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John Tavares is currently being courted as an impending unrestricted free agent by five American teams and the Toronto Maple Leafs. The Montreal Canadiens are not in the race for all sorts of reasons; that’s his prerogative.
But taxes should not be one of them.
Every year it’s the same story. When the Canadiens strike out in free agency and have trouble attracting the best players to Montreal, taxes always come up as a serious deterrent. But it’s simply not true to say a player would automatically be crippled financially by taxes if he came to play for the Canadiens or the Maple Leafs or any other team in Canada.
“I can make it so signing in Montreal is the same as signing in Texas,” an agent told The Athletic.
Really? Residents of Texas pay federal tax at a lower rate than Canadians and pay no state tax on their home games. That’s tough to beat, no?
“In my opinion, the tax rate can be as low, or if not very close to what it is in Texas, Las Vegas, Florida or Tennessee,” confirms Jason Chevrier, an accountant and tax advisor with an expertise in cross-border taxes. “It’s a myth that Canadian players – I say that because taxes in Ontario are higher than they are in Quebec at that tax bracket – it’s a myth to say Montreal is the worst place to play hockey. Montreal can even be one of the best places if it’s planned properly.”
Now we’re getting to the heart of the matter.
There are different strategies available to players to mitigate the 53 percent tax burden in Quebec, but the most effective of those strategies is called a Retirement compensation arrangement, or an RCA.
Basically, an RCA is a mechanism to defer paying income taxes for high earners who will suffer a significant drop in revenue as soon as they retire. This is something that is available to everyone, but professional athletes are eligible for exemptions that most people don’t have available to them. Not only that, but not everyone has the same financial flexibility to contribute to an RCA as professional athletes. They are in a special category of taxpayers. In terms of hockey players, it is mainly those who will go live in a place where the tax laws are more beneficial once they retire who use an RCA. Many European players and some American residents take advantage of it, but there are still some Canadians who are already planning to retire out of the country.
The way the RCA works is a player will generally place 40 to 50 percent of his salary in a trust and that amount would be sheltered from the high tax rates in Ontario or Quebec, for example. When you put money into an RCA you don’t have access to it until you are no longer employed by the team, but it is intended for when the player has stopped playing professional hockey. Once he retires and is no longer a Canadian resident, he can withdraw that money and pay a one-time tax on it at a rate of 25 percent. In some cases, the tax rate would be even lower if the withdrawal is stretched over a longer period. Not only is it a favourable arrangement, but part of that money in the trust will have grown with interest over a few years.
The RCA can single-handedly make a huge difference and essentially eliminate the tax handicap that plagues Canadian teams.
“I think it can really help,” another agent told The Athletic. “There aren’t too many teams who push this. If I were them, it’s something I would bring up right away. It would be worth it for a team to have a tax specialist in the GM’s office.”
For some reason, some Canadian teams appear to have trouble alleviating the taxation concerns of players by proposing this solution to them. At the same time, the responsibility falls on the agent to properly inform his client because it’s the player who has to initiate the trust and indicate to the team where the money is to be deposited.
Some agencies provide these services to their clients themselves and others outsource them to firms specializing in these matters. But not every agent is created equal and some totally ignore the existence of the RCA route and the potential benefit for their clients.
The fact some teams don’t use this to alleviate a player’s concerns and some agents don’t advise their clients of all the avenues available to them gives life to the common perception that taxes remain a severe Canadian handicap in the NHL.
The players who will become unrestricted free agents Sunday should have a good accountant because taxes for these athletes are extremely complex. It is not a question of simply reading a T4 and using some home tax software. It’s a huge jigsaw puzzle.
A Canadian who plays for an American team, for example, spends the majority of his time in the United States and can therefore declare he is not a Canadian resident. But he still has to produce a tax statement for each American state he played in over the course of the season, another for the U.S. government, another for the government of Canada, yet another for Quebec, and that’s not counting the cities that collect municipal income taxes.
So every player’s tax situation is distinct and heavily influenced by the division he plays in, the schedule, and his primary residence for taxation purposes.
“When we get to July 1 and start receiving offers, we will calculate what $4 million in Texas is compared to $4 million in Alberta, in Ontario or in California,” one agent said. “It won’t be the same net amount, there are big differences. So Canadian teams need to use every advantage they can, and the RCA is one of them.”
The U.S. congress passed a tax reform bill in December that was a bit of a game changer, reducing the highest federal tax rate from 39.6 percent to 37 percent. More help for the rich, you might say, but there are two sides to it. Because while it appears to be good news for the highest earners, that same bill will eliminate certain deductions that allowed for a reduction of taxable income. For example, it was previously possible to deduct state tax at the federal level, which is no longer the case. When you play in California, where the state tax is 13 percent, and suddenly you can’t deduct that amount from your federal taxes, it makes a big difference.
“It really plays in the hand of states that don’t have state income tax,” another agent told The Athletic. “So it’s even more valuable now in Florida, Vegas, Washington state, so Seattle.”
But this reform does favour Canadian markets because of mechanisms like the RCA, which allows players to reduce the gap in how much tax they pay.
It won’t be warmer in the winter, but at least it will be less expensive.
An RCA is not the only way a Canadian team like Montreal or Toronto can present a favourable tax strategy; to a lesser extent, signing bonuses can also be a useful tool.
Because of the tax agreement between Canada and the United States, a signing bonus is subject to a 15 percent tax in Canada and that amount can be deducted from that player’s federal tax bill in the United States. Let’s take an American resident who, on July 1, lists Florida as his primary residence for tax purposes. Even if he is playing for the Canadiens, as long as he receives the signing bonus while he is living in Florida, he will pay less Canadian tax on that amount.
“In the short term it could be an advantage to use signing bonuses,” said Chevrier, the cross-border tax specialist. “But on a long-term contract, the best option for tax savings is an RCA. You could do both but on a seven-year contract, the benefit of the signing bonus is limited.”
Let’s be clear, if a player chooses a team based on tax rates he might not be playing hockey for the right reasons. But taxes are nonetheless one of many considerations unrestricted free agents need to take into account and one the teams who are negotiating with those players need to address. It’s important for a team like the Canadiens or Maple Leafs who are talking to a player who falsely believes Quebec or Ontario is a tax nightmare for him.
There are tools available. It’s just a matter of knowing them and making sure the player knows them as well.
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