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The Alberta NHL Players Tax: A Precedent for Source-Based Taxation of Nonresident Athletes?

Alan Macnaughton and Kim Wood

November 2003 1. Introduction

For sports with regularly-scheduled games such as hockey, baseball and basketball, it is

common that an athlete lives in one country (the residence jurisdiction) and plays some games in

the other country (the source jurisdiction). The question this raises for taxation is how the

potential tax revenue is to be shared between the two jurisdictions.1 Although there are an

infinite number of possibilities, two are most commonly observed.2 The first approach would be

to give priority to the source jurisdiction, primarily on the policy basis that athletes “…benefit

from services and facilities funded with tax collections [in the source jurisdiction]—from the

stadium itself to the roads leading to the stadium to the costs of police protection and all the other

public services that are available.”3 Under this approach, the source jurisdiction taxes income

earned there by nonresidents, and the residence jurisdiction also taxes the income but gives a

foreign tax credit for the taxes paid to the source jurisdiction. Hence the source jurisdiction

receives most or all of the revenue from this income. The second approach would be to give

priority to the residence jurisdiction, so that only this jurisdiction taxes the income. The primary

1 Whereas for corporations these are the only two claimants for the tax base, for individuals the country of citizenship is a possible third claimant, particularly where this a developing country: J. Bhagwati and J. Wilson (eds.), Income Taxation and International Mobility (Lond: MIT Press, 1989), at xiii. 2 Other possibilities are: exclusive source taxation, in which the residence country does not tax the income at all; non-taxation of the income by both source and residence countries; and double taxation—taxation by both source and residence countries (Jinyan Li, International Taxation in the Age of Electronic Commerce: A Comparative Study (Toronto: Canadian Tax Foundation, 2003), at 48). 3 Richard G. Chandler, “Wisconsin’s Case for Taxing Athletes”, Milwaukee Journal Sentinel (July 10, 2002), 17A.

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policy justification for this approach is that it is the residence jurisdiction that has the personal

allegiance of the athlete.4

The Canada-US treaty prohibits source-based taxation of an athlete’s income from league

games held in a country other than where the team is located, and hence the residence-based

approach applies to all such cross-border income. For example, if a Canadian resident playing

for the Toronto Maple Leafs has a game in the US, the Canadian federal government taxes this

income and the US federal government does not. Most Canadian provinces and US states and

cities voluntarily follow the treaty. 5 Thus, with the current residence-based approach, each

country collects roughly zero dollars from the income of this group of individuals; Canada

collects nothing from US-resident athletes on American teams performing in Canada, and the US

collects nothing from Canadian-resident athletes on Canadian teams performing in the US.

Despite the importance of the treaty, some existing taxes have a source-based flavor. US

states have had taxes on out-of-state athletes (“jock taxes”) since California pioneered this

concept in 1978.6 Such taxes are now almost universal in the US; of the 24 states that have

National Hockey League (NHL), National Basketball Association (NBA) or Major League

Baseball (MLB) teams, 20 (83%) have jock taxes, and the remaining 4 states either do not have a

personal income tax or tax only property income.7 These taxes are partly source-based and

partly residence-based; they are source-based taxes within the US since they tax out-of-state

4 Richard J. Vann, “International Aspects of Income Tax,” in V. Thuronyi (editor), Tax Law Design and Drafting, Volume 2 (New York: International Monetary Fund, 1998), at 749-750. 5 Exceptions are Alberta, California, New Jersey and the city of St. Louis. 6 Non-residents in various occupations had been theoretically taxable in many states for years, but California began enforcement with baseball players in 1978: Richard R. Difrischia, “State and Local Taxation of Nonresident Athletes” (2000), 18 Journal of State Taxation 120-130. 7 David K. Hoffman, State and Local Income Taxation of Nonresident Athletes Spreads to Other Professions (Washington, D.C.: Tax Foudation, 2003), at 2. The other 4 states are Florida, Texas, Tennessee and Washington. The National Football League (NFL) has no teams in states that do not also have NHL, NBA or MLB teams. The District of Columbia is prohibited by federal law from having a jock tax. Various US cities also have jock taxes, including Cleveland, Cincinnati, Columbus, Detroit, Indianapolis, Kansas City, Minneapolis, New York, Philadelphia, Pittsurgh and St. Louis.

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athletes, but they are residence-based taxes when viewed internationally since they generally

exempt out-of-country athletes.

Alberta’s National Hockey League Players Tax, which was introduced in its 2002 budget,

differs from the US jock taxes in two main respects-- the revenue raised by the tax is to be given

to the Alberta teams rather than going into the general coffers, and the tax applies to all players

playing games in the province. However, it is shown below that 43% of the revenue from the

Alberta tax comes from players on American teams. Assuming that these players are resident in

the US, they would not otherwise be taxable here. Hence this portion of the tax can be

interpreted as a step towards source-based taxation of non-resident athletes.

Much previous literature has examined the US jock taxes, 8 and two recent Canadian

articles have examined the new Alberta tax. 9 However, tax policy research on source-based

taxation of nonresident athletes has been scant both in Canada and internationally.10 With

escalating player salaries raising the potential revenues of such a tax, the absence of a compelling

rationale for the existing residence-based approach, and the fact that a non-resident tax would

8 Hoffman, ibid.; Richard E. Green, “The Taxing Profession of Major League Baseball: A Comparative Analysis of Nonresident Taxation” (1998), 5 Sports Lawyers Journal 273-301; Jeffrey L. Krasney, “State Income Taxation of Nonresident Professional Athletes” (1995), 47 Tax Lawyer 395-424; Elizabeth C. Ekmekjian, “Perspective, The Jock Tax: State and Local Income Taxation of Professional Athletes” (1994), 4 Seton Hall Journal of Sports Law 229-252; Leslie A. Ringle, “Note: State and Local Taxation of Nonresident Professional Athletes” (1994), 2 Sports Lawyers Journal 169-184; Kevin Koresky, “Tax Considerations for US Athletes Performing in Multinational Team Sport Leagues or ‘You Mean I Don’t Get All of My Contract Money’ “ (2001), 8 Sports Lawyers Journal 101-123; Jeffrey Adams, “Why Come to Training Camp Out of Shape, When You Can Work Out in the Off-Season and Lower Your Taxes: The Taxation of Professional Athletes” (1999), 10 Indiana International and Comparative Law Review 79-113; James K. Smith, Ann T. King, and Kathryn B. Reeves, “State Income Taxation of Nonresident Professional Athletes” (1997), 16 Journal of State Taxation 1-8. 9 Donald J. S. Brean and Aldo Forgione, “Missing the Net: The Law and Economics of Alberta’s NHL Players Tax” (2003) , 41 Alberta Law Review 1-24; Mark Lavitt, “The Alberta NHL Players Tax: The Jock Tax Comes to Alberta –or Does It?”, mimeo., April 2003. Lavitt makes a number of comparisons of the Alberta tax to US jock taxes. Also see Aldo Forgione, “Alberta’s NHL Players Tax”, Canadian Tax Highlights (December 27, 2002). 10 The US jock tax studies have not examined this issue. The only Canadian study is Robert M. Wener (KPMG Ottawa), “Report on Major League Sports Visiting Players’ Tax”, mimeo., January 25, 2000, 7 pages. The general treaty article on athletes, but not the Canada-US league-based exemption, is discussed in Stephanie C. Evans, “US Taxation of International Athletes: A Reexamination of the Artiste and Athlete Article in Tax Treaties” (1995), 29 George Washington Journal of International Law and Economics 297-335.

