Major League Baseball sets itself apart from other major North American men’s professional sports leagues by lacking a strict salary cap. This absence contributes to a sense of limitless free agency spending. Case in point, Shohei Ohtani is expected to sign a contract worth upwards of $500 million USD in the next few weeks, and the Toronto Blue Jays are rumored to be in the running for the two-way phenom.
Skeptics tend to argue that the cost of playing for a sports team in Canada, especially in Toronto, always means more taxes. But is that really true? If Ohtani were to sign with the Blue Jays, let’s look at how he would be taxed in Canada.
Let’s assume for illustration purposes that Ohtani becomes a tax resident in the country he signs in (residency and duty day computations are beyond the scope of this article). Ohtani would be an employee of the Blue Jays, working at their Toronto location, Rogers Centre. He would receive a paycheque like any other Canadian employee. The top tax rate for an employee residing in Ontario is a combined federal and provincial rate of 53.5 per cent. Assuming his contract was spread over a 10-year term, Ohtani would earn an annual salary of $50M and his tax would be approximately $26.75M per year.
Compare that to Ohtani playing for a team based in the state of California. An employee of a California-based team will pay U.S. federal tax at a top rate of 37 per cent and California state tax at a top rate of 13.3 per cent, yielding a combined tax rate of 50.3 per cent. On those same annual earnings of $50M, Ohtani would pay $25.15M in tax per year as a California tax resident.
But that’s not the end of the story…
What if Ohtani files as a tax resident of Japan? Whether he plays for the Blue Jays or another team in the US, Ohtani would presumably be taxed on his entire salary in Japan. Japan will likely provide him with a foreign tax credit for taxes paid either in Canada, or in the U.S. With Japan’s high tax rates, let’s assume he will receive a full foreign tax credit in Japan on Canadian or U.S. tax paid. The overall tax that Ohtani pays would then be the same whether he plays for the Blue Jays or a U.S. based team, but let’s not forget the Medicare tax in the U.S. and the SDI tax in California. If Ohtani can’t claim a foreign tax credit for the high U.S. Medicare tax or California SDI tax in Japan, which could very well be the case, he may actually end up saving more in taxes by playing for the Blue Jays.
When Ohtani steps onto the field, his focus is on connecting with pitches as a hitter and striking out batters as a pitcher. With the Blue Jays, he shouldn’t be burdened by tax concerns; the tax situation might turn out to be more favorable than expected.
Disclaimer: This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article. Please note that this publication should not be considered a substitute for personalized tax advice related to your particular situation.
Jeffrey Steinberg
Partner,
Business Management & Transactional Services
Jeffrey Steinberg CPA Professional Corporation
Ananth Balasingam
Partner,
Tax
Ananth Balasingam Professional Corporation