YOUR BULLET PROOFING CHECKLIST
Tax and Financial Planning Issues for the Sports Professional
The Pro's Process discusses various approaches to building a solid financial footing for professional athletes from both an offense and defense perspective.
The actual components of your investment portfolio are considered in the offensive perspective while the defensive perspective incorporates many of the discussion points outlined below. These points, while sometimes difficult to address, may be vital to your financial wellbeing. There is no doubt that being a professional athlete brings with it many advantages, however there are also many issues that complicate the life of a young pro which simply cannot be ignored. This checklist provides a starting point for sport professionals, their families, agents and/or advisors, to assist players in achieving financial success now and in the future.
- Creating a foreign or domestic trust
- ncorporating your personal brand
- Retirement Compensation Arrangement (RCA)
- Deciding on tax residency
- Tax planning for a signing bonus
- Starting a charitable foundation
- Creating an immigrant trust
- Reducing U.S. estate tax
- Income splitting strategies for families
- Making mortgage payments tax deductible
- Life insurance: planning for the worst
- Family law considerations: A prenuptial agreement
- Making a will and an enduring power of attorney
- Probate tax planning
While we tend not to think much about the negative sides of wealth, the reality is that well-known, affluent individuals are more likely to be the subject of lawsuits. Being prepared is the key to protecting yourself, your family and your assets. One way to prepare is to consider strategies to protect that wealth. Assuming that there are no existing or foreseeable claims, a common solution is to transfer some part of your net worth into a domestic or foreign trust (subject to U.S. gift tax and Canadian deemed disposition tax), thereby changing the legal ownership of the assets and reducing the value of your assets to satisfy any action against you.
Incorporating your personal brand
You may not think of yourself as a business, but your personal brand can be as important to your career as your performance in the game. For many professional athletes, building a personal brand means endorsement contracts, and if you are a Canadian resident earning endorsement income, it may be advantageous to set up a corporation to receive the endorsement revenue rather than it being paid directly to you. This structure could allow you to take advantage of lower corporate tax rates. If the player has a spouse, they could potentially split income with the spouse by paying dividends to her from the corporation. In addition to lower tax rates, as the owner of a corporation your personal assets may be protected from liquidation if the corporation becomes insolvent. In the recent Canadian legislative environment, tax laws are constantly changing. It is always best to consult a good tax specialist before engaging in any of these strategies.
A retirement compensation agreement (RCA)
If a Canadian resident athlete is playing for a Canadian based team, they could consider asking the team to contribute to a Retirement Compensation Agreement (RCA) on their behalf. This could be suitable for an athlete where there is a distinct possibility that they may become a non-resident of Canada when their playing days are over. If the RCA is structured properly, withdrawals form the RCA as a non-resident of Canada can potentially by taxed at very favourable rates.
Other issues to consider related to an RCA:
- For the RCA to be worthwhile, it is important to determine how the country where the player is expected to retire will tax the RCA withdrawals
- An RCA may be an effective strategy for a U.S. citizen playing in Canada who will retire in the U.S.
- There may be some tax savings with an RCA for someone playing in Canada outside Alberta, who expects to retire in Alberta
- It is important to obtain an actuarial report certifying that contributions to the RCA are reasonable based on the player's age, salary, and expected years in retirement
- Assets within the RCA may be protected from creditors
Where an athlete is resident can have a dramatic effect on the overall taxes paid on his income. Normally, the athlete will be resident for tax purposes in the province or state in which they play their home games. However, it may be possible for the player to e a resident in a different province or state where they have greater residential ties (such as home, family, days present, etc.).
In some cases, players coming from a country outside North America that has a tax treaty with Canada or the U.S. could potentially remain a resident of that foreign country if they have substantial ties there; this tax filing position could result in significant tax savings.
At ONE Sports + Entertainment Group, our Concierge Service works with the player's accountant to conduct an analysis to determine which residency status is more tax preferential, and to identify the actions a player may be required to take, in order to solidify this tax position. On the matter of tax residency, the agent fee paid by a U.S. tax resident is likely tax deductible, while an agent fee paid by a Canadian tax resident is not.
Tax planning for a signing bonus
Under the Canada-U.S. tax treaty, a signing bonus is subject to a maximum U.S. tax rate of 15% if the bonus is paid by a U.S. team to a Canadian resident. Similarly, a signing bonus is subject to a maximum Canadian tax rate of 15% if the bonus is paid by a Canadian team to a U.S. resident. This rule provides a significant tax planning opportunity, particularly if a U.S. team is paying a signing bonus to a Canadian resident and then, after receiving the signing bonus, the player becomes a U.S. resident for the remainder of the year. In this case, with the foreign tax credits it is possible that the Canadian tax on the signing bonus will be eliminated and the U.S. tax rate on the signing bonus is limited to 15%.
If the team agrees, it may be worthwhile to structure the contract to include the signing bonus in order to take advantage of this preferential tax treatment.
Starting a charitable foundation
In the past, some of our clients have decided to set up a charitable foundation in their own name to raise funds, donate to charitable causes, and reduce their own income taxes. There is an option to set up a private foundation for more control, but at a greater cost, or a public foundation for slightly less control but at a lower administrative cost. We can assist in creating either structure.
Creating an immigrant trust
A player with savings of $2MM (Cdn) or more and who is going to become a new resident of Canada may wish to consider setting up an offshore immigrant trust to invest their surplus savings. In this case, the investment income earned in a properly structured offshore immigration trust can help avoid Canadian income tax for up to five years of residency in Canada. This strategy will not work in a situation where the player has lived in Canada for the previous five years.
