Taxes and Financial Reporting for American Pro Athletes in Canada
Earlier this week, national baseball writer Jeff Passan published news that the Tampa Bay Rays had received permission to explore becoming a dual city team, playing half of their home games in Florida and half in Montreal, returning baseball to Montreal after a years-long absence.
BREAKING: The Tampa Bay Rays have received MLB's permission to explore becoming two-city team: the Tampa Bay area and Montreal, sources tell ESPN. The plan: Play early-season home games in the Tampa Bay area and finish the season in Montreal. News at ESPN: https://t.co/X6uSt4KLfC
— Jeff Passan (@JeffPassan) June 20, 2019
This news prompted many jokes about the team being renamed the “ExRays” and otherwise was derided by baseball fans on social media. My initial reaction was that this move would help resolve problems with weather-related cancellations and postponements that occur early in the season in northern cities, but could otherwise raise legal compliance issues for Tampa concerning the USA Foreign Accounts Tax Compliance Act (“FATCA”). FATCA is a law enacted in 2010 by the Obama administration that requires “US persons” (generally speaking, US citizens and green card holders) to report so-called offshore financial assets to the US government under threat of severe financial penalties (never mind that when you live outside the USA, your locally held bank and investment accounts aren’t really offshore). Through agreements with foreign governments, the US government is also able to require foreign financial institutions (and other non-financial foreign entities) to directly report information about accounts held by “US persons” to the IRS. While the goal of this law is to catch supposed offshore tax cheats, it is targeted at individuals rather than corporations (despite the famous ruling by the US Supreme Court that corporations are people). Therefore, the Rays’ main legal compliance issue, if any, concerning FATCA would be answering requests from the US government about US persons with authority over bank accounts held in Canada rather than any actual requirement to do any reporting themselves.
While, as far as I can tell, the team is unlikely to face any major compliance issues regarding potential operations in Canada (especially if they were to establish a Canadian “branch” company of the team), the same is not the case for players who would suddenly incur reporting and tax requirements that they did not expect when signing a contract with a team based in Florida. “Homeland” or “stateside” Americans (those living within US borders) are often unaware of the tax and legal compliance burdens faced by Americans who move abroad to live and work. Americans who play pro sports for Canadian teams, even if they choose to live in the USA during the offseason, will also face these burdens. However, millionaire pro athletes have it better than ordinary working-class persons like me since they have the benefit of tax and legal advisors to assist them with this burden, and are also able to afford this advice.
I am not a lawyer or accountant, so this post is not intended as tax or legal advice of any nature. The content is based on my own experience as an American living outside the USA who has faced these compliance requirements and my own research.
Double Taxation of Earnings
Many of the analyses I have read, such as this one published on mondaq.com, discuss how when an American pro athlete returns home to the USA during the offseason, they are considered a USA tax resident. This omits the fact that US citizens and green card holders are always subject to US taxation, no matter where they live. The United States is one of just two countries in the world that taxes based on citizenship rather than residency. US citizens and green card holders are required to report worldwide income to the IRS. This means if you are an American working in Canada and also are required to report income to the Canadian authorities (Canada Revenue Agency, or “CRA”), this means you may end up being double-taxed by the USA and Canada.
So, how much of a hit does a pro athlete take when playing for a Canadian team? According to the Mondaq.com analysis, “U.S. resident athletes” (athletes employed by Canadian teams who return to the USA in the offseason, as opposed to “expat” Americans) are only taxed on employment income earned while physically in Canada (home games). While the Canadian tax code does not allow for deducting expenses like agent fees and training costs, signing bonuses can only be taxed by CRA at a “maximum rate of 15%.” This tax paid to CRA can also be credited against US tax owed (remember, the US taxes on worldwide income, not just US-sourced income).
When it comes to NBA teams, the highest-tax jurisdiction is Ontario, followed by California and Pennsylvania. Another analysis, discussing the case of 2019 NBA Finals MVP Kawhi Leonard, who is expected to sign a long-term deal with the reigning NBA champion Toronto Raptors or a team in his home state of California, suggests that when factoring in US social security taxes (which are higher than the applicable Canada Pension Plan rate) and Medicare taxes, there is very little difference between Ontario and California when it comes to taxes due (less than 1%). I believe many Americans may not be aware of this, given that they are led to believe Canadians pay taxes at European-level rates for their universal health care and social safety net.
However, the aforementioned analyses only discuss tax rates in Ontario. They do not mention Quebec, the neighboring province where Montreal is located. Quebec has the highest tax rates in Canada. The tax burden in Quebec in fact “is closer to that of European countries” than the rest of Canada and the United States since Quebec offers more European-style social services.
This analysis from Forbes suggests that the Rays’ current highest earner, SP Charlie Morton, would take an additional hit of $215K on his salary of $15 million, while a player earning the league minimum of $555K would pay an additional $9,600 if the Rays were to play 40 games per year in Montreal. Once again, the tax effect of such an arrangement would be similar to playing half the season in California (for what it’s worth, if I lived in California, I would be upset that I was paying such high rates and not receiving universal health care or the same types of social services as Canadians in Ontario and Quebec, who have a similar tax burden).
FATCA and FBAR
As I discussed earlier, “US persons” holding so-called “offshore” financial and investment accounts are required to report them to the IRS under FATCA. The FATCA reporting requirements are in addition to Americans’ requirement to report “foreign financial accounts” to the Treasury Department on FinCEN Form 114, the Report of Foreign Bank and Financial Accounts (“FBAR” or, as I like to call it, “FUBAR“). This reporting is very involved and requires you to turn over account numbers and balances to the US government, who may not be particularly careful about handling sensitive data, given past dealings.
These requirements mean that athletes who reside in Canada part of the year and set up local bank accounts to take care of obligations such as rent and/or mortgages, will be subject to this reporting. If they fail to do so, they can face severe financial penalties.
As suggested by Forbes, the MLBPA would likely not be in favor of allowing Rays players “to be hit with additional taxes for a quarter of the season’s games by playing in Montreal.” I also believe the MLBPA would not be in favor of players taking on the additional FATCA and FBAR compliance risks from the need to bank in Canada if they did not originally sign with a Canada-based team (e.g. the Blue Jays).
I hope this post has been educational about the compliance burdens faced by Americans who choose to live and work outside the USA. In my opinion, Americans should not be subject to FATCA and FBAR reporting for accounts held where they live (same country exception), and the US should not be able to tax income earned by non-residents. While pro athletes in the “Big 4” sports earn millions of dollars and can afford the best tax advice available, imagine what it would be like to face these issues and be forced to pay for advice and assistance as a person of ordinary means. Please consider contacting your Congressperson and asking them to support the Tax Freedom for Americans Abroad Act to move the US to a residency-based taxation system.