Proactive tax planning a must for athletes on both sides of the Canada-U.S. border
By AdvocateDaily.com Staff
Professional athletes plying their trade in both the United States and Canada need to get an early start on maximizing the tax efficiency of their affairs, says Oakville-based U.S. tax attorney Alexey Manasuev.
“Often their careers are much shorter than those in other fields, but their financial goals are still very high in the longer term,” says Manasuev, principal of U.S. Tax IQ, which represents Canadian and American based pro athletes and coaches.
“In addition to cross-border income tax compliance challenges and planning, they have to start thinking about estate planning and asset protection at the early stages of their careers to ensure they can continue to live comfortably long after retirement,” he adds.
“Ideally, we get involved at the beginning, even though the biggest tax impact will come later when their incomes tend to increase,” says U.S. tax accountant Brandon Vucen, a U.S. Tax IQ principal.
The pair provided AdvocateDaily.com with some tips and considerations for sports stars with cross-border interests.
The Canada-U.S. income tax treaty limits the maximum tax rate on signing bonuses at 15 per cent in the country where the athlete plays, with the balance paid in their country of residence.
“This is a bit of a perk for American players in Canada because that income is not subject to the high Canadian tax rate,” Vucen explains. “In some deals, the tax treatment drives the structure of compensation for American players performing in Canada.”
Retirement Compensation Arrangements (RCAs)
RCAs offer great tax planning opportunity to pro athletes. They are open to both Americans and Canadian residents and, when properly structured, allow Canadian tax residents to defer certain amount of income.
Vucen says it can be beneficial to receive the money in later tax years or after the player retires because the 50 per cent withholding tax rate for a distribution from an RCA is lower than the effective top tax bracket in many Canadian provinces.
Because the tax residency of pro athletes can change rapidly due to unanticipated trades, a pro-active tax residency and pre-immigration tax planning is key for professional athletes, he adds.
U.S. Tax I.Q. also helps pro athletes in managing U.S. state tax residency issues. Vucen says the differences between the tax regimes of individual states create both opportunities and challenges for players who still must file returns in the U.S.
“Some states, like Florida and Texas, don’t impose any personal income tax. If players are in Canada for half the year and don’t necessarily need to be located in a particular state, then establishing their residence in one of those states may reduce their tax burden,” he says.
U.S. Tax Reform
Manasuev says the ongoing reform of the U.S. tax system, and particularly the cut in corporate tax rates from 35 per cent to 21 per cent, “represents a planning opportunity” for athletes with business interests.
However, while professional athletes may benefit from overall lower corporate and individual tax rates, and favourable pass-through business provisions, Vucen says other changes brought by the Tax Cuts and Jobs Act, expected to be signed into law by the President next week or during the first week of January 2018, could have a negative effect. For example, the new bill would eliminate “unreimbursed employee business expenses,” as eligible itemized deductions on U.S. tax returns, which many players have applied to their agent fees.
“A large chunk of athletes’ salaries are spent on agent fees, so losing the ability to deduct those will have a fairly big impact,” Vucen says.
Federal Foreign Tax Credit
“The Canada Revenue Agency is very aggressive” when it comes to the foreign tax credit, Manasuev says.
Historically, the agency allowed taxpayers to make claims without much backup, but now requires proof of the ultimate tax liability on both U.S. federal and state level. On a federal level, the CRA requests a copy of the player’s IRS account transcript. This is easily obtainable, especially when we have a power of attorney on file. However, most states don’t have any account transcripts. Sometimes, the amount of state tax is very low, but it takes months for the player to get some sort of a confirmation from the state tax authority. This adds an unnecessary administrative burden and cost for the athlete. The CRA should accept copies of W-2 slips clearly showing the amount of state taxes withheld.
“The process is extremely laboursome, but U.S. Tax IQ is trying to work with the CRA to simplify the process,” Manasuev adds.