When an Agent’s Fees Are Not Deductible

Suppose you are a professional athlete and you hire a sports agent to negotiate with you. Those fees are, in the United States, generally deductible as an “ordinary and necessary” business expense. However, the same is not true in Canada.

The Canada Revenue Agency ruled several years ago that agent’s commissions are not deductible. Given that most athletes hire agents (who typically receive 3% to 5% of a player’s salary), this can be a significant issue. This impacts all four major sports leagues (there are several hockey teams in Canada, along with the Toronto Blue Jays of Major League Baseball and the Toronto Raptors of the NBA; additionally, the NFL’s Buffalo Bills play three home games a year in Toronto), and sooner or later some “lucky” athlete was going to be audited by the CRA.

That happened when Michael Caruso, a defenseman with the Florida Panthers, was audited. He lost, so he appealed his decision to the Tax Court of Canada. In Caruso v. Queen, Canada’s Tax Court ruled against Mr. Caruso.

Canadian tax law is similar to, but not identical to, American tax law. In the US, any business expense that is both “ordinary and necessary” is generally allowed. However, Canada’s Income Tax Act states, “Except as permitted by this section, no deductions shall be made in computing a taxpayer’s income for a taxation year from an office or employment.” It would seem that an agent’s fee would be deductible, given that Paragraph (8)(1)(b) states a deduction can be taken for, “(b) amounts paid by the taxpayer in the year as or on account of legal expenses incurred by the taxpayer to collect or establish a right to salary or wages owed to the taxpayer by the employer or former employer of the taxpayer;”

So are an agent’s fees legal expenses? Not in Canada:

In this case the services rendered by the agent were the services in negotiating the contract that was entered into between the Appellant and the Florida Panthers. When the Appellant was asked about the services provided by the agent, he referred to the additional $60,000 in signing bonuses that the agent was able to obtain for him…

To the extent that any of the services provided by AKT Sports Management Consultants Inc. (or MFIVE SPORTS) could be regarded as legal services, the services were not to collect salary or wages owed to the Appellant (the services were rendered before any contract was signed) nor were such services rendered to establish a right to salary or wages. The services were rendered to negotiate the contract. There was no right to any salary or wages until after the agreement was signed, which was after the services in question were rendered by the Appellant’s agent.

While there is a proposed amendment to this part of Canada’s Income Tax Act that would change the law, the judge in the case stated it would still not apply to agent’s fees:

As well, not all legal services will qualify. Only amounts paid for those legal services provided to collect amounts owed to the taxpayer or to establish a right to such amount will qualify for the deduction under this paragraph. Therefore even if such amendments were now effective the proposed changes would not result in the amount that was paid to the Appellant’s agent being deductible.

Now, decisions of this court can be appealed; however, based on this news story it appears that won’t be happening in this case. That said, this decision impacts every hockey player and many other athletes. Mr. Caruso did not earn a huge salary; I suspect some highly salaried player, such as Roberto Luongo of the Vancouver Canucks, will end up fighting this issue if he gets audited. (As an aside, Mr. Luongo will be competing in the main event of the World Series of Poker which begins on Saturday. Mr. Luongo’s $10,000 buy-in is being paid for by the British Columbia Lottery Corporation.)

Hat Tip: Robert Raiola

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