Always look on the bright side, right? Well, it turns out there’s a bright side even to the fiscal cliff — for Canada.
The Bush tax cuts for the wealthy, which expired on Jan. 1 as part of the cliff deal, return the highest individual U.S. tax rate to 39.6%, up from 35% in 2012. This officially makes Alberta the most tax-friendly place to play in the NHL, according to Sean Packard, director of Tax at OFS, which offers wealth management services to pro athletes. The provincial rate, he notes, is only 10%, which added to the federal rate of 29%, brings Alberta’s marginal rate to 39%, lower than the U.S. federal rate alone. For the Edmonton Oilers and Calgary Flames, it could be a much-needed boost in recruiting talent.
Other Canadian teams stand to gain as well. The Vancouver Canucks now come in seventh, rather than 23rd, in Packard’s ranking of NHL teams by after tax-income based on a hypothetical U.S.$2.5 million salary (see charts below). The Winnipeg Jets soared from 27th place in 2012 to 16th in 2013 after the end of the Bush cuts.
Packard was “blown away” by how much his after-tax ranking changed from one year to the next. “It had always been a given that the U.S. was a better place to play tax-wise,” he told Canadian Business.
It’s hard to believe the change has largely gone under the radar until recently. It might be because players won’t be filing their 2013 tax returns until next year, so many haven’t noticed yet, says Packard. Agents, however, are starting to ring him up to discuss the implications of the new tax landscape.
What about the effect of tax breaks like the U.S. mortgage interest rate deduction, though, which Canada doesn’t have? Packard’s rankings don’t account for all the exemptions players spending most of their time in the U.S. might be eligible for, but the mortgage deduction doesn’t seem to be — excuse the pun — a game changer.
It would save at most U.S.$20,000-24,000, he says, not nearly enough to make up the difference in after-tax income between the Florida Panthers, the most tax-friendly U.S. team, and the Oilers and Flames.
Tax rates on dividends income might still tip the balance in favour of playing for U.S. teams, says Packard, but a player would need to have “a whole lot of investment income,” for that to offset the disparity in income taxation. It might be a relevant consideration for players nearing the end of their careers, who want to save up as much as they can, adds Packard. In general, though, Canada is clearly coming out on top, and you may thank austerity for that.
Erica Alini is a reporter based in Cambridge, Mass., and a regular contributor to CanadianBusiness.com, where she covers the U.S. economy.