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essentially take the revenue from foreign treasuries rather than from the athletes, source-based

taxation deserves serious study.

The main purpose of this paper is to examine the design, revenue implications, and

advantages and disadvantages of Canadian taxation of nonresident athletes. Particular attention

is paid to a provincial tax since the treaty serves as a federal- level impediment, the provinces are

particularly in need of revenue in this era of rising health care costs, and the Alberta tax in its

present form expires at the end of 2005. Such a tax has been proposed for BC by the Vancouver

Canucks and for Ontario by the chair of the Ottawa-Carleton regional government.11 In response

to criticism of the heavy compliance burden of US jock taxes, care is taken to design a tax that is

simple to administer.

The specific tax we examine is a 15% flat-rate tax levied by the four provinces with

major- league professional sports teams—British Columbia, Alberta, Ontario and Quebec. In

contrast to opinion that non-resident taxes raise only “a bit of revenue”, 12 our findings are that

such a tax would raise just over $30 million in revenue annually for the provinces, and more in

future years if athletes’ salaries continue their past dramatic climb. Almost three-quarters of the

revenue would go to the Ontario government, mainly because the Canadian NBA and MLB

(excluding the Expos) teams are located there. Alberta would lose approximately 40% of the

revenues it raises from its existing tax because Canadian players would be exempted. For all

provinces, the increased revenue would be exactly matched by a decline in US federal income

tax revenue by the same amount. Athletes would not have an increased tax burden (and possibly

11 These proposals envisioned earmarking the revenue for assisting financially-troubled sports teams, but that is not a necessary part of such a tax. See: Terry Bell, “Canucks’ Bottom Line: They Don’t Want a Subsidy”, Vancouver Province, June 2, 2002; Iain MacIntyre and Jim Beatty, “Canucks Set to Win Some Scratch with Share of Sports Lottery Proceeds”, Vancouver Sun , September 30, 2003; Joe Halstead, “Toronto Staff Report: Provincial Visiting Player Tax” mimeo., April 27, 2000. 12 Brean and Forgione, supra note 9, at 23. Although this comment was made in the Alberta context, the revenue issue is the same in all provinces.

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would not have any great increase in their compliance burden); thus, concerns about the

unfairness of taxing one particular profession seem to be misplaced.13 The Canadian federal

government would lose only an estimated $3 million in foreign tax credits, or 11% of the

revenue generated by the provinces.

A secondary purpose of the paper is to examine the issue of sports subsidies since a large

part of the public debate over the Alberta NHL Players Tax was not about the characteristics of

the tax itself but about the propriety of giving the funds produced by the tax to the two Alberta

teams.

The outline of the paper is as follows. Section 2 provides more detail on the Alberta

NHL Players Tax and presents data on its application to various teams. Section 3 describes the

workings of the exemption from source taxation provided in the Canada-US treaty for league

athletes. Section 4, which is the core of the paper, presents the design of a simple provincial tax

on nonresident athletes, explains why it can be expected to raise significant revenue after

considering the loss of revenue through increased foreign tax credits, and presents revenue

estimates. The possibility that the tax could also apply to American athletes playing on Canadian

teams, which would raise another $27 million for the provinces at the expense of a similar

revenue loss to the federal government, is also discussed. Section 5 reviews the policy issues

concerning whether source-based or residence-based taxation of non-resident athletes is

preferable in policy terms. Section 6 considers the effects of removing the treaty provision

protecting non-resident athletes from source taxation and imposing a new flat-rate federal tax on

non-resident athletes. The issue of the disposition of the revenue is discussed in section 7—is

13 Brean and Forgione, supra note 9, at 9. However, the concern is justified to the extent the tax applies to Alberta residents.

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there a case for sports subsidies and, if Ontario wishes to use the money from the tax to aid the

Ottawa Senators, what is the best subsidy form? Finally, a conclusion ends the paper.

2. The Alberta NHL Players Tax

Alberta introduced the NHL Players Tax in the 2002 Budget Speech. 14 Effective from

August 31, 2002 to December 31, 2005, the tax is levied under part 1.1 of the Alberta Personal

Income Tax Act and is calculated in accordance with Alberta Regulation 171/2002.15 The tax is

calculated as 12.5% of the NHL hockey income in Alberta of the NHL player for the year,

defined as the sum of the player’s taxable salary for all game days in the taxation year.16 Taxable

salary is determined by dividing the base salary17 of the player in effect on the game day18 by the

number of calendar days in the NHL regular season. 19 This special tax is in addition to normal

personal income tax rules, so non-residents pay only the 12.5% tax but Canadian residents pay

both the normal 10% Alberta personal income tax and the new 12.5% tax. The $6 million annual

revenue from the tax is to be given to the Alberta teams to help their financial situation and allow

them to stay in Alberta. 20

14 Alberta Budget Speech 2002, “The Right Decisions for Challenging Times”, March 19, 2002, online: http://www.finance.gov.ab.ca/publications/budget/. 15 NHL Tax Regulation – Alberta Regulation 171/2002, online: Canadian Legal Information Institute <http://www.canlii.org/ab/regu/ra/20030225/alta.reg.171-2002/whole.html> 16 As defined in subsection 2(2) of the Regulations, supra note 6. 17 Base salary is defined in subsection 2(1) of the NHL Tax Regulation to mean Paragraph 1 Salary as defined in the Collective Bargaining Agreement between the National Hockey League and the National Hockey League Players’ Association for the period September 16, 1993 to September 15, 2004. It is further explained in the related information circular that signing bonuses, deferred compensation or performance bonuses are not to be included. 18 Subsection 2(1) of the NHL Tax Regulation defines a game day as a day in the regular NHL season on which the player performs hockey duties or services in Alberta for an NHL team. Per subsection 48.1(2) of the Alberta Tax Act, (supra footnote 5) an NHL player performs hockey duties or services in Alberta as a player for an NHL team when the player either participates in an NHL hockey game in Alberta or is present in a facility in which an NHL game is being played for all or a part of the game. 19 For more detail, see Lavitt, supra note 9, and Brean and Forgione, supra note 9. 20 Alberta Budget 2002 backgrounder – NHL Players Tax, Alberta Treasury Department. This commitment appears to be informal and is not contained in the legislation.

