Fall is a sports fan's dream: there's the drama of the baseball playoffs, football is in full swing, basketball gets underway and the Maple Leafs still have hope.

That's a lot of top-level talent to take in. But how did these premier athletes get to that level – specifically, what incentives helped them get there?

In this article, we will explore some of the small ways tax plays a role in the development of athletes through every level, and what happens when they reach the top. The Department of Finance first giveth, and then it taxes away.

First, giving:

Fitness Tax Credits

As a child, I swam competitively. I swam against, and with, future Olympians; I saw the commitment, training and high cost it takes to develop a world-class athlete. The Children's Fitness Tax Credit is meant to promote an active, healthy lifestyle for children; every little bit helps parents curb the costs of sports and competitive training. The federal government recently doubled the incentive and provides a credit on the first $1,000 of qualified expenditures towards a prescribed program of physical activity for children under 16. This credit amounts to $150 of tax savings. The Ontario government has matched the program and provides incentives totaling a maximum of $54.10. Many of the other provinces provide a similar credit as well.

Athletic Scholarships

Athletic scholarships do exist in Canada! They are not as prevalent here as they are in the United States, but they provide assistance that athletes need to further develop their skills. Scholarships play a critical role in keeping Canadian athletes on home soil. About 45 per cent of Canadian Interuniversity Sport athletes receive athletic scholarships, which cover approximately 50per centof their tuition and fees.

A specific exemption exists to exclude from taxation a scholarship, fellowship or bursary received in connection with a taxpayer's enrolment in certain educational programs. As such, the entire scholarship amount a university athlete receives could be exempt from tax.

Amateur Athlete Trusts

Trusts are another way athletes can find tax savings. An amateur athlete (one who is a member of a Registered Canadian Amateur Athletic Association and is eligible to compete in international sporting events as a Canadian national team member) is permitted to place certain income – from endorsements, prizes or public appearances – in a trust, of which he or she is the beneficiary. Any amount contributed to this trust is excluded from the income of the athlete.

Furthermore, no tax is payable by the trust on the income held in the trust. The money does not become taxable until withdrawn or, at the latest, eight years after the last year in which the individual competed as a Canadian national team member. In addition, income contributed to the trust qualifies as earned income for the purposes of determining RRSP limits. Possible income tax deferrals and RRSP limit enhancements can help today's amateur athlete save and defer tax.

Then, taxing:

No doubt developing athletes appreciate those tax incentives. But, once an athlete makes it to the top of his or her field, it's a different story.

Olympic Medal Winners

Canadian Olympic medalists are rewarded, not just with a trip to the podium and a medal to wear proudly. They also receive funds from the Canadian Olympic Committee's Athlete Excellence Fund. Winning Olympians receive $20,000 for a gold medal, $15,000 for silver and $10,000 for bronze. But, these amounts are taxable. (Many people find this policy hypocritical. Seemingly similar cash incentives from awards such as the Governor General's Performing Arts Award and the Nobel Prize are not taxable.)

Professional Athletes

Once athletes turn professional and earn money for competing in their sports, they are, of course, taxed on their earnings. Not only must they pay up, but complying with tax obligations can become an onerous task.

A world-class Canadian athlete, displaying his or her skills at competitions throughout the world, must take care to follow the tax laws of this country – and also those of the country or state where the events took place, where the earnings are typically taxable. For example, an NHL hockey player likely files income tax returns in both Canada and almost every state he plays in; a tennis star may file returns and pay taxes to every country on her tour. Fortunately, athletes will never be double-taxed; a foreign tax credit mechanism exists to prevent that; however, the compliance burdens can be overwhelming.

Talent, hard work, dedication, support of family and friends are the makings of a premier athlete. A few tax exemptions along the way may just provide that extra boost.

This article was originally published in the Fall '14 inFocus Issue.

About the Author

Adam Scherer is a partner in Crowe Soberman's Tax Group. He works in many areas including personal and corporate tax planning and compliance, assistance with SR&ED claims, estate planning for individuals and handling complex international cross-border tax. Adam's client portfolio includes high-net worth individuals, professional athletes, film directors and film producers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.