In the Tax Season: Part 3, we take a look at one of the tax planning opportunities available to players.
If you haven’t had a chance to watch the first two videos, check out the videos below.
The residency decision
In this example, we will discuss the decision of whether to cease Canadian residency for tax purposes and file taxes as a resident of the United States.
Imagine a Canadian-born player living in Winnipeg, Manitoba, who is now playing in Tampa Bay, Florida, for the Lightning. We will assume that they’re earning 5 million as their annual salary and spend time in Canada and the United States. We’re going to look at the difference in the after-tax income that a player can earn based on the tax rates in those two places.
Example
If they’re earning 5 million dollars, we can assume they are in the highest marginal tax bracket in both those jurisdictions.
Starting with Winnipeg, you pay tax both provincially and federally, so the provincial tax rate for the highest tax bracket is 17.4%, and the highest tax rate federally is 33%. The all-in tax rate is 50.4%. To keep things simple, after taxes, you’d have 2.25 million dollars.
In Tampa, if you filed taxes as a Tampa Bay resident, the state tax in Florida is zero. Federally, you’d be in the highest tax bracket, which in the United States is 37 %. All in your tax rate would be 37%. After paying your taxes, your net income, again keeping things simple, is 3.15 million.
On the surface, the difference between paying taxes in Winnipeg and Tampa Bay is $900,000.
Summary
This decision can become a relatively huge decision for players. It may make sense for them to cease residency as a taxpayer in Canada and pay taxes in the United States.
However, multiple things will need to be considered. First, do you pass the Substantial Presence Test, and can you actually file as a United States resident?
There are rules and tiebreaker rules that come into effect. Essentially are you spending enough time as a resident of the United States? If not, you will have to pay taxes as a Canadian resident.
The second thing is, do you have any significant assets in Canada. There may be a significant tax liability when deciding to cease residency since your assets will be deemed disposed of when ceasing residency.
Lastly, what happens if you get traded back to Canada, and you want to become a Canadian resident again?
The best option is to discuss your situation with a cross-border tax professional. They will be able to the above questions and help make the best decision for your situation.
Stay Tuned
In Part 4 of the tax season series, I will be discussing RCA trusts. RCA Trusts are an opportunity in Canada for Canadian taxpayers and pro hockey players to possibly shelter some of that income to make up that difference between how much tax you pay in Canada compared to some of these states that have no income tax.
