will, by definition, be a source of income whose purpose is to make a profit. In other words, the purpose of that branch of the analysis is to analyze the commercial nature of the taxpayer's activity.
In the event that the taxpayer's activity has personal or recreational elements, the analysis must determine whether the taxpayer has a subjective intention to make a profit. That determination must be made in light of a number of objective factors, including the taxpayer's profit and loss experience in past years, the taxpayer's training, the path the taxpayer’s intended course of action, and the capability of the business to show a profit3. It should be noted that these criteria are not exhaustive and will depend on the particular activity carried out by the taxpayer.
In this case, we are of the view that the athlete's activity has a personal aspect. Indeed, we do not believe that the taxpayer participates in the above-mentioned sports activities for mere commercial reasons but also for personal considerations (in particular for the love of sport, personally excelling and the potential for participating in the Olympic Games). Consequently, we believe that it is necessary to determine whether the taxpayer's activities were carried out in a sufficiently commercial manner. Generally, a person determined to distinguish herself in a field of activity, either sporting or artistic, at a national or international level, must invest considerable time and money in it.
Given the low level of financial support that the taxpayer receives - the sponsorship of $XXXXXXXXXX appears to be the only significant sponsorship - as well as the high level of expenses incurred by the taxpayer on an annual basis, it appears difficult to support the contention that the taxpayer wished to make her sports activities a profitable venture. Furthermore, it is difficult to believe that the taxpayer could devote a great deal of time to seeking additional sources of funds that would enable her to cover the costs incurred in the course of her activities, considering the time she devotes to her studies, training and competitions. That said, our conclusion may change in the future depending on the taxpayer's sporting successes, potential sponsors, and the income generated.
We are therefore of the view that the $XXXXXXXXXX sponsorship should not be included in the taxpayer's income as business income.
Finally, we remind you that the Department of Finance proposed on October 31, 2003, the addition of new section 3.1 applicable to taxation years beginning after 2004, which could have an impact on the criteria set out above with respect to the situation you presented to us. Following public consultations, the Department of Finance announced in the 2005 Budget Plan, tabled in the House of Commons on February 23, 2005, that it would be bringing forward another legislative proposal that would take into account the concerns expressed during the consultation period.
C. Could it be a prize under paragraph 56(1)(n)?
Interpretation Bulletin IT-75R4 Scholarships, Fellowships, Bursaries, Prizes, and Research Grants, clarifies what constitutes a prize and the tax treatment applicable if the prize is received by the taxpayer in recognition of outstanding achievement in a field of endeavour ordinarily carried on by the taxpayer.4 As stated in paragraph 17 of the Bulletin, an amount generally qualifies as a prize for purposes of subparagraph 56(1)(n)(i) if it is paid in recognition of a genuine accomplishment in a challenging area, whether it be of an academic, vocational or technical nature. In our view, while the wording of paragraph 56(1)(n) is broad enough to include prizes received by athletes in competition, we do not believe that it should apply to the $XXXXXXXXXX sponsorship received by the taxpayer. In our view, the amount paid by the sponsor in this case is not intended to crown an outstanding achievement by the taxpayer but rather to provide her with financial support which may enable her to achieve her ultimate goals.
(2) Can this taxpayer claim a business loss arising from her sporting activity?
Section 9 is the starting point for the analysis of the deductibility of expenses incurred by a taxpayer for a taxation year. Section 9(1) reads as follows:
Subject to this Part, a taxpayer’s income for a taxation year from a business or property is the taxpayer’s profit from that business or property for the year.
By defining income from a business or property as the profit from that business - that is, the amount of income minus the related expenses - the Act implicitly permits the deduction of expenses incurred to earn income from a business or property. Furthermore, under generally accepted business principles, only expenses relating to activities that generate income from a business or property are deductible. Similarly, paragraph 18(1)(a) prohibits the deduction of any expense unless it was incurred for the purpose of earning income from a business or property.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that these comments are of assistance. Should you require any additional information regarding this memorandum, please do not hesitate to contact us.
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate
ENDNOTES
1 See 671122 Ontario Ltd. v. Sagaz Industries Canada Inc, [2001] 2 S.C.R. 983
2 [2002] 2 S.C.R. 645
3 See R. v. Moldowan, [1978] 1 S.C.R. 480
4 Provided that the award is not made in the course of business or by virtue of an office or employment.