How much will it cost you in additional income tax dollars to play in Canada? With professional sports leagues operating in both Canada and the US, athletes and their representatives should understand the international income tax consequences of playing across the border. Failure to do so could cost hundreds of thousands of dollars in additional tax liabilities.
The income tax policies of Canada and the US differ in two important ways. First, the US’s personal income tax system is based on both citizenship and residency, whereas Canada’s personal income tax policy is based solely on residency. Second, an athlete performing services in Canada is only required to file one income tax return to the federal government while the athlete performing services in the US is also required to file a state income tax return for each state in which non-resident services are performed.
To evaluate the practical consequences of each country’s income tax policies, I looked at the tax consequences of two identical US resident hockey players. One played in Buffalo and the other in Toronto. Each player’s salary for the 2009 tax year was $3,000,000 US. Both hockey players were residents of New York, had identical itemized deductions that included state income taxes paid, agent fees ($120,000 or 3%), union dues ($5,790) and trainer’s fees ($5,000).
The end result is dramatic: the athlete who played for the Maple Leafs in Toronto paid more than $350,000 more in income taxes between the two countries than the athlete who played in Buffalo and only filed a US federal return.
The additional tax was caused by two specific issues. First, Ontario’s province income tax rate of 17.15% is nearly double the US state income tax liability of only 9.89% (even though the nonresident state filing requirements were greater in the US).
Second, although the Tax Treaty between the US and Canada alleviates some of the double taxation burden between the two countries, it does not completely eliminate it. As a nonresident of Canada, a US hockey player will need to pay tax on the income earned in Canada. During the 2009 tax year, a US hockey player performing services for Toronto will have earned $2,391,509 (169/212) having a tax liability of $1,093,153. Under the Tax Treaty between the US and Canada, the US provides a tax credit for this tax, which unfortunately is limited to $739,950.
The combination of the two issues outlined above creates a total tax burden on the US athlete playing in Canada of $1,600,182 as opposed to his counterpart’s burden of $1,247,017. That’s $353,165 less, which equals 20.15% of their total potential retained earnings of $1,752,983.
The nearly same result holds true for a Canadian hockey player who has the option to play in Canada or the US. Using the same circumstances as the previous example, it would cost a Canadian athlete $336,281 in additional tax to play in Buffalo than in Toronto. This additional tax is caused by the Tax Treaty between the US and Canada, which doesn’t eliminate the US tax paid on a resident’s Canadian income tax return.
The Canadian hockey player, just like the US hockey player in the previous example, has to pay tax on the income he earned in the US. During the 2009 tax year, a Canadian hockey player performing services for Buffalo will have earned $2,759,434 (195/212) with a federal tax liability of $842,613 and a state liability of $237,298 for a total of $1,126,545. Under the Tax Treaty between the US and Canada, Canada provides a tax credit for this tax, which once again is limited to $790,874.
The end result is an overall tax burden of $1,709,145 for the Canadian player playing in Buffalo as opposed to the tax burden of only $1,372,864 a $335,671 difference which is equal to 20.63% of the player’s total potential retained earnings of $1,627,136.
However, unlike the previous example, the Canadian hockey player can take advantage of potential tax planning strategies to alleviate the burden and make it more beneficial to play in the US. Remember, Canada’s income tax policy is based on residency as opposed to citizenship. So a Canadian hockey player who establishes residency in the US does not have to file a resident Canadian income tax return. As a result, his tax liability is exactly the same as his US counterpart’s. He actually eliminates any potential double taxation and makes it more beneficial to play in the US.
The two examples above illustrate how international tax issues play a major role in the amount of actual salary a professional athlete retains. That’s why it’s important for athletes and representatives to understand residency issues, the Tax Treaty between the US and Canada, and the differences between the state and provincial tax rates. For additional information on international tax issues or if you would like me to determine the income tax consequences of two potential contract proposals, please contact me at email@example.com or 585-705-3405
ALAN POGROSZEWSKI is an Assistant Professor of Sports Studies at St. John Fisher College and the President of his own tax consulting business whose clientele include professional athletes performing services on three separate continents. Prior to accepting his position at St. John Fisher College, Mr. Pogroszewski was the Vice President of Business Operations for Sports Consulting Group, a firm that specializes in the representation of professional hockey players. Mr. Pogroszewski received his M.B.A. from Rochester Institute of Technology in 1996 and his M.S. in Taxation from St. John Fisher in 2003