Could Vlad's Enormous Signing Bonus Be A Massive Tax Guerr-Error?

When the worlds of tax and baseball collide, I always find myself immersed in the intersection, considering the tax consequences while also making sense of the baseball implications. The details of Vladmir Guerrero Jr.'s new US$500 million contract extension with the Toronto Blue Jays has sparked much conversation both on and off the field.

According to reports, a staggering US$325 million of Guerrero's US$500 million contract extension with the Blue Jays is in the form of a signing bonus, payable over the duration of the contract. The balance of the contract, US$175 million, will be paid as salary over the course of the 14 years of the contract extension. In Canada, the distinction between the taxation of a signing bonus and the taxation of salary, particularly for a non-resident like Guerrero (who resides in Florida, which, notably, has no state taxes), is of great consequence.

While both signing bonuses and salaries are generally taxable as employment income in Canada, the recipient's residency can have a significant impact on the tax implications. Whereas non-residents like Guerrero are taxed in Canada at full rates in respect of employment income earned for services performed in Canada (currently at a 53.53% top marginal tax rate in Ontario), a properly structured signing bonus may only expose the non-resident to taxes in Canada, pursuant to Canada's tax treaty with the United States, at a rate of up to 15%.

Let's look at some numbers.

On the field, Guerrero will earn in excess of US$70,000 for each at-bat, assuming he averages 500 at-bats in each year of his contract extension, in excess of US$350,000 for each run batted in (RBI),assuming he averages 100 RBI in each year of the extension, and in excess of US$1.4 million for each homerun, assuming he averages 30 homeruns in each year of the extension. The pressure is on to make sure those at-bats, RBI and homeruns are worth the cost!

Off the field, let's assume that Guerrero's salary and bonus will be paid equally in each of the 14 years of his extension, and that 50% of Guerrero's income in each year is earned in respect of services performed in Canada.¹ This analysis only considers the Canadian tax implications of this contract.

Had Guerrero's compensation in each year been in respect of salary alone, rather than based on the alleged terms of Guerrero's contract, the Canada Revenue Agency (CRA) would have collected an additional ~US$2.7 million of taxes in each year. Over the course of the contract, the CRA will have foregone more than US$38 million in tax revenue.

Given the magnitude of those numbers, it shouldn't come as much of a surprise to anyone if the Canada Revenue Agency challenges the terms of this contract, as there are strict rules that must be followed to ensure that a signing bonus is properly characterized as such. If successful, the CRA could recharacterize all or a portion of the signing bonus as employment income earned for services performed in Canada, taxable at full rates in Canada as opposed to the treaty rate of 15%. Many have probably read or heard, even, of the CRA's recent fight with John Tavares over the signing bonus that formed part of his contract with the Toronto Maple Leafs.

In December 2023, we published Sho Me The Money? Inside Ohtani's Tax Curveball about Shohei Ohtani's groundbreaking contract with the Los Angeles Dodgers that focused on the taxation of earning deferred salary in Canada. The article highlighted an exemption to the "salary deferral arrangement" rules in Canada for athletes that would cause the athlete to be subject to tax only when the salary is received and not when it is earned. In the months leading up to signing the Guerrero extension, it was rumoured that the Blue Jays were insisting on deferring a portion of the salary. And while I don't think anyone would expect Guerrero (much less anyone) to defer as much salary as Ohtani, there may have been a way for Guerrero to minimize his Canadian tax obligations without the same kind of tax risks that will likely present themselves on account of the significant signing bonus he received as part of his contract extension with the Blue Jays.

While the deferral of income alone would not be tax-efficient from a Canadian tax perspective, there are other alternatives for non-resident athletes to minimize their ultimate tax exposure in Canada. One such vehicle is a Retired Compensation Agreement (RCA) which defers the taxation of income until such time as the amounts are withdrawn from the RCA. If Guerrero is a resident of the United States at the time of such withdrawals, taxes at a rate of up to only 15% would be levied in Canada. As a result, by using an RCA, Guerrero could have positioned himself to be in as good, or even better, of a Canadian tax position in respect of his contract extension with significantly less Canadian tax risk. Of course, to do so would mean he would be deferring a significant portion of his income which, based on reports during the course of the negotiations, seemed to be a dealbreaker.

As a final note, my curious side can't help but imagine whether Guerrero's contract contains a clause that outlines who bears the cost of any successful claim by the CRA to recharacterize all or a portion of the signing bonus as income earned for services performed in Canada. Time will tell as the terms of Guerrero's contract extension become clearer and we get to read about whether (or, more likely, when) the CRA challenges the structure of the contract.

Footnote

1. These assumptions are being made for illustrative purposes only. In fact, the specific annual payout schedule may be fundamentally different; however, the overall tax implications at the end of the contract extension will be identical in quantum with the only difference being timing. Any variance to the assumed percentage of Guerrero's income in each year earned in respect of services performed in Canada could have a significant impact – the higher the percentage attributable to Canada, the more the CRA stands to lose.