In heart-breaking fashion, the most exciting Blue Jays season of the last 22 years came to a close last month. Now the Blue Jays faithful are focused on the “hot stove” that is the Major League Baseball offseason.
As a fan, I imagine all the free agent and trade possibilities that might occur that will allow my team to make that next leap to a World Series crown. As a tax practitioner, I ponder what the tax effects might be for these players and what could entice them to either sign or re-sign with the Great White North’s only team.
The question becomes, how can the Blue Jays leverage Canadian tax rules to their advantage when enticing free agents to sign with the team?
Justin Trudeau
On October 19, I was lucky to be amongst the cheering crowd at Rogers Centre for Game 3 of the American League Championship Series. All of us in the stands were reveling in all the runs scored by the Jays, while tuned to our mobile devices for constant election updates.
“Who’s winning my riding?” “Who are they projecting to win? “The entire east coast is red!” “Is it going to be a majority?” These were just some of the questions and comments that rolled through the crowd like a wave.
Once the results of both the game (a Jays victory) and the election (a Liberal majority) were clear, I wondered: What is this going to do to the Blue Jays’ chances with free agents?
We have written numerous articles attempting to debunk the myth that playing in Canada is no worse from a tax perspective than playing in California or New York. With a current Liberal pledge to raise taxes by 4% on the upper class, these arguments will no longer hold. The rhetoric of Canada and high taxes as a reason we can’t attract free agents will again become the narrative. And this time, we won’t be able to spin it otherwise. Therefore, we must look to other methods within our current landscape to even the playing field.
Here are some ways:
Don’t move to Canada!
Canada’s tax system is based on the concept of residency. A resident of Canada is taxed on his worldwide income, which would include his entire baseball contract. Whereas a non-resident (in the case of a major league baseball player) is only taxed on his employment income that is physically exercised in Canada. Therefore, if you remain a non-resident of Canada, you will not be taxed on any of your salary that relates to services performed outside of Canada. Fortunately for the Blue Jays, spring training and all their road games are primarily held outside of Canada. When reviewing the Blue Jays calendar of service, roughly, 65% of their salary is earned from duties performed in the United States. Therefore, it is extremely important that Canadian residential ties are not obtained. Remaining a non-resident will effectively allow 65% of your contract to be non-taxable in Canada. Even if residential rules are tripped in Canada, Canada has negotiated an extensive network of Tax Treaties with various countries from around the world that would allow a player to maintain residential ties in their home country (United States and Dominican Republic to name two). The athlete must work with their advisor to ensure that they meet these tests and that he is not considered a resident of Canada for tax purposes.
Signing Bonuses
Another way to limit the taxes paid in Canada and having more of your salary taxed based on home country rates could be through the use of signing bonuses. Signing bonuses have become very popular in professional sports. A signing bonus can be defined as a sum of money paid to an employee as an enticement or incentive to join a particular organization or sign a new contract. This enticement or incentive is exactly what an athlete might need to convince him to join the Blue Jays.
For Canadian tax purposes, the treatment of a signing bonus is quite simple. The amount of the bonus is treated as ordinary employment income, and is taxable in the year received. However, when a U.S. resident athlete receives a signing bonus to play major league baseball in Canada there is a special quirk in the Canada-United States income tax convention.
The treaty provides that a signing bonus paid by a Canadian team to a U.S.-resident athlete would be taxable in Canada – but that tax may not exceed 15% of the gross amount of the payment.
Therefore, assuming the athletes U.S. tax rate is in excess of 15%, the bonus would effectively be taxable to the athlete at his normal U.S. rates.
Retirement Compensation Arrangements
The use of a Retirement Compensation Arrangement (RCA) may be attractive for a player who is a resident of a country other than Canada, who plans to return to that country at the conclusion of his playing days.
There is virtually no immediate tax benefit for contributions to an RCA. A 50% refundable tax is applicable on the portion of the player salary that is contributed and deposited into the plan. However, this can be a very attractive vehicle for a player's post-career financial planning.
If structured correctly, the athlete can withdraw funds from the plan upon retirement. The 50% refundable tax is returned on withdrawal and the player is simply taxed on the amount as pension income.
Assuming the athlete is not a Canadian resident, the pension amount withdrawn would be subject to a 25% flat withholding tax. This tax may be reduced further by Treaty (as low as 15%) depending on the country of residence of the athlete. Effectively, the player will be taxable on the income contributed to his RCA based on his home country tax rate, mitigating the high taxes he otherwise would have paid to Canada had the income been earned during his playing days. Furthermore, depending on the country the athlete retires too, the withholding tax could potentially be the only tax payable on this income!
Tax Equalization Payments
Athletes these days focus on the money in their pocket that’s left to spend after taxes. All things being equal the home city with the lower tax bill and thus providing the highest take home pay will be at an advantage. Toronto will therefore be a natural disadvantage. The solution. Offer more money!
The concept of tax equalizations are very common with multi-national corporations in order to entice workers to transfer to a higher taxed jurisdiction. The principle behind a tax equalization policy is that the employee should not suffer an economic or financial hardship (or conversely a winfall) as the result of his move to the new location. Effectively, an employer will compute what the employees take home pay would have been had he stayed in his home country. The employer will then equalize, or gross-up, the applicable salary to compensate for those differences. An employee would therefore be tax neutral and be indifferent as to which country he worked in. The Blue Jays could perform similar calculations and tax effect a player based on a particular country and state.
Win more games!
If you build a winning team and breed a winning culture for your franchise free agents will be attracted to the Blue Jays regardless of our tax rates. Winning is also more fun. The World Series share last year was close to $400,000. While that might pale in comparison to the eight-figure contracts some players are commanding, the money can’t be disregarded altogether. It could at the very least be used to mitigate the extra taxes that the players may otherwise be paying.
Mark Shapiro, Blue Jays President, has a tough task this offseason – building on the team’s recent surge of success and not letting the momentum fade away. While Trudeau’s tax increases could potentially make the numbers seem a little less enticing to some, Shapiro still has much to work with: an energized fan base, a competitive team deep with talent, numerous team-friendly contracts, and a city that embraces players and that they love spending time in. (Not to mention an MVP-caliber star candidate, a former home run champion who’s still slugging strong, an outfielder who may actually be Superman, and a young core of players led by Marcus Stroman.
We ARE just ready…..and Marcus has nice hair.
