Stickhandling financial loopholes could go a long way toward making Marner happy
Mitch Marner. Kawhi Leonard. Big money. Big taxes. Big deal.
Alot goes into which team a big-name player ultimately signs with: fit, chances of winning a championship, how nice the city is.
And, of course, how much money is on the table — after taxes.
The perception has been that Canadian teams are at a disadvantage in that area. While that can be the case, it isn’t always.
Signing bonuses — which are quite separate from salary when it comes to taxes — and what are known as retirement compensation arrangements (or RCAs) can level that playing field.
“When guys in the sports media say (athletes) don’t want to come here because of taxes, that is BS,” said Trevor Parry, a national tax estate planning specialist for Raymond James Ltd. “I can turn a Canadian player into a U.S. taxpayer, and we can create considerable tax relief for them while they play here.”
There are other factors — such as the cost of living, the value of the Canadian dollar vs. the greenback and the price of health care — that affect the bottom line when it comes to huge contracts like the ones Marner, the Leafs’ leading scorer, and Leonard, who led the Raptors to an NBA championship, will sign.
“There’s a way to equalize (tax rates), but the player has to be committed to a strategy to see that be optimized,” said Stewart Gavin, the former Maple Leaf who built a second career advising former players through Gavin Hockey Wealth.
The tax an athlete pays can vary depending on which sport they play and where, their nationality and what jurisdictions are being compared.
“I’m confident you can get a guy like Kawhi to effectively pay no more tax in Canada than he would in the United States,” said Adam Scherer, a tax specialist and partner at Crowe Soberman.
SIGNING BONUSES
NHL players in Canada are addicted to signing bonuses. The Leafs have 10 players with bonuses, the Canucks nine, the Canadiens eight, the Oilers and Flames two apiece and the Jets one. Connor McDavid, the highest paid player in the NHL, gets $86 million (all dollars U.S.) of his $100-million deal that way.
Signing bonuses offer income protection if there’s a lockout, and they must be paid even if the player is bought out. They often come in advance, meaning the player can invest the money sooner,
but they’re treated very different from salary by Revenue Canada. The first15 per cent of a signing bonus will be taxed in Canada. For Americans in Canada, the rest will be taxed at the rate of the state or province he resides.
Leafs centre Auston Matthews is a good example. Matthews is an American who plays in Ontario but resides (as far as we know) in Arizona. He’ll earn $700,000 in base salary and $15.2 million in bonuses next season. His salary will be taxed largely at the Ontario rate of 53.53 per cent. The signing bonus will be taxed at Arizona’s rate of 41.5 per cent. (The first15 per cent goes to Canada, the rest — 26.5 per cent — to Arizona). That’s about $1.4 million in savings, said Scherer.
Marner could sign an identical deal — same dollar amount, heavily loaded toward signing bonuses — and take home less pay. That’s because Marner is Canadian and resides (as far as we know) in Ontario, where his tax rate will top out at 53.53 per cent no matter how his income is defined.
Now if a hockey player has legitimately established residency in Florida or Texas — states with zero income tax — then the only tax they’d pay on a signing bonus is the 15 per cent to Canada. Some tax experts say this is particularly easy to do. Buying a house there and getting a Florida or Texas driver’s licence is the key — and, of course, living there in the offseason.
For Leonard, the story is different. The NBA’s collective agreement caps signing bonuses at 15 per cent of a contract’s value.
Leonard, believed to be a resident of Texas after playing for San Antonio, will make much more than Matthews, the highest paid Maple Leaf, thanks to greater revenue streams in the NBA. But only 15 per cent of Leonard’s pay can be tied up in signing bonuses and tax-protected that way. The rest would be subject to Canadian income tax laws. Marner and other Canadian hockey players playing in Canada are not necessarily out of luck. In 1986, the government created the retirement compensation arrangement, a special purpose trust in which a person can set up their own pension plan and pay into it, earning investment income that can be withdrawn in retirement, presumably at a lower tax rate.
