Let's Talk Tax and the Tampa Bay Lightning
Calls to adjust the NHL's collective bargaining agreement for Florida's perceived tax advantage are woefully misguided.
Every year on July 1 — and often in the days and months in between — Canadian hockey fans rant and rave about the unfair tax advantage that teams like the Tampa Bay Lightning and Florida Panthers have when trying to sign top-tier free agents. Why else would Jake Guentzel sign in Tampa before even hearing about Vancouver’s rumored big-dollar offer? How else could the Panthers lock up Sam Reinhart to such a discounted extension? The answer has to be taxes, they say.
The discourse around this issue has become so unbelievably absurd, that there are now people calling for the perceived tax disparity to be addressed in the next collective bargaining agreement between the league and its players’ association. However, there are many reasons that a player might sign a deal in one place or the other. It could be the opportunity to be close to family, nice weather, top-notch team facilities, a chance to win alongside Connor McDavid, or, yes, a bit of tax savings. It’s admittedly odd to me that taxes, which form a single part of the value proposition in a given city, are the only one of those things ever talked about as needing to be addressed in the name of parity. Newsflash: Signing in Tampa is not going to give a player the same exact experience as signing in Toronto. Nor is signing in Toronto going to give a player the same exact experience as signing in Los Angeles. Teams need to build a total value proposition when going out to sign players on the market. Few are deciding based on taxes alone.
Nevertheless, it’s taxes that consistently dominate the headlines at this time of year. Ignoring for a moment that the mechanics of any kind of tax-based cap adjustment would be stupidly complex, and unlikely to level the playing field across the board given the individual intricacies at play in each player’s tax situation, it’s worth exploring what the tax advantage actually looks like in general terms.
To that end, when I’m not talking about the Tampa Bay Lightning online, my day job is as a tax lawyer and Chartered Professional Accountant (CPA) licensed in Alberta, Canada. I’ve spent almost every moment of my work days during the last decade addressing tax issues for private companies and their shareholders, both from a compliance and planning perspective. This is an area I’m passionate about, and one that I’m (hopefully) in a decent enough position to comment on given my background.
With that bit of background in mind, I should caveat the rest of this blog. THIS BLOG IS NOT INTENDED TO BE TAX OR LEGAL ADVICE FOR ANY PERSON. NO PERSON SHOULD RELY ON THE CONTENT OF THIS BLOG FOR THE PURPOSES OF MAKING TAX DECISIONS. I AM NOT YOUR LAWYER OR TAX ADVISOR. ANY INDIVIDUAL LOOKING FOR TAX ADVICE SHOULD HIRE A QUALIFIED PROFESSIONAL IN THEIR JURISDICTION. ALL COMMENTS INCLUDED HEREIN ARE SOLELY FOR THE PURPOSES OF A GENERAL DISCUSSION ON HOCKEY.
Now that the formalities are out of the way, let’s consider the case of a fictional Canadian player who is deciding between returning home to Toronto or signing with the Tampa Bay Lightning. We’ll call him Player X, and we’ll assume that he will establish residency under the Canada-US Tax Treaty in whichever jurisdiction his team is based.
When the tax disparity is discussed in broad terms online, people often jump to the highest marginal rates applicable in one jurisdiction vs. the other. In Ontario, for instance, the top marginal rate for personal income taxes is 53.53% on every dollar earned above $246,753 (Canadian dollars).
That 53.53% rate compares to Florida, where there is no state income tax, with a top federal marginal rate of 37% on income earned above $609,350. The difference is striking. Not only is the top rate 16.53% lower, but it also kicks in at a far higher income level. People often do the quick math on that difference and then scream that Florida teams have a wildly unfair advantage when trying to squeeze contracts under the salary cap.
(Oddly, that same screaming never seems to occur when people compare Calgary/Edmonton to Toronto/Ottawa. The top marginal rate in Alberta is 48% starting at $355,845, compared to Ontario’s 53.53% starting at $246,753. Alberta also boasts far more affordable housing and doesn’t impose a provincial sales tax. Alas, I never hear any complaining…)
Of course, that rudimentary analysis ignores a bunch of important factors.
First, for a player resident in the U.S., it’s not as though all of their income is taxable at the Florida rate. The “jock tax” applicable to duty days in other jurisdictions helps to level the playing field between no-tax states and tax states. U.S. tax law is outside my area of expertise, and therefore not the subject of this blog, but CapFriendly has a useful calculator that may be helpful in getting a sense of the impact of those jock taxes that get assessed against U.S. resident players.
