Sho Me The Money? Inside Ohtani’s Tax Curveball
Shohei Ohtani, the first superstar hitter and pitcher in Major League Baseball since Babe Ruth, recently signed an unprecedented contract with the
Toronto Blue Jays Los Angeles Dodgers, landing a contract that pays him $700 million over 10 years.
The value of that contract is shocking – but the emerging details of the terms reveal that the contract isn’t worth nearly as much as it seems. Remarkably, Ohtani will only be paid $2 million for each of the next 10 years, with $680 million of that contract deferred until after the expiry of his contract. The time value of money implications and lost income on what he would otherwise have been paid alone is staggering, and from a tax lawyer’s perspective, much can be learned from it as it relates to Canadian tax obligations.
While social media rumours around Ohtani’s signing with the Blue Jays proved to be false, there are some noteworthy tax truths that would have emerged from this scenario. If Ohtani had signed with the Blue Jays and if he was deemed to be a resident of Canada for tax purposes (both big “ifs,” admittedly), the terms of his contract could have been catastrophic from a cash flow perspective were it not for an exemption from the “salary deferral arrangement” rules in Canada’s Income Tax Act.
The salary deferral arrangement rules in Canada require an employee who postpones receiving salary and wages to a later year to include the deferred salary and wages as employment income in the year the income was earned. If the terms of Ohtani’s groundbreaking contract constituted a salary deferral arrangement, Ohtani could have had to pay taxes of ~$35 million in each year of the 10-year contract notwithstanding that he’d only be receiving $2 million in each year. Thus, not only is the present value of Ohtani’s contract far less than $700 million and he will be foregoing a significant amount of income he could have otherwise earned in each year had he been paid his salary in full each year from the outset, but he might have even had to finance the taxes owing on the deferred salary before he even got paid.
Thankfully, a plan or arrangement established for the purposes of deferring the salary and wages of a professional athlete for the services of the athlete with a team that participates in a league having regularly scheduled games, like Major League Baseball, is exempt from the salary deferral arrangement rules in the Income Tax Act. As a result, an athlete only needs to pay tax on such income when it is actually received, not earned.
There are a host of other Canadian and foreign tax implications associated with a contract structured in this manner that would have to be considered as well – including who has the jurisdiction to tax (and collect) that deferred salary paid out after 2043, the tax obligations and implications to the Blue Jays, and many more.
Losing out on a generational talent stings, but hopefully the Blue Jays use the format of Ohtani’s contract and Canada’s generous tax laws afforded to athletes to attract some other talent to Toronto. In the meantime, for the rest of us non-professional athletes sitting on the sidelines, careful planning considerations should be taken to avoid the salary deferral arrangement rules, among other potentially applicable tax laws, when structuring contracts that provide for the deferral of salary and wages to a later year.