It is also possible that an immigration trust could provide some tax savings for a U.S. citizen coming to Canada, though a cost/benefit analysis should be conducted before a decision is made.
Reducing U.S. estate tax
U.S. citizens, U.S. green-card holders and domiciled U.S. residents (sometimes referred to as U.S. persons) are subject to U.S. estate tax on the fair market value of their worldwide holdings upon death. This estate tax can be as high as 45%. Individuals who are not U.S. persons are potentially subject to U.S. estate tax on only their U.S. assets (which are generally U.S. stocks and real estate) on death, regardless of where they lived in the world. Currently however, U.S. estate tax is only applicable if worldwide assets are greater than $11.2MM. If the player or his spouse is a U.S. person, it is important to be aware of some specific will planning strategies that can minimize U.S. estate tax. If you are a U.S. citizen living in Canada, you may be subject to both the Canadian and the U.S. tax regimes at your death.
Clearly there are a number of possible strategies one can consider to minimize or defer U.S. taxes, and we explore all of these options as part of our services to our clients.
Income splitting strategies for families
If a player is married and his spouse has a low level of income, there may be a variety of income splitting strategies available that can be used to reduce tax on investment income. Since everyone in Canada files a separate tax return (unlike the U.S.), family income splitting opportunities are more widely available in Canada. Spousal loans and family trusts are commonly used income splitting (and thus tax reduction) strategies to consider for use in Canada to reduce the family tax burden on investment income. Since these strategies are constantly being revamped and re-assessed by the Canada Revenue Association, it is always best to consultant a qualified accountant or cross-border specialist prior to implementing any strategy.
Making mortgage payments tax deductible
This is a topic that can cause confusion. For Canadian tax purposes, interest paid on a mortgage to purchase a Canadian or U.S. personal residence is not tax deductible. It is only tax deductible for Canadian tax purposes if the property is used for investment reasons. In addition, interest can be deducted for Canadian tax purposes on loans used to purchase investments that have a potential to pay income (stocks, bonds, mutual funds for example).
For U.S. tax purposes, interest paid on a mortgage secured on your main home or on a second home can be tax-deductible (within certain limits). The loan may be a mortgage to buy the home, a second mortgage, a line of credit, or a home equity loan.
Some of the limits imposed include the following:
- If the mortgage is taken to buy, build or improve your home, interest up to $1 million U.S. of the mortgage is tax-deductible for U.S. Tax purposes.
- If the mortgage is taken for reasons other than to buy, build or improve your home, interest on up to an additional $100,000 U.S. of the mortgage is tax-deductible for U.S. tax purposes.
No one likes to think too much about death, disability or critical illness, but the truth is that "shift happens"; things can change very quickly and not always in a good way. Professional athletes need to protect themselves from injury and sickness, especially during their careers, when earnings and the risk to their physical health are high. Also, in most cases professional athletes are the main breadwinners in the family, so by insuring themselves they are also protecting their spouses and children. Part of our job is to raise these matters, so we can plan for the worst, while hoping for the best. There are various components to Life insurance planning, and at ONE Sports + Entertainment Group we focus on Critical Illness Insurance, Permanent Life Insurance and Disability Insurance. We will examine each of these separately, with a particular emphasis on what is right for your own individual situation.
Family law considerations: A Prenuptial Agreement
Although it is a difficult subject to broach, the possibility of the athlete singing a marriage contract with his fiancés must be discussed, in order to ensure that the player's assets are protected from division should a marriage breakdown occur in the future. Based on statistics, there is a higher rate of divorce among professional athletes than among the general population, and this likelihood increases after retirement when earnings decrease. So, the issue simply must not be ignored.
Note too that player living common-law may also be impacted financially by the breakdown of the common-law relationship. We assist them by providing pertinent information a player can use before entering such a relationship.
Making a will and an enduring power of attorney
We recommend that the player have a Will and Power of Attorney in place and updated in the jurisdiction where they are resident. Furthermore, if the player has real estate or assets in another country (that is, a Canadian player with assets in the U.S. and vice versa) we have seen them consider establishing another Will and Power of Attorney in the province or state where those assets are located.
Through our cross-border contacts, we can refer players to the appropriate experts. In addition, One Sports + Entertainment group has its own in-house expert to assist you in navigating the sometimes confusing, but very important area of Estate Planning.
Probate tax planning
Some provinces (including Ontario and B.C.) and some U.S. states levy a flat probate tax on the value pf the estate's assets upon death. Real estate assets may also be subject to probate tax, even if the player is not a resident of the province or state where the real estate is located. Probate taxes are levied in addition to any U.S. estate taxes or Canadian income taxes payable on death.
We advise our clients of the various probate avoidance strategies including holding assets in joint tenancy or through living trusts. Revocable living trusts are common vehicles to hold U.S. real estate assets to help minimize U.S. state probate taxes. For this and any other Canada/U.S. strategies we discuss in this paper, it is important to work with expert cross-border tax and estate advisors. ONE Sports + Entertainment works with a select number of these professionals, a select number of which we recommend to our clients.
The materials discussed in the Bulletproofing Checklist is based on current tax law. It is provided for information purposes only and should not be construed as offering tax, investment or legal advice. Individuals should consult with qualified tax and/or legal advisors familiar with both Canadian and U.S. tax issues before taking any action based on the information contained herein.