Funding the sports stars of tomorrow

Eugenie Bouchard is an example of what, and what not to do, when it comes to funding your future star.

Eugenia Bouchard, Canada's new tennis star, suffered a tough defeat at the Rogers cup this week. Her supporters, Genie's Army, a bunch of young lads from Australia who have latched on to the comely, young up-and-comer, will be disappointed in the wake of her brilliant appearance at Wimbledon. 

Also interesting is the financial story around Bouchard's rise to stardom.

Eugenie's Dad, a Montreal investment-banker, recently lost a court case brought by Canada Revenue Agency concerning a tax scheme that he had set up as a way of funding the training of his daughter. The tax situation, as set up by Mr. Bouchard, is a lesson in what not to do when it comes to the personal finances of funding your kid's sports. But the tax scheme, properly implemented, might not be so crazy.  

As anyone raising a family today knows, it is expensive to keep the kids in gear and on the court. Fees and equipment costs spiral up year-after-year. As a way of getting a handle on those costs, Eugenie's father--way back when Eugenie was teeny--registered a charity that would allow the elder Bouchard to deduct the cost of training from their income. A commentary posted by a major Canadian law firm explains the plan: "In 2003 Mr. Bouchard created a partnership to support promising junior tennis players. The partnership funded two players, Eugenie and Beatrice. When Beatrice turned out not to have the potential to play at the professional level, the partnership stopped funding her. The only purpose of the partnership was to finance Eugenie's development as a professional tennis player. There was an understanding that once Eugenie turned professional, she would pay the partnership a portion of her tennis earnings."

In a typical year, "Mr. Bouchard would deposit an amount equal to what he had paid for Eugenie's training in the year and immediately withdraw the same amount as a reimbursement to himself.  This amount would then be claimed as a partnership business loss for the taxation year."

Turns out, the CRA did not think this a great idea. The tax court held that Mr. Bouchard "could not deduct the expenses he incurred for Eugenie as business losses because they were personal expenses."  The takeaway: If it's just your kid you are funding through the partnership, the tax lords are not going to allow it.

But could a partnership structure be used for funding young athletes legitimately? Out of pure curiosity I contacted Robert Kepes, a partner with Morris, Kepes & Winters, a boutique tax law firm. I asked Kepes whether there might not be something to the notion of financing young athletes through an investment partnership. Kepes, a good sport, indulged in the speculation.

What if an organization identified emerging talent and offered to fund that athlete in return for a cut of future earnings? If the organization developed a portfolio of athletes, surely the one-in-a-hundred breakout star would provide enough revenue to fund a pipeline of young athletes. By structuring the organization as a partnership the organization could issue units to investors who fund the development of the young athletes. The cut of some future revenues of the real stars goes back to the fund to provide investors with a return. Over time, the organization could, if run right, become a self-funding, privately-held athlete generation machine.

"Arguably, this could be a way to fund semi-amateur sports. The Bouchard case is lesson what not to do--it can't just be your daughter. But what would be interesting is having an organization based on this idea. What if Tennis Canada went to the government and got them to amend the income tax act to create such a vehicle that specifically allowed these kinds of partnerships? You could have a major organization, funded by a pool of investors that worked at creating athletes. It would be like a Labour sponsored fund, but it would be a sporting fund partnership vehicle. The units could be registered. You could make a deal with young athletes. The partnership ultimately recoups the costs from future sponsorship deals. You split up anything the partnership makes over and above the training costs and distribute that to the unit holders. Sure. You don't want equate people to horses, but there are businesses that raise horses. It's an interesting idea."

Any budding venture sports capitalists out there looking for somethign to do?