Kawhi & taxes
In just over a week, Toronto Raptors superstar, fan favourite and “fun guy” Kawhi Leonard becomes a free agent and can effectively write his own ticket to play anywhere in the NBA. Leonard was named Finals MVP after the Raptors defeated the defending champion Golden State Warriors in six games.
Basketball fans across Canada (this writer among them!) are begging Leonard to re-sign with the Raptors, in the hope the team can repeat as champs, following in the footsteps of the Toronto Blue Jays’ back-to-back World Series wins in 1992 and 1993. Local Toronto businesses are offering Leonard incentives to stay, including the use of a multi-million dollar penthouse and free dining under the “Ka’Wine & Dine” initiative. And, of course, he would continue to be paid in U.S. dollars while spending our cheaper Canadian currency.
But what about our notoriously high federal and Ontario personal income tax rates — could that be a disincentive to Leonard re-signing with Canada’s only NBA team versus returning to play for a U.S. team?
Considering that we are most likely up against the Los Angeles Clippers or, possibly even the Los Angeles Lakers, both of which are considered top suitors for him, the tax issue may turn out to be much ado about nothing, considering California also has high federal/state income tax rates for top income earners.
While Ontario’s top combined federal/provincial marginal rate is high at 53.53 per cent, California’s combined tax rate comes close, at 52.65 per cent, consisting of a 37 per cent U.S. federal rate, a 2.35 per cent medicare tax for high-income earners and a California state income tax rate of 13.3 per cent.
Based on a five-year, US$189.7 million max contract the Raptors could give Leonard, his annual income works out to US$38 million. Adam Scherer, a tax partner at Crowe Soberman LLP who wrote a recent blog about the subject, estimated that Leonard’s additional tax bill from playing for the Raptors versus playing for a California team (assuming the same annual salary) would be a mere $300,000 — chump change for Leonard and less than one per cent of his gross income.
Being a Canadian tax resident, however, would subject Leonard’s worldwide income, including endorsement and investment income, to Canadian tax. That’s why many U.S. athletes who play for Canadian professional sports teams often choose to remain non-residents of Canada. Their tax rate payable, then, depends on of which state they are considered to be tax resident.
As a U.S. tax resident, Leonard would only pay tax in Canada based on his Canadian 'duty days,' those during which he is required to be here for the job.
Prior to being traded to the Raptors in July 2018, Leonard played for the San Antonio Spurs, based in Texas. Texas has no state income tax. But, given that Leonard recently bought a US$13.3 million mansion in San Diego, it seems likely the superstar could be considered a California tax resident even if he does re-sign with the Raptors. Sean Packard, a U.S. accountant and the tax director with OFS Wealth, a Virginia-based company that helps athletes and celebrities manage their wealth, thinks that the house purchase alone could make Leonard subject to California state income tax. “The publicity surrounding his purchase of a huge house in San Diego will undoubtedly draw scrutiny from the Franchise Tax Board should he try to claim residency elsewhere,” says Packard.
As a U.S. tax resident, however, Leonard would only pay tax in Canada based on his Canadian “duty days.” Duty days begin on the first day of training camp and end either when the regular season ends or when the team finishes its playoff run. Canadian duty days count the number of days that the players are in Toronto for games, practices, training and days off. Based on the current season, it’s estimated that Canadian duty days are about 67 per cent of total duty days, meaning that Leonard would be taxable in Canada on approximately two-thirds of his Raptors employment income.
According to Scherer, however, Leonard may be able to reduce his Canadian tax exposure by structuring part of his renewal salary as a signing bonus. Under the Canada-U.S. tax treaty, the Canadian tax rate on a signing bonus paid to a U.S. resident would only be 15 per cent. He could then claim a foreign tax credit in the U.S. for the taxes paid to Canada.
But at the end of the day, the choice to re-sign with the Raptors will likely come down to the game itself. “If he signs in Toronto, it will be because he believes he can continue to win championships there,” says Packard.