Taxation of the Hockey Player Versus the Movie Star
This is a story of the unusual difference between the Canadian taxation of non-Canadian professional athletes versus non-Canadian actors and actresses.
Chapter 1 – The Hometown Hockey Hero
Jonathan Tavares grew up in Ontario and played nine seasons for the New York Islanders. He became a free agent in summer 2018 and chose to play for the Toronto Maple Leafs, his beloved childhood team. He and his advisors structured his long-term Leafs contract, similar to that of many other American players: a large signing bonus up front and under the Canada-U.S. Income Tax Treaty to only pay a 15% Canadian nonresident withholding tax on it instead of paying the top marginal Canadian tax rate in Ontario of 53.5%. Assuming he was still a resident of New York when he received the bonus, he would still be subject to U.S. federal and NY state tax on it. Such rates are lower than Ontario’s tax rates and on a $15 million signing bonus, he probably saved approximately $1.5 million in overall taxes.
However, Canada Revenue Agency (“CRA”) objected to this treatment and treated the entire amount as subject to Canadian income tax at regular income tax rates. While CRA gave him credit for the 15% of nonresident withholding tax, they assessed additional taxes up to the 53.5% rate or approximately $6.8 million. Interest was also assessed to bring the total to $8.0 million.
Tavares and his advisors filed a petition to Tax Court. Where his appeal is unsuccessful, he may be able to amend his U.S. federal return to claim an additional foreign tax credit for the extra Canadian taxes now payable to get him a large U.S. tax refund. He may also be eligible to amend his state tax return to do the same. Refunds from these amended returns would help offset the Canadian tax liability he faces. There isn’t much he can do about the interest.
Chapter 2 – The Boys of Summer
Retirement Compensation Arrangements (“RCAs”) are a common planning technique for high income individuals working temporarily in Canada. Funds are contributed to the plan creating a tax deduction for the individual at their top Canadian marginal tax rate of 48% to 54% depending on the province. While an RCA requires the individual to pay a 50% tax on the amount contributed, this tax is refunded as they withdraw funds from the plan. Where the individual withdraws funds from the plan after leaving Canada, the Canadian non-resident tax rate is 25%, much lower than the 48% to 54% tax rate levied on income while working in Canada. Professional athletes playing for Canadian teams often use RCAs to reduce Canadian taxes while playing in Canada.
Three members of the Toronto Blue Jays took advantage of RCAs in the 2010s. Canada Revenue Agency audited the Canadian tax returns for Jose Bautista, Josh Donaldson and Russel Martin and assessed millions of Canadian tax. All three are appealing the assessments in Tax Court.
Chapter 3 – What the Athletes Have in Common
Canada’s top marginal personal tax rates ranging from 48% to 54% depending on the province, are 11% to 17% higher than the top marginal U.S. federal tax rate. While some states such as New York and California have state tax rates approaching 13%, many states such as Florida, Texas, Nevada and Washington have no state income tax. The difference in tax rates on a $10 million salary can put over a $1 million dollars of tax savings in the pocket of an athlete playing for a U.S. based team compared to a Canadian team.
Such difference often dictates where a superstar signs and plays. For fun, let’s review the last five Stanley Cup winners and the top marginal tax rates for residents of the state:
2023 – Las Vegas Golden Knights 37% (no state tax in Nevada)
2022 – Colorado Avalanche 41.4% (Colorado state tax 4.4%)
2021 – Tampa Bay Lighting 37% (no state tax in Florida)
2020 – Tampa Bay Lighting 37% (no state tax in Florida)
2019 – St. Louis Blues 42.4% (Missouri state tax 5.4%)
To encourage professional athletes to sign with Canadian teams, their advisors look for ways to minimize the high Canadian tax rates with the strategies described above. Doing so can help equalize the after-tax income from a contract with a team in a low tax jurisdiction. However, with CRA challenging these strategies, players and their advisors start to run out of options to manage the high Canadian tax rates. It becomes easier to simply sign with an U.S. based team.
