Tax in Professional Sports
Getting your first professional sports contract, getting traded, or considering any big move is a huge step! Now it’s time to consider the income tax issues from this change. The tax hit can be the single biggest bite out of your paycheck and it’s important to understand what you can do to minimize the extent of the bite. Most professional athletes will need to consider both the US and Canadian tax rules.
This checklist covers some general tax considerations that you will want to think about – focusing mainly on hockey players. When we say ‘think about’, we mean that you should always discuss these matters with a professional tax advisor and be sure to cover all of your personal facts and circumstances before executing any tax plan. Your specific facts and circumstances can impact the tax answer quite a bit.
Rather than leave the best for last, let’s start with the most important items first:
1. Tax Residency Tax residency is one of the top tax considerations for a hockey player that is moving to another country or even another state/province. You are generally a ‘tax resident’ in the state/province and country where you live on a day to-day basis and where you would consider your ‘home’ to be. If you move around a lot, live separately from your family for big chunks of time, or have dual citizenship, your tax life won’t be as simple as you may think. You could be subject to US tax rules and Canadian tax rules and may need the help of the US Canada Tax Treaty to avoid doubletax.
Tax residency and immigration are usually separate, but can get blurred. Even within one country, your tax residency in a particular state or province can have a big impact on the overall amount of tax you pay. Where you are resident for tax purposes and knowing what comes with that status are critical.
2. Planning, Planning, Planning Signing a contract is a long-term plan to bring in revenue. While making this plan, it’s just as important to make a plan for keeping as much of your hard-earned money as possible. Many people think about tax only when it’s time to prepare tax returns. The tax return shows all the ways you brought in money during the year, and calculates how much of that goes to the tax authorities. That means you have an opportunity to plan how your money comes in, so you can minimize how much leaves on its way to your bank account! A great example is receiving a bonus. Bonuses you receive for signing, good performance, or making the play-offs will all be taxable and it’s important to have a plan for these payments before you receive them to try and minimize your final tax bill. There is often co-ordination required with your club’s payroll team, and perhaps other steps – early action gets best results!
3. Endorsements & Public Appearances Not only is this a good way to generate extra cash, but your “brand” may be treated as a business with its own income and expenses inside your tax return. This creates some tax planning ideas which could save you some money. For instance, some expenses that wouldn’t be deductible against your regular employment income could be deductible against your business income. Have to take a trip to Miami for a photo shoot? Just keep track of all your income and expenses in an organized manner or sit down with your tax advisor to figure out how to deal with it beforehand.
4. Other Deductible Expenses As discussed above, it is important to keep track of expenses that might be deductible against your income. The types of expenses that are deductible will depend on whether the income is employment income or business income. It is important to discuss these items with your tax advisor so you know what you should and shouldn’t track, you may also come up with ways to deduct expenses you didn’t think possible.
The following are some popular examples of deductible items:
Agent fees, legal fees, accounting fees and any other fees paid to professionals;
Banking and investment fees;
NHLPA and PHPA Dues, or any other similar fees or dues;
Car expenses – including related expenses such as gas, oil, maintenance, insurance, tolls, etc. and important to note business miles vs. personal miles;
Trainer Fees/Tips (make sure the payments are made by cheque for tracking purposes);
Travel fees and some amounts for meals and entertainment – not all expenses will be deductible however good to keep track of it. For example, a reasonable amount spent on meals in excess of per diems for away games will be deductible;
Professional sports equipment such as skates, sticks, weights, running shoes, athletic apparel and potentially other items such as massage, vitamins/nutritional supplements;
Office supplies incurred in communications with agent/accountant/club/fan mail, etc.;
Business phone expenses required for discussions with coach, agent, team, etc.;
Publicity and marketing costs such as game tickets, etc.;
Some league and team fines incurred during course of the year; and,
Cabs, parking fees, tolls (for business purposes such as away games).
