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NBA Toronto Raptors Kyle Lowry, Serge Ibaka and C.J. Miles

Myth American Athletes Pay More Tax In Toronto Could Come True

It wasn’t all that long ago Crowe Soberman (actual tax experts) blew away the myth American athletes pay more tax in Toronto than their counterparts playing in the United States. At least it wasn’t true in the major markets located in New York and California where players paid virtually the same as in Toronto despite the uneducated bleating from some of the talking heads in the US and Canadian sports media. Unfortunately things never stay the same and recently things have gotten worse for all high income earners in We The North.

Co-leaders in the Sports and Entertainment Group Adam Scherer and Jeffrey Steinberg updated the Crowe Soberman articles of a couple of years ago to reflect the changes.

For starters, the Prime Minister of Canada has wielded his tax sword and raised rates in Canada by 4%.

Canada’s top rate of tax of 53.5% versus 39.6% (US) Federal, plus state

From a tax perspective, states with no income tax (i.e., Texas) will yield the lowest overall tax result

Playing in Ontario is now the worst

followed closely by California

It sounds bad, but on closer inspection, despite the significant change in Canadian tax rates, things haven’t really got all that much worse yet.

If one follows the rationale provided by the tax experts in some detail and then skips to numbers provided as there is no way someone who isn’t expert in these matters will have a chance at actually doing it themselves, it has only gotten slightly worse for those athletes playing north of the border.

Playing in California (and by inference New York), American athletes will only cough up about one percent less in taxes than Toronto. While one percent can represent hundreds of thousands of dollars to a big NBA star like say the Raptors Kyle Lowry or DeMar DeRozan, it isn’t going to affect their decision about where to play.

The bigger savings are in the tax free states such as Florida or Texas which can cut about four percent off the taxes of a Toronto player in Crowe Soberman’s example. That’s over a million dollars a year for player like Lowry or DeRozan and it’s possible that would be enough to get some stars to change their minds about where to play.

The good news for fans in Toronto is players are still, for the most part, picking where they want to go based on winning, ownership, coaching, and lifestyle. Players continue to give up money for other factors all the time. Remember, it costs a lot more in tax to play in California over Texas and the Warriors aren’t exactly having any trouble getting the biggest names in their sport to re-up or switch teams to play there.

However, there remains a dark tax cloud on the northern horizon as Scherer and Steinberg point out.

cuts to Medicare and personal tax rates seem to be (US President Donald Trump’s) personal goal

So far Trump hasn’t been able to get out of his own way during his first year in office and that’s good news for Toronto’s professional sports franchises, but that isn’t something teams can count on over the rest of his first term. A significant cut to the top US personal tax rate could change a slight disadvantage into a significant problem, so as usual, Canada’s neighbor to the south could turn a myth into a reality overnight.

 

 

Stephen_Brotherston_insideStephen Brotherston covers the Toronto Raptors and visiting NBA teams at the Air Canada Centre and is a member of the Professional Basketball Writers Association.

 

 

 

 

 

NBA Toronto Raptors ACC

Why The Blue Jays Really Can Re-sign David Price

Hitting dingers, but not getting dinged: A look at taxation of professional baseball players in Canada  by Adam Scherer, Partner Tax
(Reprinted with permission)

“The one constant through all the years, Ray, has been baseball.” – Terrence Mann (Field of Dreams)

Another baseball season approaches, and for the first time in 20 years there is much optimism and excitement surrounding the only Canadian team in Major League Baseball (MLB) – the Toronto Blue Jays.

This optimism stems from some key off-season acquisitions, which bring new blood and more talent to the team. While sports fandom was abuzz with excitement, many media outlets (mostly those south of the border) picked up on that other “constant through all the years”- taxes. They seemingly love to point out that players moving from Miami to Toronto are going to take extreme hits to their wallets.

It is very easy for these sports pundits to simply compare federal, provincial and state tax rates and sensationalize the differences. Those differences do make for great headlines. For example, in Ontario, home province of the Blue Jays, the top combined federal and provincial tax rate is a staggering 49.53%. By comparison, in the pre-fiscal-cliff world when the acquisitions took place, a combined U.S. federal and Florida personal tax rate sat at only 35%.That’s a mind-blowing 14.53% difference! On a $100 million contract, could that mean that a player who is traded from the Florida Marlins to the Toronto Blue Jays is now paying $14.5 million more in taxes?

