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.