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Various sources indicate the losses suffered by the Edmonton Oilers and Calgary Flames

for the 2002/03 NHL season to be approximately $2 million and $8 million, respectively. 21

However, the two franchises are privately owned, so financial statements are not publicly

available to verify this information. One factor lending credibility to tales of the teams’ financial

woes is the departure of previous Canadian teams: two Canadian hockey teams (the Winnipeg

Jets and the Quebec Nordiques) folded in the mid-1990s; the Vancouver Grizzlies basketball

team moved away in 2001; and the Montreal Expos are in the process of moving. Also, the

Ottawa Senators filed for bankruptcy on January 9, 2003. Although a purchase offer of $71.8

million by Eugene Melnyk was finalized and accepted in August 2003, low revenues and a high

debt load continue to make the team’s future uncertain. 22

The new Alberta tax has attracted a great deal of public attention, partly because of

speculation that Ontario or other provinces would follow Alberta’s lead23 and partly because

there are many view of the merits of the tax itself. Team owners were grateful for the new

source of funds, and sports fans generally seemed to like the tax. Players and their collective

bargaining agent, the National Hockey League Players Association (NHLPA), vehemently

opposed the tax. Provincial officials defended the tax as helping Alberta’s NHL teams without

hurting taxpayers.

One difference between the Alberta tax and the US jock taxes is that the Alberta tax

applies only to NHL players while the US taxes apply to all athletes and even, at least in theory,

to all non-resident individuals performing services in the state. The big difference between the

Alberta tax and the US jock taxes, however, is that the jock taxes apply strictly to out-of-state

21 See Eric Francis, “Owners get a pat on the back”, online: Slam Sports <www.canoe.com/Slam030306/col_francis -sun.html>. 22 See “Melnyk finalizes purchase of Senators”, online: CBS Sportsline http://cbs.sportsline.com/nhl/story/6594071.

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athletes while the Alberta tax also applies to Alberta athletes. Since the Players Tax is imposed

on the portion of the player’s salary that relates to game-days in Alberta, the tax amounts to an

additional levy equal to roughly 3% of the base salary of each Flames and Oilers player.24 In

effect, regular Alberta residents pay a 10% rate of Alberta tax, while Alberta players on NHL

teams pay 13%.25 Hence the tax may legitimately be criticized as “taxation by profession.”

Data on the relative contributions to Alberta revenue of players from different teams are

given in Table 1. The figures are for the 2002-2003 NHL year and show total revenue of $6.9

million, which is reasonably close to the Alberta 2000 budget prediction of $6 million. As the

table shows, 43% of the revenue is from players on American teams, 48% is from players on

Alberta teams, and the remaining 9% is from players on other Canadian teams. Clearly, the

Alberta tax has set a precedent for provincial taxation of nonresident athletes.

3. The Treaty Exemption for League Athletes

Most treaties based on the OECD model contain a specific article providing that income

derived by non-resident athletes of one contracting state may be taxed in the state where the

income is derived, irrespective of whether they maintain a permanent establishment or fixed base

23 One Ontario supporter of a player’s tax is the Ottawa Senators Community Coalition, online: < http://www.oscc-ccso.net/media_en/feb25_2003.html 24 From Table 1, the Calgary Flames played 45 games in Alberta in 2002-2003, and 45/ 180 (game-days divided by the approximate length of the season) x 12.5% = 3.1%. A similar calculation for the Oilers yields 3.5%. 25 Some of the player reactions were: “I’m all right...But I’m about three per cent less happy than I normally would be...It’s very discriminatory” (Calgary Flame Denis Gauther) and “I guess our stance from a hockey player’s point of view is why does someone in the community who makes the same as me pay less taxes?....When you tell 20 or 25 guys in the whole province, you’re the only guys who are going to pay 42 or 41 per cent (tax rate) versus 38...I don’t know the legality of it.” (Calgary Flames co-captain Bob Bougher) in “Oilers Leery of Pro Tax” by Shane Holliday, The Edmonton Sun, March 19, 2002, p.7.

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in that state.26 The effect of this article is to protect Canada’s right to tax Canadian-source

income of foreign athletes

In the Canada-U.S. Tax Convention, this exemption is found in Article 16 – Artistes and

Athletes.27 Similar to the OECD model, it permits source taxation of income from personal

activities earned by entertainers, musicians and athletes.28 However, the Canada-U.S. treaty is

unusual in that it contains a paragraph specifically negating the effect of the other paragraphs of

article 16 for athletes in respect of his activities an employee of a team which participates in a

league with regularly scheduled games in both Canada and the US. The technical explanation to

this paragraph indicates these multi-jurisdictional league athletes will be subject to the rules of

Article 15 – Dependent Personal Services. Paragraph 1 of this article indicates that the income is

taxable in the state where the employment is exercised, giving Canada the right to tax the income

from games played in Canada. However, paragraph 2 of this article prohibits such taxation where

the amount is below $10,000 in a calendar year or the recipient is present in Canada for less than

183 days and the remuneration is borne by a U.S. resident. It is highly likely that most athletes

on US teams could, if they wished, meet the second condition, since they could be in Canada

only for scheduled games (under 183 days per year) and their salary is paid by an American

sports franchise or club.29 Thus, the treaty overrides domestic law and Canada does not have the

26 Chagnon, Francois. “Cross-Border Taxation of Artists, Entertainers, and Athletes”, 1997 Conference Report, Canadian Tax Foundation, p. 24:2. 27 Convention Between Canada and the United States of America With Respect to Taxes on Income and on Capital, as amended by the protocols signed on June 14, 1983, March 28, 1984, March 17, 1995 and July 29, 1997, (herein referred to as “Canada-U.S. treaty”), paragraphs 1 and 2 28 The Canada-U.S. treaty article 16 also contains a de minimus rule in paragraph 1which exempts any income amounts not exceeding $15,000 from source taxation. 29 For a discussion of how U.S. resident athletes can minimize their U.S. tax liability by structuring their off-season schedule around this 183-day rule, see Adams, supra note 8 and Robert E. Beam, Stanley N. Laiken and Daren A. Raoux, “The Taxation of Non-Resident US Athletes Employed by Canadian-Based Professional Sports Teams: Attracting Athletes to Canada” (1999), 47 Canadian Tax Journal 305-340.