That’s how it looked to a lot of people… but looks can be deceiving.

In actual fact, the math is not so simple. Let’s take a closer look at how baseball players are really taxed in Canada.

To illustrate, assume that the traded player remains a non-resident of Canada and a resident of the United States. Most players leave their families and belongings behind in the U.S. and come to Toronto only long enough to play out the baseball season. They then return home to the U.S. for the off-season.

Residency can be a complicated topic due to the mobility of professional athletes, and is beyond the scope of this article. (more on this topic in the future)

Canadian tax rules state that a non-resident is taxable in Canada if he is employed here – specifically, if he performs any of his duties in Canada. That means that a player from any club that plays games in Canada is subject to Canadian taxation, whether he is a member of the New York Yankees or Toronto Blue Jays. Does that mean every time MLB players come to the Rogers Centre for road games that they have tax bills to pay to the Canadian government? Happily for them, no. A tax treaty between Canada and the U.S. exempts players of U.S. teams from paying taxes on those games.

By the same token, a U.S. resident on a Canadian team who performs a portion of his duties outside of Canada would not be subject to Canadian taxation on those days. So, a Blue Jays player does not pay Canadian taxes on income he earns for games he plays outside of Canada – effectively, road games and spring training.

The Blue Jays spend roughly 45% of their time in Canada. Therefore, a U.S.-resident Blue Jay pays tax to Ontario and Canada on only 45% of his total employment income.

The player gets credit for the taxes he paid to Canada when he files his U.S. return – so he avoids double taxation. Effectively, a Blue Jays player ends up paying the higher of the two tax rates between Canada and the United States (factoring in his U.S. state of residence) on his “home game” income.

The comparison of a player’s tax burden does not stop with the home game vs. road game factor. Other significant factors come into play. Employees in Canada are very restricted on the expenses they can claim against their income. This is not the case for athletes in the U.S., who can claim agent fees and training expenses as deductions against their income. Agent fees generally run at least 3% of a player’s income – potentially a big number! This further inflates the Canadian tax burden as compared to that of the United States.

But countering this effect is the United States’ vastly increased tax rates, which came into effect in January 2013. The U.S. now has a top federal rate of 39.6% and a Medicare tax rate of 2.35%. While Canada’s social security costs are marginal (Canada Pension Plan and Employment Insurance premiums) and less than their corresponding taxes in the United States (FICA), there is no meaningful Canadian equivalent to the Medicare tax that exists in the United States. Further, an employee of a U.S. organization pays this Medicare tax on his entire income (including the other 55% of his income – the equivalent of his road appearances).

Rising U.S. tax rates and steep Medicare costs significantly narrow the gap between Canadian and U.S. taxes for professional athletes. There may also be other ways for athletes to reduce their Canadian tax bill. This may involve restructuring their contracts to receive a signing bonus. (Signing bonuses get preferential tax treatment under the tax treaty between Canada and the United States.)

Ignoring contract restructuring and using all the variables described above, we computed that the tax bill for a player who is a resident of Florida and moves from the Marlins to the Blue Jays with $100 million left on his contract is only an additional $2.7 million, over the life of the entire contract. It is a significant number, but it is far lower than the $14.5 million some sports reporters would have us believe.

For comparative purposes, if that same player was traded to a team in California, instead of Canada, he would actually be worse off financially! In that case, he would pay an additional $3.5 million in taxes. A move to a team in New York State (where tax rates are similar to Toronto) would cost the player an additional $2.5 million in taxes – assuming that player does not want to live in a swanky Manhattan condo, where city taxes would cost him a further $1.7 million.

Florida and other non-taxed states such as Texas are only a few examples where large tax discrepancies may exist when a player is traded to a Canadian team. However, as illustrated above, the added tax costs for a player moving to the Blue Jays would be no different than if he moved to the Dodgers or the Mets.

While the trade from Florida may cost a player $2.7 million in taxes, the players who came to Toronto this offseason from San Francisco and New York are likely no worse off than before – and may be even better off financially.

