Tax Season: Part 5 discusses when should NHL players open a corporation.
If you haven’t had a chance to watch Parts 1 to 4, check out the videos below.
Opening a corporation is an opportunity available to players if they’re earning endorsement income. This will shelter some of that endorsement income that they’re generating while they’re still playing.
This applies only to players who are earning an endorsement contract. Whether that’s CCM or Nike’s who pay you to use their equipment, run an ad tv ad, or whatever it may be. If they’re paying you an endorsement contract outside of the salary that you’re earning from the team that you’re playing for, it may make sense to incorporate your personal brand. All of that marketing income can run through your business.
I won’t go into the finer details of what a corporation is and how to set one up. If you have any questions about that please ask.
Benefits of Corporation
Today I want to show the benefits of having your endorsement income inside your corporation.
In this example, we will look at a player who’s earning $3 million in annual salary. They live in Manitoba and are filing taxes as a Manitoba resident. They earn $500, 000 this year from an endorsement contract. Let’s take a look at how that looks personally compared to corporately.
On the first side, we’re going to add $500,000 to the player’s personal income. Remember you’re already earning $3 million from your team in salary. This $500,000 is going to be taxed at that highest marginal rate. Which in Manitoba, is approximately 50%. After taxes on this additional endorsement income, you will net $250,000. Half of your money goes straight to the government.
Now let’s look at if you had incorporated your personal brand. I’ll use myself as an example. Let’s say I had created Adam Henry Incorporated for the sole purpose of running any endorsement income or marketing income through. My business is going to generate that $500,000 of business income from that endorsement contract. The corporate tax rate in Canada combined with Manitoba is 27%.
Small business deduction
However, there’s something in Canada called the small business deduction. In Manitoba, if you qualify for the small business deduction you can reduce that tax rate from 27% down to 9%.
Paying 9% within your corporation on $500,000 of endorsement income would result in approximately $455,000 after taxes in your corporation. Right away you can see the difference. $455,000 in your corporation or $250,000 on your personal income tax. That’s a significant difference.
Things to consider
There are a few things to consider. This money is still in your corporation, so you don’t have this personally. You can’t just go spend this today personally. If you want to pull this to your personal side and withdraw from your corporation, that will create taxable income personally.
The benefit of having this corporation is you can defer that until a later time in your life when your personal income is lower.
Let’s say you’re no longer earning that $3 million contract, you’re retired, you’re in your 40s and you haven’t started collecting your NHL pension yet. You could use some of that cash and the retained earnings within that corporation to pay yourself a more consistent income stream in retirement.
This is a very oversimplified example. What I wanted to show you is that you have the opportunity to incorporate your personal brand, by doing so you could shelter some of the taxes in the short term and create a steadier income stream in retirement once your income goes down.
If you have any questions at all about incorporating your personal brand or when it makes sense, please don’t hesitate to reach out there are a lot of nuances within it.
There’s a cost to open the corporation, ongoing costs annually to make sure you’re filing the taxes properly and keeping that business active. Then there’s a whole other discussion about the tax planning and the ongoing preparation to make sure that it’s set up properly and you’re withdrawing the money out of that corporation in the most tax-efficient matter.
At the end of the day, this idea is something that could net you more money in your pocket down the road. It’s worth exploring if you’re earning that endorsement income as a professional hockey player.