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right to tax such U.S. athletes on their employment income earned while playing in Canada.30

For summary charts of the treaty articles pertaining to athletes, see exhibit 1.

Exhibit 1: Residence/Employment Matrix for League Athletes with Income > $10,000

Country of Sports Team

Canada U.S.

Canada taxes worldwide income, U.S. has no right to tax. (If player

is U.S. citizen, U.S. will tax worldwide income and then

provide equivalent foreign tax credit).

U.S. taxes portion of income earned in the U.S., Canada taxes worldwide income and provides

credit for U.S. taxes paid.

Canada

Reason: player exempt from U.S. tax since not in country > 183

days and remuneration borne by Canadian employer.

Reason: player not exempt from U.S. tax since remuneration borne

by U.S. employer.

Canada taxes portion of income earned in Canada, U.S. taxes

worldwide income and provides credit for U.S. taxes paid.

U.S. taxes worldwide income, Canada has no right to tax.

Country of Residence

(as determined

by treaty t ie-breaker rules)

U.S. Reason: player not exempt from Canadian tax since remuneration

borne by Canadian employer

Reason: player exempt from Canadian tax since not in country > 183 days and remuneration borne

by US employer.

30 To avoid administrative hassle, U.S. athletes can file a Regulation 105 treaty-based waiver to exempt them from the 15% withholding requirement in ITA 153(1)(g); also see Albert Baker and Mark Briggs, “Revenue Canada Provides Increased Guidance on Waivers From Withholding Under Regulation 105”, (1999) International Tax Planning, v.3(4), p.596-601.

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4. A Proposed Provincial Tax on Non-Resident Athletes

(1) Scope

Let us consider a provincial tax that is restricted to non-resident athletes. The first

question to address is which non-residents should be taxed. Current federal and provincial

personal income tax laws tax the income of athletes resident in countries other than the US,31

US-resident athletes who play for Canadian teams, and non-resident athletes who do not play in

leagues with regularly-scheduled games (e.g., golfers). Thus, the principal gap in these laws is

athletes playing on American teams who are residents of the US.

If the source basis is viewed from the perspective of the province, the new tax could also

apply to athletes who live in other provinces within Canada. However, for at least 40 years

Canada has taxed all employment income in the province of residence on December 31

regardless of the province in which it was earned.32 This is a condition of the tax collection

agreements, both under the previous tax-on-tax version and the new tax-on-income approach,

since this rule is part of the definition of taxable income.33 Hence, if a province is to adhere to

the principles underlying the tax collection agreements, it cannot tax Canadian athletes who are

resident in other provinces. It would seem wise to continue this tradition, particularly in view of

the many problems that have been caused by state taxation of nonresident citizens in the US.34

31 Most of Canada’s other tax treaties follow the OECD model with slight modifications, the end result being that Canada has the right to tax non-resident athletes from non-U.S. countries on their source income. See Daniel Sandler, The Taxation of International Entertainers and Athletes: All the World’s a Stage (Netherlands: Kluwer, 1995), at 57-58, Table A. Also see Daniel Sandler, “Canada” in The International Guide to the Taxation of Sportsmen and Sportswomen (International Bureau for Fiscal Documentation, 2002). 32 Ernest H. Smith, Federal-Provincial Tax Sharing and Centralized Tax Collection in Canada (Toronto: Canadian Tax Foundation, 1998), at 124 and 152. 33 See Department of Finance, Federal Administration of Provincial Taxes: New Directions (Ottawa: Department of Finance, 2000). 34 See David Schmudde, “Constitutional Limitations on State Taxation of Nonresident Citizens” (1999), Law Review of Michigan State University – Detroit College of Law 95-169. Table 1 shows that Alberta raises 9% of its revenue from Canadians living outside Alberta, so in that respect it taxes out-of-province athletes in the same way that the US jock taxes apply to out-of-state athletes. The fact that Alberta contemplates providing tax credits if other

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Taxing athletes on American teams who are not residents of Canada also appears to be a

violation of the tax collection agreements since it redefines income for tax purposes for these

athletes. However, the Alberta NHL Players Tax also redefines income for athletes and the

federal government has not complained, at least not publicly. Perhaps the Canada Customs and

Revenue Agency (CCRA) would even collect the tax for a fee, although Alberta has chosen to

collect the tax itself. In any event, it appears that the tax collection agreements, as they are

currently administered, would not prevent imposing the proposed provincial tax on non-resident

athletes.

In summary, the proposed tax is to apply to the Canadian-source income of all athletes

who are residents of the US and who play for American teams that participate in leagues with

regularly-scheduled games. The tax is source-based only on an international basis, and in this

respect it differs from the American jock taxes.

The most important leagues that the new tax would apply to are the NHL, NBA and

MLB. There are at least four other professional leagues which have teams in Canada: the

National Lacrosse League has teams in Toronto, Calgary and Vancouver, the American Hockey

League has teams in Manitoba, St. John’s, Toronto and Hamilton; the North American Football

League has a team on Hamilton; and the International League (baseball) has a team in Ottawa.

However, it is perhaps best to exclude these other leagues as relatively little revenue is involved

relative to the compliance burden. 35 Exempting these leagues while catching the main ones

could be done in the law by setting a threshold requirement for being subject to the tax in terms

provinces taxed Alberta athletes is consistent with this view: see paragraph 48.5( c) of the Alberta NHL Players Tax and Lavitt, supra note 8,at 33, footnote 72. 35 A non-athlete example of a situation to avoid is of a musical group with total annual income of $22,000 that was subject to tax in 22 states. The accountant chose to file only some of the required returns in order to reduce the burden of fees charged (M. Bryan and R. Hawkins, “The Biggest NFL Losers—Some Nonresident Athlete State Income Tax Calculations” (2003), State Tax Notes (September 15, 2003), 761-764, at 763).

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of a minimum dollar value rather than a minimum number of days of physical presence.36

Players in the Canadian Football League and the National Football League would not be subject

to the tax as these teams currently have no cross-border games.

Four provinces have NHL teams—Alberta, British Columbia, Ontario and Quebec—

while the NBA and MLB (excluding the Expos) are restricted to Ontario. Thus, this proposal is

an expansion of taxing power for British Columbia, Ontario and Quebec, since these provinces

presently levy no taxes on such non-resident athletes on non-Canadian teams. On the other hand,

this proposal restricts the application of the Alberta NHL Players Tax, which currently applies to

all NHL players playing in Alberta. As noted above, since the Alberta tax is scheduled to exp ire

at the end of 2005, this might be an appropriate time to review its design.37

One potential concern about the proposed tax is that the Alberta government has stated

that the reason it taxed all athletes under the NHL Players Tax instead of just non-residents is

that the latter type of tax would not withstand a North American Free Trade Agreement 38

(NAFTA) challenge.39 However, it has been noted that income tax measures are generally

outside the scope of NAFTA. 40 Thus, the imposition of a tax on non-resident athletes would not

be a NAFTA violation. Also, US states have been taxing Canadian athletes on their source

taxation for numerous years without any discussion of a NAFTA problem.