Secondly, it completely ignores that many — if not all — Canadian-based NHL players are going to hire highly qualified tax professionals to at least partially mitigate the impact of playing in a high-tax jurisdiction. Veteran agent Allan Walsh, with Octagon Hockey, has been beating this drum on social media for years. He often mentions “RCAs” as the preferred tax planning vehicle of choice for Canadian players, with successful implementation resulting in a tax rate similar to that of a player based in Florida. So, what is an RCA?
In very simple and general terms, a ‘Retirement Compensation Arrangement’, or RCA, is a plan established through the creation of a trust by which payments are made by by an employer or the employee to a custodian for the purposes of distributing them later to that employee after retirement. In our example, contributions would be made to a custodian who would then hold them in trust for Player X, to be received by Player X after his retirement. It essentially allows for a deferral.
If set up correctly and reasonably, the magic of the RCA is that payments made into the plan are generally not taxable to the employee at the time the contributions are made by the employer. For employee-made contributions, a deduction may be available to the player at the time they are paid into the plan provided certain conditions are met.
Instead, amounts are taxed in the employee’s hands at the time they are withdrawn, which may be at a time when said employee has left Canada and established residency elsewhere. If that’s the case, distributions from the plan should be subject to a 25% withholding tax in Canada (or, potentially at a lower rate if modified by tax treaty with the jurisdiction the player then calls home) rather than at the 53.53% marginal tax rate applicable to an Ontario resident. Again in very general terms, that’s how an RCA may be used to substantially lower the tax impact for a Canadian-based player who is going to retire somewhere else. In many cases, such a structure combined with retirement residence in a low-tax jurisdiction or the impact of foreign tax credits can cause the perceived tax disparity between playing in Toronto and playing in Tampa to all but disappear.
Of course, as with most good things in life, there are a couple catches. First, contributions to an RCA are subject to Part XI.3 tax in Canada. This is, in effect, a 50% refundable tax. If the employer wants to contribute $1,000,000 to the RCA on behalf of a player, $500,000 of that must be remitted to the Canada Revenue Agency. That tax is refundable to the RCA when benefits are paid out to the retired employee at a rate of $1 for every $2 paid to the retired employee, but the withheld tax does not earn investment income or interest during the years before retirement. It just sits there doing nothing. As such, a player is giving up the opportunity cost of investment earnings on 50% of the funds contributed to an RCA — which could be significant. That same refundable tax is applicable to realized investment earnings within the plan, as well. So, while an RCA may create absolute dollar savings on taxes, there is a likely a true cost associated with the time value of money for a player who won’t be retiring for many years when compared to a player who earns straight salary at a low tax rate to begin with in a place like Florida.
Second, there is administrative cost and risk associated with maintaining an RCA. It’s not as simple as dumping Player X’s entire salary into an RCA. RCA contributions must be “reasonable” and, to work as described above, the plan must be structured properly to meet certain technical requirements in the Income Tax Act. Beyond the cost of professional services to set the plan up properly in the first place, ongoing reasonability is not defined in Canada’s Income Tax Act, so there are often actuarial costs associated with maintaining an RCA to ensure that the plan remains onside with the law. The reasonability risk and administrative costs associated with these plans are best evidenced by former Toronto Blue Jay, Jose Bautista. Bautista is currently in a fight with the Canada Revenue Agency at the Tax Court of Canada, as Canada Revenue Agency is disputing deductions he claimed for contributions to an RCA. The Tax Court fight will undoubtedly be lengthy and expensive for Bautista, which again grinds against any potential tax win he thought he might be getting when the plan was set up.
So, what’s the bottom line with all this? I keep using the word “perceived” when describing the tax advantage that Florida boasts over Canada for NHL players, largely because the gap isn’t nearly as large as it’s often made out to be. With the right planning strategies in place, NHL players in Canada can absolutely reduce their Canadian tax exposure to make it more comparable to that which they would experience in many U.S. states. With that being said, the unquantifiable impact of risk appetite and the quantifiable impact of both administrative cost and time value of money losses are very real. So, while the Tampa tax advantage may not be nearly as big as it’s often made out to be, it does exist to at least some smaller extent.
But, that small-ish advantage is not what’s truly driving players to sign in Tampa or Miami. Player X is doing it because he has an opportunity to live a great total lifestyle with franchises that have shown a relentless commitment to winning. Being able to wear shorts and sandals to the practice rink matters. Knowing your owner will do what it takes to build a championship roster matters. Not having to deal with crazy attention when you’re trying to enjoy dinner out with your family at a local restaurant matters. Franchise stability matters. Joining a team with a winning culture matters. Again, the total value proposition of playing in Florida right now is pretty damn great. The tax advantage existed when that value proposition didn’t, and just ask the Panthers and Lightning how easy it was to attract talent back then.
As always, thanks for reading.