Tax Season: Part 4 discusses RCA Trusts. An RCA Trust is an option for players playing in Canada to help mitigate some of the higher taxes they will have to pay.
RCA stands for retirement compensation agreement. Let’s discuss an overview of:
- how the trust works
- how you use it
- the biggest benefit of the trust and
- how it can create income in retirement.
If you haven’t had a chance to watch Parts 1 to 3, check out the videos below.
How does the trust account work?
It’s an agreement between the player and a sponsor. The sponsor would be your team, so if you’re playing for a Canadian club, say the Winnipeg Jets, you could have the Winnipeg jets help you set this up.
You would direct a portion of your annual salary into the RCA trust.
Here is an example.
If a player is earning $5 million, to keep it simple, what you could do is direct $1 million of salary into the RCA trust.
The remaining $4 million would show up on your tax return as taxable income for that year.
The trust is structured into what are essentially two accounts. Once the money is in the trust, there’s an investment account and a refundable tax account (RTA).
The investment account has 50% of the money, and the RTA has the other 50%. The investment account can purchase investments, and that money can grow inside. The refundable tax account needs to balance the investment account.
If the investment account grows, some money will flow into RTA. If the investment account diminishes, money will flow from the RTA back to the investment account to keep the balance between the two accounts.
Benefits of the trust
The benefit of the trust is the tax shelter it provides.
In those early years, when the player is making $5 million and in the highest marginal tax bracket, shelter $1 million of that taxable income and leave it in the trust.
Pay the tax on it down the road instead of paying a hefty tax bill today.
The RCA trust withdrawals are taxed in the jurisdiction that the player lives in at that time.
If the player lives in a jurisdiction taxed more favorably, they would be paying even less tax in aggregate.
Pro hockey players earn most of their lifetime income in a short amount of time. They are going to pay a ton of tax.
By taking advantage of the RCA trust, they can spread that income out over a longer period, pay less tax, and create a more consistent income stream in retirement.
Creating an income in the gap years
In the future, when the player so desires, they can start withdrawing funds from the trust, and they’ll pay tax on the income that they take.
Consider a 15-year career where a player made contributions to their RCA of $1 million each year.
That is a good chunk of change in taxes savings each year by directing money to this trust.
Where this becomes beneficial is at age 35 when they retire.
The NHL pension does not kick in until age 62. What many players do is use the trust to create some income.
Especially in those bridge years to gap between their last year playing and the first year, they start taking their NHL pension.
Now that the accounts have grown over the years, with the help of a professional, the accounts can be structured to pay an income.
A level of income that is tax-efficient and can help maintain the lifestyle that they have become accustomed to.
The money earned today can be spread out over a longer-term. That will result in a lower overall amount of tax being paid.
Initial set up costs
There are a couple of things to be aware of; there is an initial cost to set up the RCA trust. There is also an annual cost to maintain. Both are important to consider.
When working with a tax professional, be sure they understand how to set this up and know your situation.
Withdrawals should be as tax efficient as possible.
Where I come in is to help you understand the best way to use this for you and your family.
I can help put you in contact with a professional who can legally set up the trust correctly.
If a player is playing in the NHL for a Canadian team, the RCA Trust is undoubtedly worth exploring with their advisor.
In the fifth and final video, I will be discussing the benefits of creating a personal corporation.