By: Eva Khabas
Kyle Lowry has made a pretty good living from basketball, but the long-time star of the Toronto Raptors may soon be leaving town. And Canada. In August he will become an ‘unrestricted free agent’ which in the lexicon of pro sports means he has put in his time and, once his latest contract is up, he’s free to sign with any team. Usually, that’s the highest bidder. If you’re a star in the NBA that is bound to be a lot of money. But with such high income also comes taxes.
Lowry began his pro career with the Memphis Grizzlies in 2006 when he was a first-round draft pick. He promptly signed a four-year contract for $5.3 million which paid him an annual salary of just over $1.3 million. (Note: In North American, all pro team players are paid in U.S. dollars, even lowly hockey players who ply their trade for Canadian NHL teams).
In 2009, Lowry was traded to the Houston Rockets and the next year he signed a new four-year contract with them for $23.5 million – or a tidy $5.9 million per season. In 2012, he was traded to the Toronto Raptors where he became a bona fide star. In fact, Lowry is now considered the best player the Raptors have ever had in team history. So parting, if it comes to that, will be such sweet sorrow. It will be especially sweet for Lowry and the tax man. And in two countries yet.
Let’s look at the numbers Lowry put up with the Raptors, and I’m not talking points and rebounds, but salary.
In 2014, he signed a four-year contract for $48 million or $12 million per season. And remember, we’re talking U.S. dollars here. In 2017, he signed a three-year contract for $100 million or $33.3 million per season. And in 2020, he signed a one-year deal which paid him $30.5 million. Yes, he took a cut!
Before we feel sorry for Lowry, consider that his latest deal equates – in Canadian dollars – to about $36.8 million. And for just one season. Compare that to Auston Matthews, of the Toronto Maple Leafs, who is not only the Leafs’ highest-paid player, but the highest-paid player in the NHL. Matthews makes about half what Lowry earned this past year.
What with COVID-19 and having to play all their games south of the border the past season, the Raptors endured a miserable year and missed the playoffs ‒ and it’s only been two years since they were NBA champions. This leaves widespread speculation that Kyle Lowry is heading to greener pastures south of the border, despite the fact he is the highest-paid athlete for any pro sports team based in Canada. Ever.
Now here’s the rub. There are huge differences between making that kind of money in Canada and making it in the U.S. Not only is the level of income tax higher in Canada, but there are also other considerations. Here are two big ones:
• Residency is important in your tax scheme and for an American citizen like Lowry who earns his income in Canada, or most of it, he has to play by the rules of the IRS. For the past nine years, Lowry has had dual residency which means, in essence, he would personally be paying maximum tax in Canada, while claiming a foreign tax credit for tax paid in the U.S. This is because his overall Canadian tax liability likely exceeds his tax liability in the U.S. More on this below.
• The past year with COVID threw all kinds of curves at people like Lowry because the Raptors played all their games in the U.S. and none in Canada. Based on publicly available information, he did have a house in Canada and with the Raptors an income-producing contract here. We can’t say for certain unless we examine his tax return (and we can’t because we are not the CRA), but chances are he did file his taxes in 2019 and 2020 as a Canadian tax resident.
Notwithstanding all that, the U.S. President Joe Biden administration in Washington is sure to increase U.S. tax rates, as is the government of Justin Trudeau in Ottawa, especially if it wins a majority in the next election. What will this mean for high income earners?
Let’s assume Lowry moves to Florida (there is speculation in the press to that effect). Keep in mind this is all in U.S. dollars. For a Florida taxpayer, the top federal marginal tax rate is 37 per cent. Assuming single filing status (i.e., a single individual without a spouse or dependents), and an annual wage income of $30.5 million, a Florida taxpayer will pay approximately $11.7 million in income taxes. That same income in Ontario results in about $16.3 million in income taxes since the top marginal personal tax rate in Ontario is 53.53 per cent. That is a 16.53 per cent difference in the top marginal tax rate!
Chicken For Life
A Toronto restaurant recently offered free chicken for life to Lowry if he stays with the Raptors. Considering his annual tax savings of $4.59 million by just moving to Florida, free chicken for life is unlikely to be a deciding factor!
Being a true Canadian patriot, it is hard for me to give advice on this and I would gladly offer some incentive to Lowry to stay with the Raptors. But numbers don’t lie. If he does move to the U.S., it would be best for him to cease his primary, and as many secondary residential ties with Canada, as possible so he is not a resident for Canadian tax purposes.
Significant ties include a home in Canada. According to The National Post, Lowry’s house was up for sale. (https://nationalpost.com/news/canada/say-it-aint-so-has-raptors-kyle-lowry-listed-his-toronto-house). It begs the question. Did Lowry list his house to cut his tax-residency ties to Canada?
Having a family in Canada is also included in the category of significant ties. Lowry and his wife have two sons. If he does move to the U.S., it would be best not only for family relationships, but also for tax reasons for his family to stay with him in the U.S. most of the time.
It is also best for him to sever secondary ties here although it is unlikely having them would have a deciding impact. Such ties would include personal property in Canada (i.e., car, household items like furniture), not to mention Canadian bank accounts and credit cards, provincial health insurance, and other things.
Finally, length of time in and out of Canada, intention to leave Canada or come back, and continuity (i.e., prior history of presence in Canada and absence from Canada), are also considered in determining whether or not an individual is a Canadian tax resident in any given year.
While moving to Florida can be beneficial from the standpoint of income tax, other factors should be considered as well ‒ such as estate planning, healthcare, and the Canadian departure tax.
The bottom line is if you are a high income earner who is considering making a move south to Florida, or anywhere else in the U.S., make sure to reach out to qualified, cross-border tax specialists who can advise you on all the tax implications.BPM
is an accountant who runs Tax By CPA.