NAFTA could potentially apply if a provincial government were to provide the tax

revenues to a particular hockey team, such as if Ontario gave money to the Senators to help them

36 Brian Arnold, “Threshold Requirements for Taxing Business Profits Under Tax Treaties”, in Canadian Tax Foundation, forthcoming, at 2:31. 37 Lavitt, supra note 8, at 39, suggests that the Alberta tax is a stopgap measure to help the Alberta teams survive until the NHL and the NHL Players’ Association work out a new collective bargaining agreement in 2004. 38 North American Free Trade Agreement Between the Government of Canada, the Government of Mexico and the Government of the United States, December 17,1992 39 Why doesn’t this new tax violate NAFTA? All players are being treated in the same fashion, which complies with NAFTA”, Alberta Budget 2002 backgrounder – NHL Players Tax, Alberta Treasury Department. 40 Brean and Forgione, supra note 9.

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to remain in Ottawa. This could be a violation of NAFTA’s national treatment principles, as all

investors are to be treated equally regardless of any preference for locality. 41 However, many US

cities and states have used massive amounts of tax revenues to support professional sports teams

and facilities without prompting a NAFTA challenge. Furthermore, it has been argued that

Canada should be taking action under the realm of NAFTA to prevent any further US state or

local subsidies, or to potentially pursue a claim for financial compensation equal to the dollar

value of the inability of Canadian sports teams to receive equal government treatment compared

to their American counterparts.42

Overall, it appears that NAFTA would not be a barrier to the imposition of a provincial

tax on non-resident athletes.

(2) Rate Structure

A major criticism of the US jock taxes is that they impose high compliance costs, mainly

because each player must submit a return and pay tax to each state imposing a jock tax. One way

to solve this problem, as recommended by the Federation of Tax Administrators, is to put the

responsibility on the team rather than the individual player.43 One composite return is filed by

each team for all of its team members, and the team is also be responsible for withholding tax

from team member compensation and submitting it to the tax authority. Although this method

41 Article 1102, supra note 40 42 B. Appleton & M. Neceski, “Submission: NAFTA and Sports” (May 12, 1998). Online: Appleton & Associates International Lawyers <http://www.appletonlaw.com/6bsports.htm>. The NAFTA challenge submission was presented to the government of Canada over 4 years ago; thus, it appears Canada has decided that pursuing such a challenge is too uncertain or not worthwhile. For an evaluation of the Appleton & Neceski submission, see Heather Manweiller and Bryan Schwartz, “Trade and Sports: Time Out: Canadian Professional Sports Team Franchise – is the Game Really Over?” Asper Review of International Business and Trade Law (2001), v.1, p.199 43 James Wetzler (chair), State Income Taxation of Nonresident Professional Team Athletes: A Uniform Approach (Task Force on Nonresident Income Tax Issues, Federation of Tax Administrators, 1994).

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has not so far been used in the US, it is used by the Alberta NHL players tax. 44 Technically the

levy is on the player, but the team is required to act as a withholding agent. This is a departure

from current law in that the non-Canadian teams have no permanent establishment in Canada;

however, the treaty has no application at the provincial level and, since employees of the teams

visit Canada for games, it should not be difficult to enforce the tax obligations.

The composite-return method is much simpler to apply using a flat-rate tax rather than a

progressive rate structure with personal reliefs and tax credits. A flat-rate tax can be calculated

simply from knowledge of the team’s payroll, while the more complex progressive structure

requires a separate calculation for each player.45

A flat-rate tax may also be justified on equity grounds. For example, the average NHL

player makes $1.6 million Canadian and a common percentage of that income allocated to a

province could be 2%, so in-province income would be $32,000. Taxing based on an income of

$32,000 and not considering the player’s out-of-province income might seem to be

underestimating the player’s ability to pay and not giving the source country a proper share of

the player’s world tax liability.

California has dealt with this issue by calculating tax on a worldwide basis and then

multiplying by the ratio of California income to worldwide income to determine tax owing. 46

Applying that approach would essentially mean that all league athletes would have most of their

income taxed at the top marginal provincial rate, since the current minimum salaries in US

44 Lavitt, supra note 9, at 25 and 27 and NHL Tax Regulation – Alberta Regulation 171/2002, Section 50 varied (4), (5). 45 Difrischia, supra note 6, at 129, notes that many athletes would be willing to pay more tax in order to have a simple system, as present jock tax rules involve considerable aggravation and costs. 46 Ekmekjian, supra note 8, at 246, footnote 103. This method is also applied by Switzerland to part-year residents. Ssee Kees van Raad, “Non-Discriminatory Income Taxation of Non-Resident Taxpayers by Member States of the European Union: A Proposal” (2001), 26 Brooklyn Journal of International Law 1482-1492, at 1488.

16

dollars are $150,000 for the NHL, $367,000 for the NBA, and $200,000 for MLB. 47 However,

applying a flat-rate tax at approximately the top marginal rate achieves the same equity objective

but is simpler, requires less intrusion on the player’s privacy, and does not pose the same

enforcement problems in terms of determining income outside of the country. 48

As for the personal reliefs, most authors believe it is more appropriate that the residence

country should be the one which takes into account the taxpayer’s personal attributes, such as

those relating to medical costs, subsidies for home ownership, basic exemption, etc. since it is

the country that has the personal allegiance of the taxpayer.49

The choice of a rate is more difficult. It would be desirable to pick a rate that is

reasonable across the country since various provinces may wish to launch such a tax and, ideally,

it would be administered by the CCRA on a national basis to reduce compliance and

administrative costs. The 2003 top rates for the provinces that have professional sports teams are

as follows: 14.7% for BC, 24% for Quebec, 17.41% for Ontario, and 10% for Alberta. In

addition, the section 120 rate for non-residents taxable in Canada is 13.92% (48% of the top

federal rate of 29%). Based on this comparison, 15% might be a suitable rate. This rate also has

the advantage of producing horizontal equity with non-resident actors and entertainers, who

presently face a 15%withholding rate on fees paid for services rendered in Canada. 50

Given that the proposed tax is similar to the Alberta NHL Players Tax in that the

collection and returns are the responsibility of the teams rather than individual players, the

