Economic forces hinder Canadian NHL Teams
Introduction
For the first time in almost fifty years, Canada has failed to send one of their seven NHL franchises to the Stanley Cup playoffs. With that, it can be expected that Canadian based teams will be looking to make a big splash this off-season when several top tier free agents hit the open market on July 1st.
Unfortunately, their ability to compete in free-agency with their US counterparts is being hindered by economic factors beyond these teams’ control. In the last two years, Canada has seen their currency drop 19% in comparison to the US Dollar. Additionally, Canada’s new liberal government has increased tax on the highest income bracket from 29% to 33% starting this year. All Canadian teams are affected by these factors; however, each individual team will feel these affects differently.
Montreal, Toronto, and Vancouver are viewed as large market teams with financial resources, while Calgary, Edmonton, Ottawa, and Winnipeg are viewed as small market teams that remain budget conscious. Considering this divide, each team will be impacted by either or both of these economic factors.
Large Market Teams
Large market Canadian teams will be most affected by the increased federal tax rate. However, it is interesting to note that the provincial government of British Columbia lowered their provincial income tax rate, and thus, Vancouver will not be as affected as either Toronto or Montreal by the federal tax increase.
The impact of the increased federal tax rate potentially lessens the available cap space of Toronto and Montreal because of their need to pay players a premium. With Toronto likely to be the more active team in free agency this offseason, they will be used in an example to illustrate the impact of the rising Canadian tax rate.
The gold standard for superstar players are the identical contracts of Blackhawks teammates, Jonathan Toews and Patrick Kane having signed matching eight year, $84,000,000 contracts in July of 2014. The contract Toews and Kane signed offer each player an after-tax, or net value, amount of $46,806,992. Last off-season a player signing in Toronto would have required a gross amount of $90,866,898 to have an equal net value to that of Toews and Kane.
The increased Canadian tax rate will likely hamper Toronto’s ability to have the offseason many expect. If Toronto pursues a marquee free agent this offseason and he demands to receive the same net value as Toews and Kane, Toronto would have to offer a gross contract of $99,984,946. A seven-year deal at this amount would carry a cap hit of $14,283,564 and an eight-year deal would have a cap hit of $12,498,118.
If Toronto dips into this year’s free agent pool, per the collective bargaining agreement, they will not be able to offer any free agent from another team more than a seven-year contract without assistance of a sign and trade with that player’s former team.
Realistically, Toronto would have to figure out a way to sign any player to an eight-year deal and even then, they will need to absorb a cap hit of an additional $2,000,000 per season, which would equate to a quality third or fourth line player.
Small Market Teams
Not only are Winnipeg, Calgary, Ottawa and Edmonton facing the rising Canadian tax rate (with Calgary and Edmonton also being affected by the rise of the Alberta tax rate from 11.25% to 15%), but they also have seen a budget gap develop between their revenue and player contract expenses over the past two years.
Because Canadian teams must pay their players in US Dollars (USD) but earn their revenue in Canadian dollars, the depreciating value of the dollar, as shown in the chart below, is the cause of this budget gap for small market Canadian teams.
During the 2014 offseason, the Canadian dollar was exchanging nearly one to one with the USD allowing Canadian teams to sign players to contracts that could be offset nearly dollar for dollar in revenue. Canadian teams went into the 2014 offseason under these circumstances with no idea that the Canadian dollar would dramatically lose value compared to the USD over the next two years..
During the 2014 offseason, the Winnipeg Jets owed $29,000,000 over five years to Blake Wheeler, who signed a 6-year contract worth $33,600,000 with the team during the 2013 offseason. During the 2014 offseason, the Jets expected to need to generate $30,894,875 Canadian in future revenue to cover the remaining amount owed to Wheeler over the life of his contract, which equates to $6,178,975 per year. This would leave the Jets with only a deficit of $378,975 Canadian per year due to the exchange rate.
The falling Canadian dollar dramatically increased the budget deficit Winnipeg faces today. Each year the Jets need to generate $7,366,670 Canadian to offset Wheeler’s $5,800,000 yearly salary. This equates to $1,187,695 more than in 2014 to solely offset Wheeler’s contract.
The chart below shows the budget gap each of the small market Canadian teams face heading into the 2016 offseason. These Canadian teams experiencing an internal budget deficit will be hard pressed to dip into the free agent market and spend significant money on top tier players.
Conclusion
Every Canadian NHL team will be affected by the two changing economic factors in Canada. However, different teams will be impacted in different ways. Teams with the financial resources to spend freely may be limited due to their need to pay players a premium to compensate for the higher taxes the player would have to pay to play there, pushing the team closer to the salary cap ceiling. Other teams have an internal budget that is not as high as the salary cap. If their budget is set in Canadian dollars, their spending on players will be extremely limited.