For professional athletes, coming into a considerable amount of wealth at a young age brings with it many challenges.
Young athletes find it difficult to resist the temptation to spend it all on a lavish lifestyle, complete with sports cars, houses and jewelry.
As is often the case with most professional athletes (basketball, baseball, soccer and football players), the career span of a hockey player is a short one. According to Sports Illustrated, an estimated 78 percent of NFL players are bankrupt or face serious financial stress within two years of ending their playing careers. In the same article, it states that 60 percent of NBA players are broke within five years of retiring.
Given that financial mismanagement is common among professional athletes, it is important that young hockey players establish a solid, well-rounded plan that will help them preserve their wealth for when their playing days come to an end. Many pro athletes assume the money will keep flowing for years, but for the vast majority, this is not the case.
In these complex times, it is important for a player to surround himself with advisors who have the knowledge and experience to deal with his unique needs. Seldom can one look to a single professional who possesses ALL the skill sets required to cover the tax, legal, investment and business issues that could arise.
A proper team should consist of an agent, lawyer, accountant and investment professional. Such a team will provide the athlete with highly specialized professional advice, and would provide crucial "checks and balances" from independent and unbiased parties.
Once drafted, athletes are often prey to an array of "can't miss" business opportunities, many of which come from friends and family. These business ventures range from sports bars bearing the athlete's name, to fast-food franchises, to motion pictures, to inventions — just to name a few. While these "sexy" opportunities, in many cases, draw the player's interest, it is important for the player's team of advisors to weigh in.
Unlike a doctor or dentist, whose income normally rises over the years, the earning curve — or lack thereof — greatly affects how and what an NHL player should invest in. For example, careful tax planning can have a significant impact on an athlete's present situation and can produce results that the athlete can benefit from post-career. Futhermore, subtle differences, such as being paid over a seven-month period, typically yield different advice.
Immediately following a draft, residency determination for the NHL player should be one of the first items to be examined.
Income taxes will likely be an NHL player's largest outlay. The choice of country of residence will greatly influence what taxes the athlete pays. The various filing requirements of a cross-border hockey player are complex and should be handled by professionals who deal specifically in this area.
The Canada-U.S. Income Tax Treaty rules that prevent double taxation are complex but offer those with an understanding of them many planning opportunities. With Ontario's top tax rate of 49 percent, a player could be looking at a 14 percent reduction to the top U.S. federal tax rate of 35 percent.
In addition, the U.S. affords a player the ability to deduct a number of expenses related to his sport, including agent and professional fees and training costs. As a result, an 18-year-old Canadian player drafted by a U.S. team could drastically reduce his overall tax burden, consequently increasing his after-tax cash flow.
The high visibility and skyrocketing salaries of athletes have not been overlooked by the Canada Revenue Agency and the Internal Revenue Service. In view of the governments' quest for increased revenues, a player must take the proper steps to ensure his residency choice is properly documented. This is best done on the advice of a cross-border tax professional.
Originally published July 2012
JEFFREY STEINBERG
Jeffrey is a partner in the Audit & Advisory Group and has established the firm's Sports & Entertainment Group. Jeffrey deals with Canadian, American and International clients handling a variety of issues including tax compliance and filing, cross-border and residency planning, investment review and due diligence.
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.
