It's summer in Toronto! This means it's the season for outdoor patios, wearing shorts and for us sports fans, trips to the dome to see our beloved Blue Jays play ball.
But for hockey or basketball fans, we are in the heart of the off-season. It's the time of year when we exchange dreams of wearing the uniform of our cherished Maple Leafs or Raptors, to dreams of wearing a suit and making big financial and personnel decisions for the teams. If you're like me, you have read all the rumours and speculate who we will trade for and who we might sign as free agents. Summer small talk shifts from analyzing last night's big play to debating roster construction, free agency, luxury taxes, hard caps, soft caps and traded player exceptions.
In today's free agency landscape, the athlete holds a lot of the cards. Teams put on presentations and pull out all the stops to woo a player to come, or stay, in their city. It's no different here in Toronto. There are a lot of positive attributes both the Maple Leafs and Raptors can focus on: competitive clubs, a lively, safe and clean city, cosmopolitan atmosphere, fine restaurants and nightlife. Athletes here are also playing for some of the most rabid fan bases on the continent. As far as basketball is concerned, players not only represent a city, but an entire country! However, it's inevitable that at some point, somewhere, someone, will bring up "taxes" as a reason not to come here. As a fan and a tax professional that argument always raises my blood pressure. I've written numerous times on the subject, including this multi-scenario analysis reviewing the options that the Raptors point guard faced in the off-season in 2015. The timing is right to review again, since he faced the very same decisions this off-season.
It's now 2017, have things changed? For starters, the Prime Minister of Canada has wielded his tax sword and raised rates in Canada by 4%. At the same time, there is a new Commander-in-Chief running the United States, and while cuts to Medicare and personal tax rates seem to be his personal goal, it has yet to be seen what will result.
We will again assume that our basketball star will remain a resident of the United States for tax purposes. Most players will leave significant ties back home in the United States and will be able to be considered a resident of the United States for income tax purposes as they return home during the off-season.
For 2017, we analyze the possibility of signing a $24M contract with the Raptors, Spurs (Texas), 76ers (Pennsylvania) and Warriors/Lakers (California), using the tax rate landscape as we know it today.
A few reminders on how U.S. resident athletes are taxed in Canada:
- Players are only taxed in Canada on their employment income in Canada. For the Raptors, this means that only their home games are subject to the Canadian tax regime. Therefore, any difference in tax rates (i.e., Canada's top rate of tax of 53.5% versus 39.6% Federal, plus state) is limited to only the days spent employed in Canada. Last season, the Raptors spent roughly 67% of their service time in Canada. Therefore, the remaining 33% of games would be taxed similarly regardless of the team the player played on.
- Canada still does not allow most deductions from employment expenses (i.e., agent fees and training costs that are allowable deductions in the United States) further exacerbating the tax gap.
- A player will sign for their maximum bonus under the collective bargaining agreement ("CBA"). Based on the tax treaty between Canada and the United States, Canada can only tax signing bonuses at a maximum rate of 15%. Therefore, to the extent any income is subject to a maximum of 15% tax in Canada, a player will receive a full credit against their U.S. taxes for this income thus placing them in no worse off position by playing in Canada.
- We have not examined the impact of other cost savings possibilities like retirement compensation arrangements ("RCAs"). The National Hockey League and Major League Baseball currently allow players to take advantage of these arrangements. However, the National Basketball Association ("NBA") currently prohibits the use of these retirement vehicles.
Using all these factors we came to the following conclusions:
- From a tax perspective, states with no income tax (i.e., Texas) will yield the lowest overall tax result (approx. $10.5M)
- Playing in Ontario is now the worst ($11.5M), followed closely by California ($11.25M) and then Pennsylvania ($10.8M)
So, there you have it. In 2015 when we last examined the numbers, a player would be virtually indifferent playing in New York or California versus Toronto. From an income tax perspective, Toronto is now the worst place to play in the NBA, with a gap of approximately 4% between teams with home games in cities with no state or city tax. Further, if the Republicans are successful in lowering personal and Medicare taxes in the United States, that gap may grow significantly higher.
Therefore, it is important that teams in Canada use whatever tax saving vehicles may be available to their players to ensure their tax bills remain as low as possible. This includes planning to ensure they retain United States residency and the maximization of signing bonuses. From an NBA perspective, the Raptors still hold an advantage in retaining their own players since the CBA allows retaining teams to pay their players larger amounts for longer terms. However in an open field competition for free agents, the Raptors are at a tax disadvantage. So, when Jalen Rose of ESPN argues that players won't want to play in Canada because, "They have to pay Uncle Sam AND the Queen," sadly, the numbers now support his argument.
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