A few weeks into 2013, a tax report landed on Allan Walsh’s desk. What it showed gave the Montreal-born hockey agent pause: as of the beginning of the year, the best place for NHL stars to play, tax-wise, wasn’t Florida, Tennessee or Texas, but somewhere in his home and native land—Alberta.
The expiry of the Bush tax cuts on Jan. 1, as part of the “fiscal cliff” deal, has returned the U.S. top federal marginal income tax rate to 39.6%, up from 35%. That’s higher than Canada’s 29% highest federal rate and Alberta’s 10% flat provincial rate combined. In other words, Alberta now has the lowest marginal tax rate for high-income earners in North America—even lower than U.S. states with no state income tax at all.
The implications go well beyond hockey. “People assumed as an article of faith for a long time that income subject to U.S. taxation, as opposed to Canadian taxation, would be taxed at lower rates,” says Saul Abrams, a tax lawyer at Calgary-based Moodys Gartner Tax Law. The old truism, he’s been telling clients, no longer holds. The novel tax landscape is bound to play out to Alberta’s, and Canada’s, advantage, he says.
It’s not just about being a tax haven for the rich. The change affects the calculations of organizations structured as partnerships, whose income is subjected to personal rather than corporate rates, notes Abrams. So-called pass-through entities make up around 94% of American firms, according to the Congressional Budget Office.
Admittedly, it takes a rather mundane $135,055 of individual annual income to make it into the top federal tax bracket in Canada, as opposed to more than US$400,000 in the U.S. Taxpayers who fall below that U.S. threshold are, generally speaking, better off south of the border. For those who do pass the higher American bar, though, Alberta is a compelling option.
Another caveat is that Americans don’t benefit from the lower Albertan rate because Uncle Sam taxes its citizens and permanent residents wherever they live. A number of wealthy individuals have been trading up their U.S. passports for our friendlier northern tax climate in recent years, however, fleeing unpleasant U.S. obligations such as inheritance and gift taxes, which Canada does not collect.
The difference between being one of the lowest-taxed jurisdictions and the lowest matters, says Sean McLean, a partner with executive search agency Caldwell Partners. “Anytime you can use a sound bite that’s as concise and compelling, it’s obviously a tremendous asset,” he says.
Naturally, taxes aren’t everything. Chances of winning the Stanley Cup and chemistry with teammates and coaches rank higher for NHL players, says Walsh. Tax rates are, however, “one of the things we’re always looking at,” he notes. Savvy taxpayers around the world could say the same.