47 Sources: http://sportsillustrated.cnn.com/hockey/nhl/2001free_agency/ for the NHL, http://www.nba.com/news/cap_030715.html for the NBA, and http://sportsillustrated.cnn.com/baseball/mlb/news/2000/04/05/mlb_salaries_ap/ for MLB. 48 This approach is currently used in Canada at the federal level for inter vivos trusts. Alternatively, the tax could be imposed at the flat rate with an election for the player to calculate tax using the California method: see van Raad, supra note 46, at 1492. 49 Vann, supra note 4, at 749-750. 50 ITA 153(1)(g), Regulation 105. However, this rate is further reduced to 10% on the first $5,000 of income under the Canada-U.S. Tax Convention, Article 17, Paragraph 1

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administration costs may be similar to the Alberta estimate of a quite reasonable $150,000

annually—2.5% of the projected revenues.51

(3) Tax Base

The next issue is the determination of the Canadian-source income. There are two

quantities to be determined—the athlete’s employment income and the proportion of that income

that is earned in the province. There are three possible models: the US jock taxes, the Alberta

NHL players tax, and the Income Tax Act’s calculations for non-resident athletes who are not

eligible for the treaty exemption (principally non-resident players on Canadian teams).

The Alberta52 tax calculates employment income as the player’s base salary only. 53 In

contrast, the US jock taxes may include signing bonuses, performance bonuses and deferred

compensation54 and the Income Tax Act’s concept of employment income is similarly broad.

The Income Tax Act also taxes total signing bonuses at a 15% rate, thus avoiding disputes about

the allocation to the various jurisdictions. It would seem reasonable to follow the Income Tax

Act approach in order to provide uniformity of treatment on a federal-provincial basis and to

reduce the scope for tax planning which moves income from base salary to non-taxed forms of

remuneration. 55

Similar issues arise with respect to the formula for determining the proportion of total

employment income that is taxable in the province. Once again, the Alberta tax opts for extreme

simplicity, using the ratio of game days in Alberta to the total number of days in the NHL regular

51 Alberta Budget 2002 Backgrounder – NHL Players Tax. 52 Lavitt, supra note 9, at 25 to 27, makes the case that the Alberta method is superior. 53 NHL Tax Regulation – Alberta Regulation 171/2002, paragraph 2(1)(a). 54 Endorsements and other money paid to athletes other than from a team is probably self-employment income and hence is not taxable in the source country because there is no permanent establishment. See Jackson E. Donley, “State Taxation of Endorsement and Royalty Income of Nonresident Professional Athletes” (1998), 16 Journal of State Taxation 1-14.

18

season. In contrast, the CCRA determines the income of non-resident athletes taxable in Canada

by the ratio of duty days in Canada to total duty days in the year, where duty days include not

only games but practices, pre-season training camps, etc.56 The CCRA approach is better for

three reasons. First, the CCRA method was established earlier and, with this issue as well as the

others discussed above, conformity with the CCRA approach is desirable because it reduces

compliance costs and eliminates the possibility of double taxation, which could occur within

Canada if different provinces levied such a tax and adopted different income-allocation

approaches.57 Second, although the Alberta approach is easier to enforce, the Federation of Tax

Administrators in the US recommended the duty-days approach since it was viewed as more

equitable in that it took into account all of the athlete’s contractual obligations to the team.58

Finally, the Alberta approach generates too low an allocation of income in that the numerator is

game-days in the jurisdiction but the denominator is not just total game-days but also non-game

days in the regular season. 59

(4) Athletes’ Tax Burdens and the Retaliation Issue

One issue that might be a concern is that the imposition of the new provincial tax might

cause US states to retaliate by taxing Canadian-resident athletes. At present, only 2 of the 20

states with jock taxes—California and New Jersey—tax Canadian-resident athletes. This is

inconsistent with the intent of the Canada-US treaty, but the treaty only applies at the federal-

55 See Beam et al, supra note 29. 56 Ibid., at 309-310. 57 This can occur either because of the use of different allocation fractions or because of different definitions of duty days. See Ekmekjian, supra note 8, at 242. 58 Wetzler, supra note 43. 59 The Alberta approach seems designed to reduce the tax liability of Alberta players. As Table 1 above shows, the Alberta approach implies that only 25% of Flames players’ income and 28% of Oilers players’ income is earned in the province. This result is absurd since half of all games are home games, played in Alberta, and most of the team

19

government level. If the other 18 moved in the same direction, would that hurt Canadian athletes

or Canadian provincial and federal tax revenues? And is it likely that they would do so? These

questions require some background.

For athletes resident in Canada, personal income taxes paid to foreign governments,

including US states, are eligible for a foreign non-business tax credit against Canadian federal

income tax. Credit for foreign taxes is only given at the provincial level on a residual basis, i.e.,

to the extent that full credit has not been given at the federal level. Given that no US federal

taxes are imposed (because of the treaty) and US state tax rates are far below the tax rates at the

Canadian federal level, the US state tax should be fully creditable at the Canadian federal level

and provincial tax credit is unlikely to be used. Thus, the imposition of American jock taxes on

Canadian athletes would not reduce provincial revenue or increase the athletes’ tax burden.

The extra jock taxes would add to the compliance burden of Canadian athletes, however.

A Canadian NHL player might have to file 15 state tax returns if all states with jock taxes and

NHL teams imposed these taxes on Canadian players. It has been estimated that in 1994 these

returns cost between $250 and $750 US to prepare. If accountants’ charges have increased in

line with Canadian inflation of 21% from then until now, the extra 13 returns would cost

between $5,000 and $15,000 in cur rent Canadian dollars annually. 60

For those concerned about federal revenues and taxpayer compliance burdens, one might

ask whether it is likely that the application of new provincial tax applies to athletes would cause

more states to tax Canadian athletes. This is an open question. 61 On the one hand, retaliation

would seem unlikely in that the proposed provincial tax would not reduce a state’s revenue

practice time also occurs in the province. Lavitt, supra note 9, also discusses this issue but does not address the revenue effect. 60 See the Bank of Canada’s inflation calculator at http://www.bankofcanada.ca/en/inflation_calc.htm.

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(unlike taxes imposed by other US states). For athletes resident in the US, personal income taxes

paid to a Canadian province are eligible for a foreign tax credit on the athlete’s US federal return.

No state credit is given. Perhaps for this reason, the Alberta NHL Players’ Tax seems not to have

inspired any such reaction.

On the other hand, it is certainly fair that if Canada adopts source-based taxation of non-

resident athletes then the US could adopt similar measures. In addition, the state might not like

the fact that its athletes are taxed by a foreign country, even if that did not actually increase the

athletes’ tax burden. Also, it might be viewed as anomalous that states do not presently tax out-

of-country athletes even though they tax out-of-state athletes. The fact that two states already

have this policy makes it not so strange. On balance, it seems likely that all of the states levying

a jock tax would eventually retaliate and tax Canadian athletes. This is the assumption in the

revenue estimates below.

