The Tax Effect of Athletes Traded to Canadian Teams

Most avid sports fans, and in particular baseball fans, know about the blockbuster trade between the Miami Marlins and Toronto Blue Jays. However, what most avid sports fans don’t know is the tax consequences the traded Marlins’ players will face.

Pending the commissioner’s approval, the Miami Marlins traded Jose Reyes, Josh Johnson, Mark Buehrle, Emilio Bonifacio, and John Buck to the Toronto Blue Jays for seven average-at-best major and minor league players. With a combined $40+ million due to these players in 2013, the Marlins’ motivation for this move is to cut payroll for a club that underperformed in 2012. In addition to cutting their own payroll, the Marlins essentially cut each individual player’s payroll as well.

Players across all sports are aware of the tax consequences of signing with a Canadian team, which is part of the reason high-priced free agents view the Blue Jays and Raptors with a wary eye when considering their options. Tax rates in Canada are significantly higher than in the United States, especially for players in Florida, which does not have a state income tax. Ontario (province where Toronto is located) recently increased its tax rate to 18.97%. When that is combined with Canada’s 29% federal rate, players will pay 47.97% income tax in 2013. Under current United States law, the highest tax rate in 2013 will be 40.5% (39.6% assuming the Bush tax cuts are not extended plus 0.9% Medicare surtax on high earners).

As if the tax rate differences weren’t enough, Canada does not allow deductions for some common baseball expenses that are deductible in the United States. Agent fees, clubhouse dues, and training expenses are among the deductions allowed in the United States, but not in Canada.

After taking into account the different tax laws, Josh Johnson will owe nearly $600,000 more in taxes per year. Reyes and Buehrle will owe similar amounts next year. In 2013, the five players traded to the Blue Jays will face a higher tax bill of roughly $2 million combined. Jose Reyes, who signed a $106 million, six-year contract last December, will face an $8 million tax increase over the next six years.