Defenseman Lane Hutson signed a contract extension with the Montreal Canadiens on Monday that will pay him $70.8 million over eight years. But the peculiarity of the agreement is that almost 80% of his remuneration will be paid in the form of a personnel bonus. We explain why.
On average, the young defenseman will earn $8.85 million per year. But in reality, as his contract progresses, his base salary increases and his bonuses decrease.
For the first four years of the contract, his base salary will be $1 million per year, plus bonuses of $11 million for the first two years, $9.5 million for the third and $6.5 million for the fourth.
Why did you structure your compensation this way?
“It's a way to have a large amount of money available right away that you can invest right away” before you retire, explains Vincent Duquette, director of sports content for TVA Sports.
This structure also gives players significant tax advantages, which are made possible by the treaty concluded between Canada and the United States, mentions Julien Le Meaux, assistant professor of accounting sciences at HEC Montréal.
The agreement, in particular, provides for a lower tax rate on amounts provided as an incentive to sign the agreement.
So Lane Hutson would only have to pay 15% tax on the hiring bonus portion — $55 million of the $70.8 million — rather than a marginal rate that exceeds 50%.
He is also exempt from double taxation of his income and enjoys tax benefits on amounts contributed to a pension arrangement under the Canada-United States treaty.
Please note that these rules only apply to American players whose tax residence is in the United States who join a Canadian team.
A unique case?
Since the tax convention has been in place since 1980, Julien Le Meaux is at a loss to explain why we don't see more American player contracts structured like Lane Hutson's.
“A signing bonus is something more beneficial for the player. It's better to get most of your reward today rather than stretch it out over time because the money will lose its potency over time,” he says.
“Of course, we risk seeing more if [les équipes canadiennes] want to be competitive in other markets, like Florida or Nevada, where there are no state taxes,” says Vincent Duquette.
But it must be said that such a financial scheme is less interesting for teams. For training, it is more profitable to spread the reward over time, “because the real cost over time will be much lower,” says Mr Le Meaux.
But to compensate, the Habs are offering a lower overall salary than if the defenseman had signed with another team, Mr. Duquette argued.
“This allows the Canadian to reduce the impact of Lane Hutson's salary on the payroll. In another market, he could have earned a salary.” [annuel moyen] higher than, say, $9.25 million or $9.5 million,” he explains.
Thus, the team has more opportunities to sign important players and offer them long-term contracts.
Is the RCAF on Hutson's trail?
However, the sword of Damocles may have hung over Lane Hutson's head.
This is because the Canada Revenue Agency (CRA) has not hesitated in the past to try to recover millions of dollars from players whose contracts included a similar financial package.
Such is the case with Toronto Maple Leafs forward John Tavares, whose compensation included a $15.25 million signing bonus on his $77 million contract.
Instead, the CRA believes the salary should be taxed at the full rate and is seeking $8 million in unpaid taxes from the player.
However, the Tax Court of Canada case appears to have been suspended indefinitely, the Journal reported. Hockey news.
According to Julien Le Meaux, Lane Hutson has nothing to fear, at least for now.
“There is no case law yet that prohibits this,” he said.
“The way the contract is worded determines whether it is truly a signing bonus or a salary increase. There is no existing contract model, so it is worked out on a case-by-case basis,” he adds.