(5) Would Canada as a Whole Gain Revenue?

Given the conclusion above that athletes’ tax burdens would not be increased by the

proposed tax, it is apparent that source-based taxation versus residence-based taxation is a zero-

sum game among 4 levels of government: Canadian provincial and federal governments and US

state and federal governments. This raises the question of whether implementing the proposed

tax, and moving to source-based taxation, is a zero-sum game within Canada. More specifically,

would the loss of revenue to the Canadian federal government from granting foreign tax credits

to Canadian players in respect of taxes paid to the US on games there offset the gain to the

provincial governments from taxing Americans on games here? One might at first think so,

61 It is reported that seven unnamed states have reciprocal exemptions which would cease if the visiting player tax were enacted in Ontario: Wener, supra note 10, at 4.

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since schedules in the NHL, NBA and MLB ensure that the numbers of cross-border games

played in Canada and the US are exactly equal (since any team plays the same number of home

games as away games). Hence one US commentator claims that US jock taxes raise “a pitifully

small amount of revenue once all the credits are taken.”62

There would be circumstances in which this could happen. To illustrate, consider the

situation where Ontario and Michigan each have one team with a payroll of $60 million

Canadian, and each team spends 10% of its duty days visiting the other country. All the Ontario

players live in Ontario, and all the Michigan players live in Michigan.

Suppose initially Michigan has a 15% tax on nonresident athletes that it does not apply to

Canadian athletes, and Ontario legislates its own 15% tax. If Michigan begins to apply its tax to

Canadians, both Ontario and Michigan would have revenue of 15% x 10%% x $60 million, or

$900,000. The Canadian federal government would grant a foreign tax credit of $900,000 to the

Ontario athletes for taxes paid to the Michigan government, and the US federal government

would similarly grant a foreign tax credit of $900,000 to the Michigan athletes for taxes paid to

Ontario.63 Thus, in this hypothetical situation, the proposed tax would accomplish only a

redistribution of revenue from the two federal governments to the provincial and state

governments. Canada as a whole would have zero additional net revenue relative to residence-

based taxation. 64

One obvious reason why this scenario does not hold in real life, and Canada as a whole

would gain from taxing nonresident athletes, is that the 15% proposed provincial tax rate is

higher than US state tax rates. Michigan’s top rate of jock tax (which is the same as its top

62 David Hoffman, “ ‘Jock Tax’ Singles Out Athletes”, Tax Notes (August 4, 2003), at 730. 63 The credit given is equal to the lesser of the foreign taxes paid and the domestic taxes that would have been paid on the foreign-source income.

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marginal rate for all residents) is 4.1%, and the top marginal tax rate applying in the 20 jock-tax

states is 9.3% in California. In contrast, every province in Canada has a top marginal tax rate of

10% or more and we propose a flat rate of 15% for the proposed tax. Also, as discussed above,

all states but California give non-residents the benefit of the graduated rate structure.

A second reason why Canada would gain is that the payrolls of Canadian teams are

smaller than those of American teams. Although this is not true in basketball ($86 million

American average versus $90 million for the Raptors), it is true of hockey ($68 million American

average vs. $60 million Canadian average) and baseball ($128 million American average versus

$96 million for the Blue Jays).65

The third reason Canada as a whole gains is that more players in cross-border games have

American residence than Canadian residence. Although athletes almost always have the same

country of residence as where their team is located, the one exception is that baseball and

basketball players playing for Canadian teams are believed by the player advisors to which we

have spoken to have US residence, probably because of the lower taxes there and the athletes’

US upbringing.66 This does not affect their status under the proposed tax—all players on

Canadian teams would be exempted—but it means that no foreign tax credits would have to be

granted by Canada for MLB and NBA players. The explanation is as follows. The nonresident

64 The US as a whole would also have zero net revenue because the $900,000 in Ontario tax would reduce US federal revenues by an equal amount through the foreign tax credit system, just offsetting the $900,000 in Michigan revenue. 65 See Tables 2, 3 and 4 below. This is somewhat similar to the idea that developing countries benefit from source taxation because they are capital-importing countries (Li, supra note 2, at 56); Canada is a net importer of athlete labour, so source taxation of that income benefits Canada. 66 Wener, supra note 10, at 4, states that players employed by US teams almost invariably are US residents. For baseball, this is confirmed by the report that only 7 of the 764 MLB players in 1997 list Canada as the country of residence (Green, supra note 8, at 273, note 151). For the Toronto Blue Jays, the official information is that of their 56 players, 50 live in the US, 3 live in the Dominican Republic, 2 live in Venezuala, 1 lives in the Netherlands Antilles, and none live in Canada (Dan Diamond, 2003 Toronto Blue Jays Official Guide (Toronto: Polar Bear Press, 2003) pp. 24-160). .

23

Blue Jays and Raptors players are taxable in Canada on their Canadian-source income,67 so they

should be exempt from the proposed tax (as should be any players on Canadian teams who are

resident in Canada, since they are also already taxable here). However, nonresident Blue Jays

and Raptors players would not be eligible for foreign tax credits on their Canadian returns for US

jock taxes paid.

These three factors means that applying the proposed tax to the visiting athletes playing a

Canadian sports team creates a net profit for Canada as a whole, even assuming that all states

retaliate and tax Canadians on that team under their jock taxes. The overall benefit then

increases with the number of sports teams. 68 Thus, Ontario, with its 4 professional sports teams,

generates the biggest net advantage to Canada under the proposed tax.

(6) Provincial Revenue Estimates

This section of the paper estimates the revenue that would be raised if all provinces with

a MLB, NBA or NHL sports team (Alberta, British Columbia, Ontario and Quebec) levy a 15%

tax on US-resident athletes who play for American teams in these leagues. The base of the tax

would be employment income earned in the province, measured by multiplying employment

income received from the team by the ratio of duty days in the province to total duty days in the

year.

As noted above, we assume that all players on American teams are US residents and

hence subject to the tax. Given this assumption and a flat-rate tax with no deductions or credits,

the tax can be computed at the team level, even though it would be levied on individual athletes.

67 For such athletes, Article XVI of the treaty is silent. Also, they are not exempted from tax under Article XV as their remuneration is borne by an employer who is resident in Canada. 68 Smith, supra note 8, at 3. Smith also points out the tax rate issue discussed above.

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The calculations below are based on the reported payrolls of each team in the three

leagues.69 Payroll definitions are not given in these sources, so to the extent that these figures

reflect only the base salaries, the revenue figures will be understated. For duty days, we follow

Hoffman and assume that duty days are 1.3 times game-days for baseball and 1.2 times game-

days for basketball and hockey, with 210 total duty days in the season for hockey and baseball

and 105 for basketball.70 The numbers of game-days are from the posted schedules of the teams.