The bottom line is that it is time to eliminate taxes as a potential reason for athletes staying away from Canada. Baseball players should focus on factors other than taxes when deciding to play here: a beautiful and lively city with fine restaurants and nightlife, and playing meaningful baseball games all summer long in a stadium packed with the best fans in baseball. Those things will help curb any costs.

 

Adam SchererAdam Scherer is a partner in Crowe Soberman’s Tax Group and co-leads their Sports & Entertainment service offering. Click here for more information or follow Adam on Twitter at @sobermantax.

 

 

 

NBA Toronto Raptors Kyle Lowry

The Myth American Athletes Pay More Tax In Toronto Blown Away

Every now and then somebody tries to explain the inability of the Toronto Blue Jays, Raptors or Maple Leafs to land some available big name free agent using Canada’s exceedingly high personal income tax rates. That overly simplified explanation couldn’t be further from the truth. While income tax rates vary widely between individual provinces and states, there is no escaping federal taxes in either Country and that’s the really big nut in this discussion.

There would be no point in trying to say income taxes are simple, no one would believe it anyway. However, it should be understood that Canada and the United States have tax treaties in place that ensure their citizens only pay income taxes once. There is no double taxation and residents of one Country get tax credits for taxes paid to the other Country.

Canadians are almost undoubtedly unaware that the highest personal tax rate in the U.S. at the federal level is a comparatively shocking 39.6 percent plus US citizens pay an additional 2.35 percent Medicare tax. That’s about 42 percent before getting to local and state income taxes.

In Canada, the highest marginal tax rate is only 29 percent. Unfortunately, if you live in Toronto, provincial taxes will bump that as high as 49.53 percent.

Now it’s been true for a long time that if you are comparing Toronto to New York or Los Angeles, you’d be splitting hairs as far as your personal income tax bill goes when earning a top athletes’ salary. The difference comes when players start considering the income tax free states like Florida or Texas, but it’s not as big a difference as first impressions would lead one to believe.

Crowe Soberman (actual tax experts) have done some great examples using the Blue Jays in 2013 and the Raptors in 2015. Based on these examples, if players say they are making their decisions based on personal income tax costs, they are full of something – and it smells.

Ignoring contract restructuring and using all the variables described above, we computed that the tax bill for a player who is a resident of Florida and moves from the Marlins to the Blue Jays with $100 million left on his contract is only an additional $2.7 million, over the life of the entire contract.

That’s a increased income tax cost of 2.7 percent of his contract to play in Toronto for a baseball player over playing in Florida or Texas. Pretty much no one makes a contract decision in professional sports based on that amount of money.

In basketball (and it would be safe to assume hockey would be similar), residency rules increase the no state income tax advantage, but it’s still not as big a difference as most people would assume.

We computed the tax bill for the point guard on a $12 million per year contract. Our point guard is going to pay approximately $5.92 million in taxes and social security payments per year on his contract. For comparative purposes, had that player signed with the Rockets or Heat, he would have only paid $5.12 million in taxes and social security.

While that’s slightly more than double what the baseball player would be hit with, it is still only 6.67 percent of the contract and that’s a number the team, the player and his agent should be able to easily handle in negotiations. The advantage of teams in income tax free jurisdictions certainly isn’t overwhelming or untenable.

These discussions are not unique to Toronto either. Pretty much every team outside of Florida and Texas has to deal with the same issue. In the basketball example, Crowe Soberman calculates the player would be $63,000 better off in New York and $70,000 worse off in Los Angeles and no one raises personal income tax rates as an impediment to attracting professional athletes to those markets.

This summer the Toronto Raptors managed to sign a $60 million free agent without a whisper about Canadian tax rates. The issue shouldn’t come up with hockey players either. However, the Blue Jays have ‘rented’ All-Star pitcher David Price for the playoff drive and some of the talking heads are suggesting the team will have to significantly outbid US teams in free agency to keep him because of the income tax differences. Don’t believe them. If Price decides not to sign in Toronto, personal income taxes will not be the deciding factor. All it takes is a little information to blow that myth away.

 

 

Stephen_Brotherston_insideStephen Brotherston covers the Toronto Raptors and visiting NBA teams at the Air Canada Centre and is a member of the Professional Basketball Writers Association.