After honing his craft over nine National Hockey League seasons, John Tavares finally reached the point this summer where he was free to choose his own destiny.
With 272 goals and 349 assists over 669 career games, he was a prized commodity – a star who was hitting unrestricted free agency in the prime of his career after leaving the New York Islanders shortly before celebrating his 28th birthday, which he did last month.
Despite overtures from teams across North America, however, the Mississauga, Ont., native chose to sign with the Toronto Maple Leafs on the first day of free agency, with a seven-year, US$77-million contract.
But while a rapidly improving Leafs franchise ticked the box in terms of sentiment, it couldn’t hold a candle to other teams in terms of net salary. Every single one of the other 30 teams in the NHL, save for the other Ontario-based club, the Ottawa Senators, likely would have put more cash in Mr. Tavares’s pocket than the total $15.9-million salary he will earn over the course of the 2018-19 season playing for the Leafs. This is because of how Ontario taxes high earners.
Sports agents have long bemoaned the tax rates that high-salaried Canadian-based athletes face. For example, Ontario’s top individual tax rate is 53.3 per cent, the highest among all NHL locales.
But wealthy people have tools that can tamp down the effects of those tax rates.
Financial advisers recommend their high-income clients, such as professional athletes, use a vehicle called a Retirement Compensation Arrangement (RCA) to help offset high income taxes. In basic terms, an RCA allows an individual to sock away up to half of their salary each year and delay accessing it until retirement, when the individual may well be living somewhere else and paying a far lower tax rate.
“They make tremendous sense,” says Trevor Parry, a national tax estate-planning specialist for Raymond James Ltd. in Toronto. “Every player on the team should have one.”
Mr. Parry has put RCAs to work for numerous pro hockey players among the Leafs and Montreal Canadiens.
He has also tried to put them in place for Toronto Raptors basketball players, but the National Basketball Association’s collective bargaining agreement bans the practice. The NBA felt the implementation of RCAs gave the Raptors, the sole franchise outside the United States, “an unfair advantage,” according to Mr. Parry.
RCAs work best for players who don’t eventually plan to retire in Canada. Many choose to move back to Europe or U.S. states such as Florida or Texas that have no state income tax.
For those who plan to stay north of the border, though, even leaving the provinces of Ontario or Quebec, where the tax rate for high earners such as Mr. Tavares would be 53.16 per cent, can be beneficial. “As long as you’re out of Ontario and Quebec, you’re out of the plus-50-per-cent range,” Mr. Parry says.
Despite the obvious benefits of RCAs, the prevailing sentiment seems to be that they are underused, both in professional sports and elsewhere.
According to Jason Pereira, a senior financial consultant with Toronto’s Woodgate Financial Inc., many financial advisers and accountants simply don’t understand how RCAs work.
“A lot of accountants don’t do advance tax planning, they just do tax prep, and most financial planners don’t understand taxation,” he says. “In my experience, for athletes, it fits, absolutely.”
When RCAs emerged in the 1980s, the marginal tax rate in Canada was less than 50 per cent, so they were not as efficient as they are today.
“Now that we’re in tax rates in most provinces north of 50 per cent or approaching 50 per cent, it really put [RCAs] back on the map,” says Brian Cabral, senior financial planner, tax and estate planning, with Richardson GMP Ltd. in Toronto. “Not just for athletes, but also for senior executives and business owners.”
People earning more than $200,000 or $250,000 a year would be good candidates, he says.
Regular pension contribution deductions and registered retirement savings plans (RRSPs) work well for those making in and around $150,000 a year or less, but those making more might benefit from an RCA. People whose incomes exceed that threshold "need a different type of plan that can address the gap left behind between your traditional RRSP or pension plan,” he says. “So that’s where the RCA fits.”
For those whose circumstances change – they lose their job or need to access their money – RCAs can be wound up. The Canada Revenue Agency has a special unit in Winnipeg that deals with the administration of these kinds of retirement compensation arrangements.