With the trade between the Marlins & Blue Jays, the deal I negotiated with the Marlins in 2004 for Carlos Delgado looks even better. When the Marlins refused to include a “no trade” clause, I insisted that they agree to unique language that gave Carlos some protection in the event of a trade.
The deal I negotiated contained a guarantee that if he was traded to a team that resided in a state that had a state income tax, the team he was traded to would “make him whole”. In other words he would net out the same amount he would have received had he remained in Florida, a state with NO state income tax. This had NEVER been done in MLB before... and to the best of my knowledge, has not been done by ANYONE since.
BTW, the amount Delgado saved on a contract signed EIGHT years ago is roughly $2,269,500. If you factor in inflation, both inflation in the US dollar approximately 25%
AND 40% increase in Average MLB salary, that figure would increase SIGNIFICANTLY... probably equal to a NET value to Carlos of more than $4 million in 2013 dollars.
The Agents for Jose’ Reyes (Peter Greenberg, now part of Legacy Group), Mark Buehrle (CAA Jeff Berry), Josh Johnson (Sosnick/Cobbe), Emilio Bonifacio (Paul Kinzer who was recently fired from Wasserman Sports), John Buck (Aces) whose companies collectively employ well over 100 Agents and represent more than 1500 Players didn’t protect their clients as well as I protected Delgado. And, as you can see from the article below, they will literally pay a heavy price for being represented by Agents who do a better job of recruiting Players than they do of representing them.
Kurt Badenhausen, Forbes Staff
I cover sports business with rare dip in education & local economies
11/14/2012 @ 12:38PM |1,199 views
Traded Marlins Players Will Take $2 Million Tax Hit In Canada
This is a guest post from K. Sean Packard, CPA, who is the Director of Tax at OFS where he specializes in tax planning and the preparation of tax returns for professional athletes. He can be reached on Twitter at @AthleteTax and firstname.lastname@example.org.
The Miami Marlins are set to trade Jose Reyes, Josh Johnson, Mark Buehrle, John Buck and Emilio Bonifacio to the Toronto Blue Jays in exchange for Yunel Escobar and a handful of prospects. With a combined $40+ million due to these players in 2013, the Marlins’ motivation for this move is to cut payroll for a club that underperformed in 2012. If the trade is approved by the commissioner, the players involved face significant tax consequences.
Being traded from the Marlins to the Blue Jays will cost Johnson nearly $600,000 per year. Reyes and Buehrle will lose similar amounts. Combined the five players will face a higher tax bill of roughly $2 million.
Players across all sports are aware of the tax consequences of signing with a Canadian team, which is why high-priced free agents view the Blue Jays and Raptors with a wary eye when considering their options. It is difficult for these teams to compete on a level playing field with other teams in their respective sports.
Tax rates in Canada are significantly higher than in the U.S., especially for players in Florida, which does not have a state income tax. Under current law, the highest tax rate in the US in 2013 will be 40.5% (39.6% assuming the Bush tax cuts are not extended plus 0.9% Medicare surtax on high earners). Ontario recently increased its highest provincial tax rate to 18.97%. When combined with Canada’s 29% federal rate, players will pay 47.97% income tax in 2013.
The highest paid player involved in the trade was Josh Johnson, who will earn $13.75 million in 2013 (Buehrle is due $11 million and Reyes $10 million). Because Johnson will likely not spend over 183 days in Canada in a given year, he will file there as a non-resident. When taking into account spring training and road games, about 40% ($5.5 million) of his income will be taxable in Canada, resulting in roughly $2.6 million in Canadian taxes. His tax on this income in the U.S. would be roughly $2.2 million, a difference of $400,000 in 2013.
To further exacerbate the players’ tax problem, Canada does not allow deductions for common baseball expenses, which are deductible in the US. These include:
- Agent Fees – Typically 4% to 5% of a player’s salary.
- Clubhouse Dues – Tips paid to clubhouse managers (clubbies) at home and on the road. Clubbies set up the players’ lockers before each game, lay out the pre- and post-game spread, adjust players’ equipment and provide any other service the player may need. It is not uncommon for a player to pay $20,000 to $50,000 in clubhouse dues in a season. Typically the higher earners pay the most.
- Training Expenses – Athletes utilize specialized trainers to maintain their fitness in the offseason, especially as spring training approaches.
Canada and the U.S. both allow deductions for union dues.
As for Johnson, if Canada allowed deductions for baseball expenses, he would deduct 40% of those expenses. Assuming he pays a 5% agent’s fee, $50,000 in clubhouse dues and $10,000 in offseason training in 2013, he would have $300,000 in deductions, resulting in nearly $150,000 of tax savings he will not receive.
Johnson is allowed some relief. Because he is U.S. citizen/resident, he will receive a credit for taxes paid in Canada. But this credit cannot exceed the taxes paid in the U.S. on the same income and does not include the 0.9% Medicare surtax. Further, Johnson must reduce his baseball income by the allocatable portion of his baseball expenses (40%) even though they are not deductible in Canada. This reduces his foreign tax credit to $2.06 million, or nearly $600,000 below what he paid.
While the unused foreign tax credit can be applied to future years, it is unlikely that Mr. Johnson will ever see the majority of it. In order to receive any of the credit back in future years, he would have to sign his next contract with—or be traded to—an American League team who plays games in Canada, preferably an American League East team who plays ten games a year there. If he plays games in Canada for another team, he can treat the earnings from those games as foreign earnings for purposes of the credit carryover. Due to the tax treaty between the U.S. and Canada, income from visiting players is not taxable in Canada.