It’s mostly been misinformation that scares American athletes when it comes to paying Canadian income tax, often perpetrated by American media working in Canada who simply put, just aren’t in the right tax bracket, but any NBA free agent with an adviser worth anything will know this is one thing he doesn’t have to worry about.
it is not unreasonable to say that with thoughtful tax planning, Kawhi could structure his affairs in Canada so that he’s no worse off tax-wise playing for the Raptors than for a California team.
In the case that matters most to Canadians just ahead of NBA free agency, Kawhi Leonard won’t be influenced in his decision between the Los Angeles Clippers and the Toronto Raptors because of income taxes.
On the surface, the math looks relatively simple. Income taxes in Toronto, Canada are 53.5 percent total. US Federal tax is 37 percent, add in California state tax at 13.3 percent and don’t forget Medicare tax of 2.35 percent totaling 52.65 percent, making the straight up difference between L.A. and Toronto less than one percent. BUT the situation for American athletes playing in Canada is so much better than this as Scherer explains:
the Raptors calculated that their players spent 66 percent of their working days in Canada. Thus, only two thirds of his salary would be taxable in Canada. Credits are available in the U.S. for taxes paid in Canada, meaning effectively that a player pays the higher of either the Canadian tax rate or the U.S. tax rate on his working days in Canada.
So even this slight difference is reduced by a third just by filing correctly, but it gets better.
NBA rules also allow a player to earn up to 15 percent of his salary in the form of a signing bonus. As we’ve noted before, signing bonuses get unique treatment under the Canada-U.S. income tax treaty.
Signing bonuses are only taxed at 15 percent in Canada so,
it’s possible Kawhi could have $27M per year taxed in Canada at an effective rate of 45.3 percent, for a total tax obligation of $12.2M. Much lower than in California!
Now no one is going to claim an NBA free agent isn’t going to keep more of their money by playing in the state tax free franchises located in Texas or Florida, but high tax states like New York and California face the same challenges as Canada and they don’t seem to have a lot of blow back from players about this issue and with the Clippers as the Raptors main challengers for Leonard’s services, income taxes shouldn’t even be a consideration.