There has been a significant amount of discussion about the tax treatment of Olympians. It has been well reported that the Canadian Olympic Committee (COC) awarded prize money to Canadian athletes that won medals in London. It has equally been well reported that this money is taxable.
The tax treatment of Olympic prize money in Canada mirrors that in the U.S., though American athletes may also be subject to tax on the value of their medals due to legal precedent (there is, as of yet, no precedent in Canada for taxing the value of Olympic medals). The U.S. congress, however, is set to consider a tax exemption on these winnings in its Fall term.
This has resulted in many people asking if Olympians should pay tax on this money, but before the question of 'should' is considered, we first need to understand why they pay tax and what tax they pay -- the boring yet important part that is too often ignored. There is, in fact, nothing special about the taxes levied on income derived from Olympic medals. They are the same taxes laid on any kind of income.
Prize money is considered to be an 'other source of income' under the Income Tax Act (ITA). Subparagraph 56(1)(n)(i) of the ITA stipulates that "an amount received by the taxpayer as or on account of a scholarship, fellowship or bursary, or a prize for achievement in a field of endeavour ordinarily carried on by the taxpayer [emphasis added], other than a prescribed prize" is taxable.
There are two exemptions to paying taxes on prize money. First, prize money that is considered to be a 'windfall', such as lottery or sweepstakes winnings, is not taxable. Second, prize money associated with a 'prescribed prize' is not taxable. As noted in the Income Tax Interpretation Bulletin for prizes, "a prescribed prize is any prize recognized by the general public for meritorious achievement in the arts, the sciences or service to the public.' Examples include the Nobel prize and the Governor General's Literary Award. The exemption for a prescribed prize dates back to 1987 after John Polanyi won a Nobel Prize. In 2008, CRA reviewed the rules and determined that Olympic awards are similar to other athletic awards -- not a public service -- and therefore do not qualify as a 'prescribed prize.'
Any of us who participate in various sports 'beer' leagues do not need to worry about claiming that $100 kitty that we won on the weekend. This is because we are not "in a field of endeavour ordinarily carried on by the taxpayer." And given some of our athletic abilities, the winnings are probably also windfall winnings. We engage in these sporting events solely for fun. Olympic and other non-professional athletes, however, are competing at a level where it is an ordinary endeavor and, like it or not, there is an expectation to earn income (prize money is considered to be 'other income') from those endeavors.
Most non-professional athletes are not going to get wealthy doing what they do -- but that is irrelevant. Many taxpayers are not going to get wealthy from their ordinary endeavors yet they are subject to full taxation. Consider the stay-at-home mom who operates a small day care business out of her house. Her annual income may be well below what an Olympic athlete is awarded for winning a medal, yet she is subject to taxation. Is she not also contributing to the public good? Why do we not exempt her from taxes?
This brings up a point about our tax system. Our tax system must be fair -- for everyone. Adding exemptions and loopholes to our tax system reduces fairness and adds unnecessary complexity. Everyone seems to hate exemptions and loopholes in the tax system, crying afoul at every turn. Yet exemptions and loopholes seems to be exactly what is being asked for here. The lack of consistency to our opinions regarding our tax system is perplexing.
Let's also remember recent calls to tax the rich. Some athletes who are participating in the Olympics earn income that puts them well into the top 5 per cent of income earners in Canada. Should they be exempt from taxes on their winnings?
And what about other non-professional athletes that compete on an international level? Should they pay tax on their winnings? And what 'sports' should be included? Given the debate about what could be included for the Child Fitness Tax Credit we should be intimately familiar with the difficulty in answering this question.
Canadian athletes can already reduce the amount of tax owed through two vehicles. First, Canadian athletes who are members of a registered Canadian amateur athletic association and eligible to compete in international sporting events can put their winnings into a federal Amateur Athletics Trust. Second, athletes can deduct expenses incurred from earning that income.
There is nothing intrinsically unfair about subjecting Olympic athletes to taxation. In fact, not subjecting them to taxation raises serious questions about fairness and tax exemptions. Our athletes already have access to ways to reduce their tax liability and, much like ordinary Canadians, must structure their taxes accordingly.
Lindsay Tedds is an Assistant Professor of economics in the School of Public Administration at the University of Victoria. You can follow her on twitter@LindsayTedds