“So let’s say buddy is getting $10 million a year and say it’s $2 million (a year into the RCA). Fast forward a number of years … He finds himself in Dallas … Then he collapses the thing,” said Parry. “He pays a Canadian withholding tax, but he’s in the United States and Texas has no state tax. He is subject to federal tax, but the Americans give him a tax credit on the Canadian withholding. So it works out he pays very little, if anything, upon receipt of his RCA holdings.
“So the long and the short of it is, I can turn a Canadian player into a U.S. taxpayer and we can create considerable tax relief for them while they play here.”
As for Canadians who stay in Canada after they retire, they can “arbitrage” the fund, withdrawing small amounts annually as income, usually taxed at a lower rate.
Matthews and other American hockey players can also take advantage of RCAs. The NHL helps teams set them up. Parry said they are also popular with the Toronto Blue Jays.
This option is not available to Leonard. The NBA’s collective agreement outlaws RCAs altogether, believing they would give the Raptors a competitive advantage in signing free agents. Ontario’s 53.53 per cent tax rate (provincial plus federal) is the second-highest in the country behind Nova Scotia’s 54 per cent. In other provinces with NHL teams, Quebec is at 53.31 per cent, Manitoba 50.4 per cent, B.C. 48.9 per cent and Alberta 48 per cent.
The nuances of taxes are a lot like comparing apples to oranges. Canadians pay for health care through taxes, but no one pays more than $900 annually for OHIP in Ontario. Americans pay for health care outside of taxes and it can be quite expensive.
Athletes in the U.S. can no longer write off a lot of their expenses, such as agents and legal fees, after changes introduced in 2018. There’s also the cost of living. An athlete who wants to live in Los Angeles or New York faces higher costs than in Toronto. Throw in the exchange rate and their dollars go further in Canada, said Scherer.
In Leonard’s case, all things considered, a California-based team could make the most sense — with a tax rate of 46.86 per cent. “When I crunched the numbers, if (Leonard) maximizes his signing bonus, I can get his tax rate in Canada down to 45 per cent,” said Scherer.
It could come down to the city and the team.
“Where do you want to live?” said Gavin. “Your quality of living, where family is, the team, the opportunity to win. Players like to make as much money as possible, but winning will trump that.”
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The Maple Leafs have used their financial might unapologetically. Salary bonuses and up-front money are a big part of most contracts they sign. In addition to Matthews:
John Tavares gets $30 million of his seven-year deal in signing bonuses in the first two years, and nearly $71 million of his $77-million total in bonuses overall.
Kasperi Kapanen’s threeyear, $9.6-million deal includes $6.24 million in bonuses, with nearly half paid in the first year.
Andreas Johnsson’s fouryear, $13.6-million includes $8.8 million in bonuses, with $6.9 million paid in the first two
The Pittsburgh Penguins traded high-scoring winger Phil Kessel to the Arizona Coyotes for centre Alex Galchenyuk on Saturday night.
Minor league defenceman Pierre-Oliver Joseph also will go to Pittsburgh. The Coyotes get minor-league defenceman Dane Birks and a 2021 fourthround draft pick.
The 31-year-old Kessel had 27 goals and 55 assists with the Penguins last season. He won Stanley Cup titles with Pittsburgh in 2016-17 with current Coyotes coach Rick Tocchet, then a Penguins assistant.
Kessel has scored at least 30 goals six times during a 13-year NHL career that includes stints with Boston and Toronto. Galchenyuk had 19 goals and 22 assists with the Coyotes in 2018-19. years.
“In some cases the players feel they can get a greater average annual amount elsewhere,” said Leafs GM Kyle Dubas. “Some of it is to do with the present value of money, and they’re willing to forgo some of the average if the bonus is structure is split up in different ways.
“We get the taxation part of it used against us a lot. If you play elsewhere it’s a lower tax bracket. Other teams use that. We’re fortunate because of the revenue we’re able to draw in. I think for us to sit back and have the taxation argument used against us, but then not to be able to use any advantage we have, would be foolish on our part. That’s the way we’ve try to do it.
“Other teams aren’t apologizing for using taxation or cost of living to aid their arguments. I don’t think we should apologize either, and we won’t.”