My name is Mark Goodfield and I am a tax partner and the managing partner of Cunningham LLP in Toronto. This blog is about income tax, business, the psychology of money and investing topics and is meant for taxpayers no matter their income bracket, but in particular for high net worth individuals and entrepreneurs who own private corporations. I also blog about whatever else crosses my mind; I have to entertain myself. This is my personal blog and the views and opinions expressed in this blog do not reflect the position of Cunningham LLP. I am blunt and opinionated (at least for a Chartered Professional Accountant). You've been warned.

The blogs posted on The Blunt Bean Counter provide information of a general nature and should not be considered specific advice, as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Monday, February 11, 2013

Sports Agents Fees - A Large non-deductible Expense for NHL Players in Canada

From Mr.Sub Shoot-out at Air Canada Centre
Unlike many hockey fans, I am not excited that the NHL is back. Personally, I think this season is a farce. In protest I watched the first season of the Sons of Anarchy instead of the Leafs and Hab's home opener. It took me several years after the first baseball strike to come back. I love sports, but I can easily live without watching them. So in keeping with the NHL’s legal battle theme for the 2012/2013 season, I today discuss an interesting income tax case involving an NHL player.

Many professional athletes hire a sports agent to assist in negotiating employment terms with their teams and endorsement contracts with corporate entities. Typically, when an agent secures an employment contract for an athlete, he/she is required to pay a commission fee based on a percentage of the contract amount usually between 3-5% (for a list of the top paid baseball agents, follow this link). Although one would think such a fee would be a deductible expense to the athlete, that is not the case in Canada as Michael Caruso of the Florida Panthers recently found out when he went to tax court.

Mr. Caruso’s case brings to light the differences in how athletes are taxed in the United States and Canada. As any sports fan could tell you, U.S. based players often cry the tax blues when they are traded to a Canadian team. The additional income tax payable became a significant point of discussion following the recent Toronto Blue Jays/Miami Marlins trade. According to this article, it may cost Jose Reyes traded from the Marlins to the Blue Jays as much as $5million in extra income taxes because of the trade to a Canadian team.

Not only do U.S. based players typically pay less income tax as noted above, but the IRS allows them to deduct their agent’s fees on their income tax returns; although as discussed in this sports agent blog  the IRS are auditing agent fees to ensure they are actually paid in the year they are claimed. 

The Canada Revenue Agency (CRA) position on the deductibility of agent fees is set forth in IT-168R3. Paragraph 6 specifically disallows the following expenses: “Players employed by sports clubs are limited to the same deductions from employment income as are available to any other employee by virtue of section 8. For example, fines paid by players personally are not deductible. Legal fees incurred in the negotiation of player contracts are also not deductible”.

Back to Mr. Caruso. In 2008 he entered into a three year contract with the Florida Panthers. In 2008 he paid his agent MFIVE Sports Management (Anton Thun is the best known MFIVE agent) $2,927 and deducted the same amount on his personal tax return. The CRA promptly disallowed the deduction. Caruso then appealed to the Tax Court of Canada but the judge ruled in favour of the CRA

The Canadian tax rules allow a deduction for legal expenses incurred in order to collect or establish a right to salary or wages from an employer or former employer. Michael Caruso’s appeal was rejected for the following reasons:

i) There were no facts to suggest that Michael Caruso’s agent, MFIVE, was authorized to practice law. Note that the CRA’s requirement only allows for legal expenses to be deducted.

ii) Even if MFIVE’s services were considered legal services, the services were not for the purpose of collecting or establishing a right to salary or wages. A right to salary or wages can only exist after an employment contract has been signed – MFIVE only assisted in negotiating an employment contract that would subsequently give rise to a right to salary or wages.

Although most of us have little sympathy for well-paid NHL players, it seems blatantly unfair to disallow an agent’s fee. In my opinion, the CRA is not recognizing the economic reality of the “employee” expenses a player incurs.

Top Ten Reasons to vote for The Blunt Bean Counter

top Canadian finance blogs
Jeremy from Modest Money is running a poll of the top Finance Blogs in Canada. Last year I was nominated in the Investing category and thanks to my loyal readers and my mom who voted 10 times, I managed to come in fifth. This year Jeremy has grouped investing and personal finance blogs together, so a top twenty finish would be solid. If you get a chance, visit Jeremy’s site to look around and vote for me. Don’t ask me why, but I had a sudden inspiration to have some fun and decided to create a David Letterman like top ten reasons list, why you should vote for The Blunt Bean Counter:

10. A vote for me is a vote for all unloved accountants everywhere (see the Big Cajun Man’s comment about many peoples “visceral hatred of accountants”).

9. What other blogger provides a tax twitter tip a day while constrained by a ridiculous 140 characters?

8. I am not a frugal blogger like half of Canada’s bloggers (that deserves 1,000 votes on its own).

7. What other fun loving blogger gives you girls an alternative to the “I got a headache” excuse by suggesting you tell your significant other that you just want to stress test his death before you get down to it?

6. I provide ideas that can potentially save you thousands of dollars, instead of trying to save you 49 cents on a box of 12 Popsicles.

5. I discuss the various neuroses you will develop in trying to get wealthy, so you feel better if you are not wealthy.

4. I may occasionally be blunt and sarcastic, but at least you don’t feel like you are reading a Happy Days Blog.

3. What other blogger will tell you to use a 1% prescribed interest loan to set-up a family trust to allow you to pay for your kids private education tax-free and then tell you, that you only need $500,000 to $1,0000,000 to do it. Come on, no one else teases you like this?

2. What other blog solves a tax problem you did not know you had in a way you don’t understand (full disclosure, I read this years ago in a newspaper).

1. If I win the $100 contest prize, I will go on eBay and buy copies of Great Hockey Classics (which is on VHS by the way) Toronto vs. Montreal, the 1967 Stanley Cup Playoffs (awesome link) and provide those copies to Leaf fans born in 1968 who have not seen the Leafs win a cup in 45 years.

This reason ties my blog together in a nice blue bow. Who needs to watch Leaf games when you know they will not win the Stanley Cup anyways?