Canada: Hitting Dingers, But Not Getting Dinged: A Look At Taxation Of Professional Baseball Players In Canada

"The one constant through all the years, Ray, has been baseball."
– Terrence Mann (Field of Dreams)

Another baseball season approaches, and for the first time in 20 years there is much optimism and excitement surrounding the only Canadian team in Major League Baseball (MLB) - the Toronto Blue Jays.

This optimism stems from some key off-season acquisitions, which bring new blood and more talent to the team. While sports fandom was abuzz with excitement, many media outlets (mostly those south of the border) picked up on that other "constant through all the years"- taxes. They seemingly love to point out that players moving from Miami to Toronto are going to take extreme hits to their wallets.

It is very easy for these sports pundits to simply compare federal, provincial and state tax rates and sensationalize the differences. Those differences do make for great headlines. For example, in Ontario, home province of the Blue Jays, the top combined federal and provincial tax rate is a staggering 49.53%. By comparison, in the pre-fiscal-cliff world when the acquisitions took place, a combined U.S. federal and Florida personal tax rate sat at only 35%.That's a mind-blowing 14.53% difference! On a $100 million contract, could that mean that a player who is traded from the Florida Marlins to the Toronto Blue Jays is now paying $14.5 million more in taxes?

That's how it looked to a lot of people... but looks can be deceiving.

In actual fact, the math is not so simple. Let's take a closer look at how baseball players are really taxed in Canada.

To illustrate, assume that the traded player remains a non-resident of Canada and a resident of the United States. Most players leave their families and belongings behind in the U.S. and come to Toronto only long enough to play out the baseball season. They then return home to the U.S. for the off-season.

Residency can be a complicated topic due to the mobility of professional athletes, and is beyond the scope of this article. To learn more about this topic, click here.

Canadian tax rules state that a non-resident is taxable in Canada if he is employed here – specifically, if he performs any of his duties in Canada. That means that a player from any club that plays games in Canada is subject to Canadian taxation, whether he is a member of the New York Yankees or Toronto Blue Jays. Does that mean every time MLB players come to the Rogers Centre for road games that they have tax bills to pay to the Canadian government? Happily for them, no. A tax treaty between Canada and the U.S. exempts players of U.S. teams from paying taxes on those games.

By the same token, a U.S. resident on a Canadian team who performs a portion of his duties outside of Canada would not be subject to Canadian taxation on those days. So, a Blue Jays player does not pay Canadian taxes on income he earns for games he plays outside of Canada – effectively, road games and spring training.

The Blue Jays spend roughly 45% of their time in Canada. Therefore, a U.S.-resident Blue Jay pays tax to Ontario and Canada on only 45% of his total employment income.

The player gets credit for the taxes he paid to Canada when he files his U.S. return – so he avoids double taxation. Effectively, a Blue Jays player ends up paying the higher of the two tax rates between Canada and the United States (factoring in his U.S. state of residence) on his "home game" income.

The comparison of a player's tax burden does not stop with the home game vs. road game factor. Other significant factors come into play. Employees in Canada are very restricted on the expenses they can claim against their income. This is not the case for athletes in the U.S., who can claim agent fees and training expenses as deductions against their income. Agent fees generally run at least 3% of a player's income – potentially a big number! This further inflates the Canadian tax burden as compared to that of the United States.

But countering this effect is the United States' vastly increased tax rates, which came into effect in January 2013. The U.S. now has a top federal rate of 39.6% and a Medicare tax rate of 2.35%. While Canada's social security costs are marginal (Canada Pension Plan and Employment Insurance premiums) and less than their corresponding taxes in the United States (FICA), there is no meaningful Canadian equivalent to the Medicare tax that exists in the United States. Further, an employee of a U.S. organization pays this Medicare tax on his entire income (including the other 55% of his income – the equivalent of his road appearances).

Rising U.S. tax rates and steep Medicare costs significantly narrow the gap between Canadian and U.S. taxes for professional athletes. There may also be other ways for athletes to reduce their Canadian tax bill. This may involve restructuring their contracts to receive a signing bonus. (Signing bonuses get preferential tax treatment under the tax treaty between Canada and the United States.)

Ignoring contract restructuring and using all the variables described above, we computed that the tax bill for a player who is a resident of Florida and moves from the Marlins to the Blue Jays with $100 million left on his contract is only an additional $2.7 million, over the life of the entire contract. It is a significant number, but it is far lower than the $14.5 million some sports reporters would have us believe.

For comparative purposes, if that same player was traded to a team in California, instead of Canada, he would actually be worse off financially! In that case, he would pay an additional $3.5 million in taxes. A move to a team in New York State (where tax rates are similar to Toronto) would cost the player an additional $2.5 million in taxes - assuming that player does not want to live in a swanky Manhattan condo, where city taxes would cost him a further $1.7 million.

Florida and other non-taxed states such as Texas are only a few examples where large tax discrepancies may exist when a player is traded to a Canadian team. However, as illustrated above, the added tax costs for a player moving to the Blue Jays would be no different than if he moved to the Dodgers or the Mets.

While the trade from Florida may cost a player $2.7 million in taxes, the players who came to Toronto this offseason from San Francisco and New York are likely no worse off than before – and may be even better off financially.

The bottom line is that it is time to eliminate taxes as a potential reason for athletes staying away from Canada. Baseball players should focus on factors other than taxes when deciding to play here: a beautiful and lively city with fine restaurants and nightlife, and playing meaningful baseball games all summer long in a stadium packed with the best fans in baseball. Those things will help curb any costs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.