This article originally appeared on https://crowesoberman.com‘s website and is co-authored by NSR Media’s Sports Economics insider, Adam Scherer, BA, CPA, CA. Please visit the website for more articles on the intersection of sports and economics.
Adam will be joining us in the 9AM hour, this coming Sunday on Sauga 960AM, to elaborate on the contents of this blog. If you have any questions, please feel free to call in (416.640.0200) on Sunday morning to chat about Auston Matthews’ contract.
Fans of the Toronto Maple Leafs have reason to be thrilled today. Canadian taxpayers may have reason to be a bit irritated.
On February 5, Auston Matthews signed a five-year contract extension with the Maple Leafs for $58.15 million. Only $3.65 million of that sum is in the form of regular salary. The rest: $54.5 million, is in signing bonuses.
There may be CBA (collective bargaining agreement) or salary cap reasons for structuring his contract this way, but the tax implications are the exciting stuff!
To refresh your memory on athlete taxes in Canada, the main factor in determining how much Canadian income tax a player pays is based on his residency. While many factors can affect the determination of where a player resides for tax purposes, most foreign-born players, like Matthews, can likely structure their affairs to avoid triggering Canadian residency rules.
Why is residency important? Sticking with the Maple Leafs example, players who are residents of either Canada or the United States are taxed on their entire salary in their home country. Those who are considered residents of the U.S. must also pay tax in Canada – but only to the extent of time on Canadian soil. (A quick glance at the team’s schedule tell us this amounts to approximately 73 per cent of players’ salaries.) 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 Canadian income – so he’s not paying twice, just once in each country.
Since 2016, Canadian income tax rates have been higher than all U.S. states’. So, the ultimate cost to a U.S.-resident athlete playing in Toronto is the difference between his U.S. tax rate (between 37 and 50 per cent, depending on the state) and his rate in Ontario, which tops out at 53.5 per cent. This delta between Canadian and U.S. tax rates has been an oft-used argument by some players and agents to avoid signing with Canadian teams.
Enter the concept of signing bonuses. These have become popular in professional sports, especially in the National Hockey League. A signing bonus is 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. Exactly what an athlete might need to convince him to join a Canadian team like the Leafs.
From a tax perspective in Canada, a signing bonus is simple: the amount of the bonus is treated as ordinary employment income, and is taxable in the year received. But, when a U.S.-resident athlete receives a signing bonus to play in the NHL for a Canadian team, a special quirk of the Canada-U.S. income tax treaty kicks in.
The treaty provides that a signing bonus paid by a Canadian NHL team to a U.S.-resident player would be taxable in Canada – but that tax may not exceed 15 per cent of the gross amount of the payment.
Assuming the player’s U.S. tax rate exceeds 15 per cent (it does, remember the 37-50 per cent), the bonus would effectively be taxable at a combined rate equal to his normal U.S. rates. And so, there is no Canadian tax cost disadvantage on the signing bonus amount.
Let’s run some quick numbers – does the signing bonus put an end to a common argument against playing in Canada? At the same total dollars, but without a signing bonus, Auston Matthews’s salary in the first year of his contract would be approximately $15.9 million. Based on his number of work days in Canada, $11.6 million of that would be subject to Canadian tax. Imagine for a second he was debating playing for the team in Arizona instead – his U.S. tax on that income would be 41.5 per cent. So comparing the two scenarios, playing in Canada would trigger a 12 per cent tax cost on the Canadian portion of the income, equaling $1.4 million. But with his signing bonus contract, only $700,000 is ordinary salary and $500,000 would be taxed in Canada. The signing bonus drops his cost of playing in Canada to a mere $60,000 for year one. If the debate was between a team in Canada and a team in New York or California, this number would drop even more, since those states’ tax rates are much closer to Canada’s. So, it is possible that by signing this type of contract, Matthews has saved almost $1.3 million in combined taxes in Canada and the U.S. in the first year alone! Seems like enticement or incentive to me.
Let’s run more quick numbers – what does all this mean for tax coffers in Canada? Assuming again the same total dollars but without the signing bonus, $15.9 million salary would have meant the Canadian government would collect $6.2 million from Matthews in the first year of his contract. Instead, thanks to the signing bonus structure, they’ll collect only $2.5 million. Over the life of Matthews’s contract, Finance Canada will be down approximately $13 million.
Taxpayers shouldn’t worry too much about it though – with Matthews’s help and a little luck, all the ancillary revenues generated from the Leafs’ future Stanley Cup runs will more than make up the difference!
Connect with the Authors
Adam Scherer, BA, CPA, CA
Adam is a Tax partner at Crowe Soberman whose client portfolio includes high-net-worth individuals, owner-managers, professional athletes, film directors and producers, U.S. corporations operating in Canada, and individuals immigrating to and emigrating from Canada. He is also the co-leader of the firm’s Sports & Entertainment practice. Connect with Adam at: 416.963.7174, firstname.lastname@example.org or twitter @SobermanTax.
Jeffrey Steinberg, BA, CPA, CA
Jeffrey is a partner in Audit & Advisory at Crowe Soberman, as well as the co-leader of the firm’s Sports & Entertainment practice. He is knowledgeable, practical and results-oriented in the professional service he provides clients and his holistic approach to client needs is what separates him from others. Connect with Jeffrey at 416.963.7105 or email@example.com or twitter @SobermanSports
David Silber, BComm, MMPA, CPA, CA
David joined Crowe Soberman in 2010 and is a partner in the firm’s Tax Group. David works in all aspects of the firm’s tax practice, including domestic and international tax. David’s expertise includes estate and trust planning, domestic tax, corporate tax planning and corporate reorganization and structuring. Connect with David at 416.963.7196 or firstname.lastname@example.org