In simply over per week, Toronto Raptors celebrity, fan favorite and “enjoyable man” Kawhi Leonard turns into a free agent and may successfully write his personal ticket to play anyplace within the NBA. Leonard was named Finals MVP after the Raptors defeated the defending champion Golden State Warriors in six video games.
Basketball followers throughout Canada (this author amongst them!) are begging Leonard to re-sign with the Raptors, within the hope the crew can repeat as champs, following within the footsteps of the Toronto Blue Jays’ back-to-back World Collection wins in 1992 and 1993. Native Toronto companies are providing Leonard incentives to remain, together with the usage of a multi-million greenback penthouse and free eating beneath the “Ka’Wine & Dine” initiative. And, after all, he would proceed to be paid in U.S. whereas spending our cheaper Canadian forex.
However what about our notoriously excessive federal and Ontario private revenue tax charges — may that be a disincentive to Leonard re-signing with Canada’s solely NBA crew versus returning to play for a U.S. crew?
Contemplating that we’re almost definitely up towards the Los Angeles Clippers or, presumably even the Los Angeles Lakers, each of that are thought of prime suitors for him, the tax concern could turn into a lot ado about nothing, contemplating California additionally has excessive federal/state revenue tax charges for prime revenue earners.
Whereas Ontario’s prime mixed federal/provincial marginal fee is excessive at 53.53 per cent, California’s mixed tax fee comes shut, at 52.65 per cent, consisting of a 37 per cent U.S. federal fee, a 2.35 per cent medicare tax for high-income earners and a California state revenue tax fee of 13.three per cent.
Primarily based on a five-year, US$189.7 million max contract the Raptors may give Leonard, his annual revenue works out to US$38 million. Adam Scherer, a tax associate at Crowe Soberman LLP who wrote a latest weblog in regards to the topic, estimated that Leonard’s extra tax invoice from taking part in for the Raptors versus taking part in for a California crew (assuming the identical annual wage) could be a mere $300,000 — chump change for Leonard and fewer than one per cent of his gross revenue.
Being a Canadian tax resident, nevertheless, would topic Leonard’s worldwide revenue, together with endorsement and funding revenue, to Canadian tax. That’s why many U.S. athletes who play for Canadian skilled sports activities groups usually select to stay non-residents of Canada. Their tax fee payable, then, is dependent upon of which state they’re thought of to be tax resident.
As a U.S. tax resident, Leonard would solely pay tax in Canada primarily based on his Canadian ‘responsibility days,’ these throughout which he’s required to be right here for the job.
Previous to being traded to the Raptors in July 2018, Leonard performed for the San Antonio Spurs, primarily based in Texas. Texas has no state revenue tax. However, provided that Leonard just lately purchased a US$13.three million mansion in San Diego, it appears seemingly the celebrity might be thought of a California tax resident even when he does re-sign with the Raptors. Sean Packard, a U.S. accountant and the tax director with OFS Wealth, a Virginia-based firm that helps athletes and celebrities handle their wealth, thinks that the home buy alone may make Leonard topic to California state revenue tax. “The publicity surrounding his buy of an enormous home in San Diego will undoubtedly draw scrutiny from the Franchise Tax Board ought to he attempt to declare residency elsewhere,” says Packard.
As a U.S. tax resident, nevertheless, Leonard would solely pay tax in Canada primarily based on his Canadian “responsibility days.” Obligation days start on the primary day of coaching camp and finish both when the common season ends or when the crew finishes its playoff run. Canadian responsibility days rely the variety of days that the gamers are in Toronto for video games, practices, coaching and days off. Primarily based on the present season, it’s estimated that Canadian responsibility days are about 67 per cent of complete responsibility days, that means that Leonard could be taxable in Canada on roughly two-thirds of his Raptors employment revenue.
In response to Scherer, nevertheless, Leonard could possibly cut back his Canadian tax publicity by structuring a part of his renewal wage as a signing bonus. Underneath the Canada-U.S. tax treaty, the Canadian tax fee on a signing bonus paid to a U.S. resident would solely be 15 per cent. He may then declare a international tax credit score within the U.S. for the taxes paid to Canada.
However on the finish of the day, the selection to re-sign with the Raptors will seemingly come all the way down to the sport itself. “If he indicators in Toronto, will probably be as a result of he believes he can proceed to win championships there,” says Packard.
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Property Planning with CIBC Monetary Planning & Recommendation Group in Toronto.