Consider the 1999 NBA Draft. With the number 2 overall draft pick, the Vancouver Grizzlies select Steve Francis, a U.S. college star point guard. When asked by a Vancouver radio station about playing for the Canadian west coast based franchise, he stated “It’s cold. It rains a lot. It [the government] takes all your money”. Francis never played a game in a Vancouver uniform; the Grizzlies traded him away before training camp of his rookie year.
The Montreal Expos had difficulty in their 35 seasons attracting and retaining talent. Players on other teams often had “no trade to Montreal” clauses and high levels personal taxation were cited as reasons for this. In 1994, the Expos put together a group of young emerging superstars that led the team to a 74-40 record, first place in the National League and visions of a World Series title until a labour dispute shut down the season. Over the next few seasons, young Expos superstars such as Pedro Martinez and Cliff Floyd would win their World Series rings with U.S. based teams while Canadian born Larry Walker would complete a hall of fame career in the U.S.
Chapter 4 – The Hollywood A Lister
In the mid-1990s, my partner Warren Dueck and I worked on a case study for a Canadian film producer. They were concerned that big movie productions were staying in the U.S. and not coming to British Columbia and Ontario for one reason: taxation of the lead actor or actress. Many of these Hollywood A listers lived and worked in California and when negotiating a deal to star in a major motion picture, they and their advisors had influence over where the movie was shot.
If it was shot in the U.S., the top effective marginal tax rate between U.S. federal and state tax was approximately 45% or 9% lower than the 54% tax rate in either British Columbia or Ontario. Further complicating matters was California, a state that does not allow foreign tax credits thus driving the total U.S. federal, State and Canadian tax rate to approach 60% or 15% higher than if the movie was shot in the U.S. On a $10 million actor’s salary, the additional $1.5 million of taxes could scrub a Vancouver location shoot in favour of Burbank, California. The Canadian film producer was concerned that the Canadian movie industry and the thousands of jobs associated with it would suffer.
Our analysis showed that a hypothetical lower Canadian tax rate on actors and actresses could be claimed fully as a foreign tax credit on their U.S. federal income tax return, effectively delivering the same after-tax income whether the film was shot in Canada or the U.S. The film producer used our conclusions in a study that showed while Canada would receive less in tax revenue from the actor or actress, the thousands of jobs created in a Canadian movie shoot would generate much more Canadian tax revenue than what was lost on the reduced tax rate for one person.
The Canadian film producer and their advisors lobbied the Liberal government on the merits of a lower tax rate for non-resident actors and actresses. In 2001, Finance enacted section 216.1 of the Canadian Income Tax Act, creating a 23% Canadian tax for a non-resident actor and actress providing services in Canada.
Chapter 5 – Go on the Power Play?
Could Canadian professional sports franchises lobby the federal government for a special reduced tax rate for non-resident pro athletes like what was done some 25 years ago for actors and actresses? Justification 25 years ago for came from the surrounding economic benefits of movies shot in Canada. It seems unlikely in the current political climate that Canadians would support tax breaks for millionaires. However, our federal and provincial governments spend hundreds of millions building stadiums and arenas for these franchises in the name of economic development and spinoff, so what is a few million in tax breaks to allow them to field championship contending teams?
It may be easier for CRA to recognize that existing tax laws and treaties allow for legitimate tax planning for non-resident athletes to reduce Canadian taxes and lay down a sacrifice bunt to advance the runner. Athletes playing for Canadian teams still pay full Canadian tax rates on games played in Canada. They and the coaches, trainers, management, arena workers and many others pay Canadian taxes too.
As the tax cases are heard, it may come out that CRA’s assessments are fair with these players and their specific facts and actions being offside with existing legislation. Even where true, the damage to Canada’s reputation as a place for major free agents to play will be substantial.
The fear 25 years ago was that movies would no longer be shot in Canada without tax breaks to non-resident actors and actresses. The fear today should be that with such high-income tax rates Canadian pro sports franchises cannot remain competitive for elite players. While the Leafs will not ever leave Toronto, teams like the Montreal Expos and Vancouver Grizzlies have left Canada for the U.S. resulting in thousands of jobs and millions of dollars of economic activity leaving Canada.
