Tax Matters columnist Tim Cestnick writes an open letter to Kawhi Leonard, giving him all the tax reasons for him to stay in Toronto to play:
In addition to winning the NBA Championship this year, you’ve won the hearts of a nation. These are monumental tasks, as you know. And yet, with the gifts you possess and the Finals MVP performance you delivered, you’re a champion – and an honorary Canadian in our minds. And now here we are. Your free agency.
As I ponder what your presence in Toronto has meant over this past year, I can’t help but put my adviser hat on and think about so many factors that I hope your own advisers are speaking to you about. Think of these as the top personal finance, estate and legacy reasons to re-sign in Toronto.
Create a financial legacy
Take this from someone who advises some of the most affluent families in North America: It will be very difficult for the next generations to create the kind of financial success that you have known.
You have the opportunity to leave a financial legacy behind that could ensure continued opportunities for the next few generations of the Leonard family. But this doesn’t happen easily, and in most affluent families, the family wealth almost always falls to just average levels by the third generation.
If I were your adviser, I would encourage you to earn as much as you can – guaranteed – for as long as you can. So, the difference between earning a guaranteed US$140-million, or US$190-million, is massive. That US$50-million difference alone is sufficient to ensure continued financial opportunity for your family for an additional generation – or more. Please don’t dismiss it.
Maximize your take-home pay
You have some great opportunities in front of you to maximize your financial legacy by reducing your taxes. Perhaps your greatest opportunity is that you have some flexibility in where you pay the majority of your taxes. You’re a U.S. citizen, so you’re going to pay the U.S. federal government share no matter what. But you have some flexibility in deciding whether California, Texas or Canada gets the majority of the rest of the taxes you’ll pay.
How so? Folks are taxed based on where they’re a resident for tax purposes. Some might say you’re a resident in California because you own a home there – but that’s not how it works. Generally, you’re a resident where, in the settled routine of life, you regularly, normally or customarily live. Is that California? Texas? Perhaps Toronto? You likely have the opportunity to determine this for yourself, depending on how you want to set up your life – regardless of which team you play for.
But where should you pay tax? Let’s take a look at the next four years. I want to thank Mark Feigenbaum, a cross-border tax specialist, for the math here. If you play for the Raptors, you’ll earn US$36.5-million a year, or US$146-million over the next four years. If you choose to be a resident in Toronto for tax purposes, you’ll pay US$11.8-million in taxes in Canada, plus US$7.7-million in taxes to the U.S. (federal and state), for a total of US$19.5-million in taxes, and you’ll keep US$17-million for yourself each year.
If you play for a Los Angeles team, you’ll earn US$140-million over that four years. In this case, you won’t be a resident in Toronto, so let’s assume you’re a resident in California for tax purposes. California is a highly taxed state. You’ll pay US$17.6-million in taxes (federal and state) and you’ll keep US$17.4-million for yourself each year – virtually on par with Toronto.
But there’s something else to consider: Under the NBA’s collective bargaining agreement, the Raptors can pay you a signing bonus of up to 15 per cent of your total compensation. And under the Canada-U.S. tax treaty, if you structure your tax residency properly, that signing bonus will face tax at just 15 per cent in Canada. That could drop your Canadian tax bill by as much as US$4.2-million over a five-year contract. This would reduce your overall tax burden for playing for the Raptors to less than your tax bill for being a resident in Los Angeles and playing for the Lakers or Clippers.
To sum it up: Over the next four years, you could take home as much as US$80.6-million playing for the Raptors and structuring your signing bonus and tax residency properly, while you’d take home US$69.6-million playing in Los Angeles facing taxes as a California resident. That’s an US$11-million potential benefit for playing in Toronto.
Consider the extra year
What about the extra year the Raptors can provide on your contract over Los Angeles? That fifth year is worth an additional US$43-million before taxes. Some would say, “No big deal, Kawhi will earn that somewhere else, if not in Toronto, when he signs at the end of four years.” But what about potential injuries? Taking a guaranteed fifth year will only mean more certainty for your financial legacy and long-term security of your family.
Move from success to significance
Finally, over the past 25 years the Raptors have laid an incredible foundation for the growth of basketball in this country. This year, there were six Canadians chosen in the NBA draft – four in the first round alone. It was Damon Stoudamire, Vince Carter, Chris Bosh and Kyle Lowry that have laid this solid foundation. Kawhi, your performance has taken basketball to new levels in this country. You’re moving from success on the hardwood to significance in Canadian history books. Canadians would love for you to cap off a story that isn’t quite finished yet. What a legacy for you and your family to be proud of.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at firstname.lastname@example.org.