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RCA and professional athletes

Posted under: RCA

For the financial planner, there are a number of unique concerns to address when providing overall compensation strategies for professional athletes such as NHL or NBA players:

  • The athlete will have a comparatively short career, likely lasting a decade or less.
  • Salaries are considerable during this time period with sizeable increases as the athlete’s career progresses.
  • Clubs should look for means of reducing employment related taxation where possible. Clubs based in Ontario and Quebec face substantial provincial health taxes based on total payroll.

The use of a Retirement Compensation Arrangement (RCA) can greatly assist in attracting and retaining professional athletes working in Canada, provide critical reduction and deferral of taxes and harmonize benefits among teams on both sides of the border.

The RCA StructureiStock_000010065071_Small

The RCA, as defined in Subsection 248 (1) of the Income Tax Act (Canada), is a trust established by the employer (“the club”) for the benefit of its employees (“the player”) designed to supplement future retirement needs. The application for an RCA is filed with the Canada Revenue Agency (CRA), who in turn establishes a Refundable Tax Account (RTA).

In order to comply with CRA reasonableness testing, it is strongly recommended that an Actuarial Certificate be prepared to establish a rational ceiling for contributions. The club then makes a contribution to the investment account established by the trustees. For each dollar placed in the investment account, a matching contribution is made to the RTA and the club deducts both contributions. The RTA replenishes the investment account as withdrawals are made in the future, typically once the player’s career has concluded. Withdrawals are not mandatory, and might commence any time after the player has left the team.

Advantages of an RCA

The advantage of this strategy is that the player avoids immediate taxation on the income and the club avoids the provincial payroll tax that would have been levied had the contribution been paid out as salary. The player may now look forward to the ability to forward average his income and radically reduce overall tax. For instance, if a player were paid $3,000,000 in 2015 by an Ontario based club, he would incur income tax of approximately $1,458,674. The club would also pay approximately $58,500 of Employer Health Tax (EHT) to the Ontario government. If the player’s contract directs that $1,000,000 is paid to an RCA, the player saves $495,296 in immediate income tax and the club saves $19,500 in EHT.

What Happens After a Trade or Retirement?

If the player is traded or signs with another team, the assets of the RCA are not affected until withdrawals commence and, if a player decides after the conclusion of his career to become a non-resident of Canada for tax purposes, the RCA withdrawals will be subject to the tax treaty between Canada and his new country of residence. If the treaty with the new country directs that “periodic” or “lump sum” pension payments are not subject to taxation as income by the new country, the RCA trust will remit between 15% – 25% withholding tax to Canada, and no further tax will be levied.

Partnering with GBL

With extensive experience in designing retirement strategies, the team at GBL is dedicated to delivering exceptional service and results at true value for money. Our representatives will collaborate with all the key decision makers, assist in the most thorough due diligence process and prepare individually tailored structures suited to your client. We have substantial in house expertise and work with experts in a variety of fields to deliver the exact solution required.