5. Professionally Prepared Tax Returns You may need to file tax returns in every jurisdiction in which you play – this means Canada, US Federal and every State that you play in. It can get messy. If you’re a US citizen, you’ll have an extra layer of forms to file as you continue to be subject to US tax rules even if you are not a Tax Resident there. Canadians that move to the US who give up their ties to Canada may not need to file a Canadian return unless they play in Canada. Your team will generally provide you with an accurate listing of the various jurisdictions where you need to file. However, the payroll group treats everyone generally, and prepares your tax reporting slips that way. It is in your best interest to review your specific needs in advance with your tax advisor and compare this to what your club is preparing for you before the end of the year. This way, the reporting that the club provides the tax authorities matches your situation, and there is no need to respond to messy audit letters later on. A solid tax preparer, combined with a great plan will help ensure you pay as little tax as your situation requires, and will help minimize the dreaded double-tax that occurs if you pay tax on the same income in two different jurisdictions!
6. Tax Efficient Investments Having investments that generate income is a great way to build long-term wealth. Like the strategy with your hockey income, you should be looking to keep as much of this income for yourself / your family as possible. If you are moving to a different state or country, you need to review the tax issues for investment income in your new home. Different countries have different rules for investment vehicles. You need to be aware of these rules in order to make them work for your situation. For instance, if you move out of Canada you could be subject to what is called a “departure tax”. Or, there may be certain ways to earn investment income that get you favorable rates. There may also be investment types that are allowed in one country, but not in others. Rather than being caught in an expensive situation, discuss your financial plan with your tax advisor to make sure it’s tax-efficient.
7. Retirement Planning Unfortunately hockey careers tend to be shorter than office careers. In order to be ready for that next phase, we will need to consider any potential deductions for retirement planning accounts for the jurisdiction you live in, or are moving to. We should also discuss the tax treatment of any existing registered retirement accounts that you have such as a TFSA or RRSP accounts in Canada or the IRA or 401K accounts in the US. There may be special mention made of these accounts to the tax authority where you live, and you may also want to consider having all of your accounts in one place.
8. Disclosure Requirements The tax authorities hate to think they are missing out on potential tax money from their residents. This means that apart from the tax planning issues, we may also need to consider foreign disclosure requirements that arise when you keep accounts in your home country while moving to a different country. Both the US and Canada have significant foreign disclosure requirements with stiff penalties for failure to comply. Depending on the extent of your holdings, it can be costly and time consuming to comply with these requirements. Best to have these items dealt with in advance in order to have peace of mind throughout the year.
9. Estate Planning You need to consider and be aware of any estate tax planning issues in the country you are moving to. There may be very different rules and some estate planning or creditor proofing may be prudent. The extent of estate planning required will depend on the level of worldwide assets that you own. Keep in mind that a person’s domicile for estate and gift tax purposes could be different than their tax residency for income tax purposes. Also, don’t be too quick to apply for a Green Card in the US as that can have longterm tax implications that could be far more costly than visa renewal headaches. Finally, depending on where you live, ensure that you have considered appropriate cohabitation or prenuptial agreements when you are planning to live with your partner.
10. Avoid the “Dressing Room Tax Plan” There may be some legitimate tax planning opportunities such as setting up trusts or a corporation. However, be aware that these opportunities usually involve sophisticated tax planning which will be very specific to particular situations. Just because a friend or colleague is doing it, it doesn’t mean it will be right for you. Do your homework, discuss it with your tax advisor, and be careful before jumping into more complicated tax plans, especially if they sound too good to be true!
For more information, please contact:
Arun (Ernie) Nagratha, CPA CA, CPA (Illinois) Partner T: 416-214-7833 ext.102 F: 416-214-1281 arun.nagratha@trowbridge.ca
Wayne Bewick, CPA CA, CFP, CPA (Illinois) Partner T: 514-866-4913 F: 416-214-1281 wayne.bewick@trowbridge.ca