We use the figures reported after the season is over since factors such as rain-outs and which

teams make the playoffs affect the figures. Our figures are intended to be the same as those of

the CCRA but their actual number are unknown.

The left-hand panels of Tables 2, 3 and 4 estimate the revenue that might be derived by

Ontario from the NHL, MLB and NBA respectively. The total revenue figures at the bottom of

the left panel of each of these tables appears in the first column of a summary table, which is

Table 5. This table also shows revenue figures for Quebec, Alberta and British Columbia, which

have NHL teams but no MLB or NBA teams.71 Detailed calculations for these provinces are

omitted but on publication of this article they will be posted on the first author’s website.

For an example of the Ontario revenue calculations, consider the first row in Table 2,

which is for the Anaheim Mighty Ducks hockey team. Their 2002-2003 payroll is $61.2 million

Canadian. They played 2 games in Ontario that season, which gives them 1.2 x 2 = 2.4 duty-

days in Ontario out of the total of 210.72 Thus, Ontario-source income is the $61.2 million

multiplied by 2.4 and divided by 210, or $699,771. Tax revenue is 15% of that, or $104,966.

69 Hockey: 2002-2003 payroll statistics from ESPN.com - http://sports.espn.go.com/nhl/powerranking?season=2003&week=12. MLB: 2002 payrolls from http://espn.go.com/mlb/news/2003/0721/1583823. NBA: 2002-2003 salaries from: http://www.hoopshype.com/salaries.htm 70 Hoffman, supra note 7, at 6. These figures actually vary by team; Green, supra note 8, at 295 and 298, calculates the duty days of two players on different baseball teams for the 1998 season at 227. 71 The Montreal Expos are not included in the tables due to their impending departure from Canada.

25

Making a similar calculation for all US-based NHL teams playing in Canada in that season

produces estimated total tax revenue to Ontario of roughly $3.8 million. The calculations for the

Toronto Blue Jays baseball team in Table 3 and the Toronto Raptors basketball team in Table 4

are similar; the only difference in calculation are in the assumptions of duty-days per game-day

and in total duty days for the season, as described above. Although tax is based on the calendar

year and these figures are for sports season that can straddle two calendar years, this should not

make a difference other than for the first calendar year the tax applies.

The overall results, as shown in the left-hand column of Table 5, are that $30 million in

revenue would be raised by the proposed tax in 4 Canadian provinces. The great majority (74%)

is from Ontario, while other provinces are as follows: $2 million (7% of the total) each for

Quebec and BC; and $4 million (12% of the total) for Alberta.

Revenues from the existing Alberta NHL Players Tax are not included in the above

figures. Alberta would lose 47% of the revenue by moving to a non-resident tax, even though the

rate would rise from 12.5% to 15%. The reason for the decline is that Canadian players, which

are assumed to be coincident with players for Canadian teams, are no longer being taxed.

Revenue from non-residents actually goes up by 23%, largely because of the rate increase,

although a small amount is due to the change in the allocation formula to duty days from

Alberta’s game-day-to-season- length ratio.

The distribution by sport is that baseball and hockey each amount to 39% of the revenue

while basketball amounts to 22%. However, these fractions come from the visiting athletes

playing just one baseball team and one basketball team, as opposed to 5 hockey teams. Baseball

and basketball are bigger on a per-team basis because the average American baseball and

basketball team has a higher payroll ($128 million and $86 million vs. $68 million) and the

72 Duty-days are not actually fractional amounts such as 1.2, so this figure should be interpreted as an average only.

26

proportions of games in Canada that involve an American team are higher (100% for the Raptors

and 98% for the Blue Jays vs. 67% for the Leafs). This is why Ontario’s revenues are so high—

it has the only Canadian baseball (excluding the Expos) and basketball teams.

(7) Estimates of Federal Revenue Loss

The right-hand panels of Tables 2, 3 and 4 give figures for the amounts of jock taxes that

would be paid by players of Canadian sports teams in respect of games in the US if the players

were subject to these taxes.73 The conditions under which this could occur are discussed below.

For an example of the jock-tax calculations, consider the second row of the right-hand

panel of Table 2, which concerns the calculation for players on Ontario NHL teams (the Toronto

Maple Leafs and Ottawa Senators) in respect of their games in the US with the Atlanta

Thrashers. The Leafs had 2.4 duty days (2 games) in Atlanta out of their total of 210 duty days,

so Leafs players Georgia-source income is the Leafs payroll of $85.3 million times 2.4 and

divided by 210, or $974,857. Similarly, the Ottawa Senators, with a payroll of $49.1 million,

also had 2.4 duty days in Georgia, so their players’ estimated jock tax liability is that payroll

amount times 2.4 divided by 210, or $561,143. Hence the Georgia-source income of all Ontario

players was $1,536,000. Applying the top Georgia marginal tax rate of 6% produces a Georgia

jock tax liability of $92,160, which is shown on the second row, far right column of the table.

The jock tax amounts shown are probably too high. 74 This upward bias arises from

several sources, of which the most important is probably the assumption that the top rate of tax

applies on the athlete’s whole income, although most states apply a graduated rate structure.

Another source of bias is our implicit assumption of effective enforcement of the tax law. Some

73 Jock taxes imposed by US cities are omitted as they are relatively small. 74 One reason they could be slightly too low is that jock taxes levied by US cities are not included.

27

authors contend that athletes may choose not to file in some states, notably Massachusetts and

Maryland, which take a non-aggressive approach in collecting state income taxes.75 Still another

source is that some states tax an athlete only income over a certain threshold,76 or only if the

athlete is present in the state for more a certain number of days.77 Fixing these biases and

producing an accurate calculation of jock taxes would be possible, since salaries for individual

athletes are publicly available, but it would require detailed knowledge of state tax rules and the

degree of compliance with these laws by Canadian athletes.78

The implications of these jock-tax amounts for Canadian federal revenues vary with

assumptions made about residency and the response of US states to the introduction of the

proposed tax. As our base case, we assume that all players on Canadian NHL teams are

residents of Canada, all players on the Toronto NBA and MLB teams are US residents, and all

US states levying jock taxes will apply these taxes to Canadian-resident athletes after the

proposed tax is enacted. For hockey, the implication is that the jock taxes paid by hockey

players on Canadian teams would be as shown in the right-hand panel of Table 2—hockey

players would now be subject to these taxes—and these would also be the amounts of foreign tax

credits granted at the Canadian federal level. As discussed above, the jock tax rates are

sufficiently low relative to Canadian federal rates that the foreign tax credits should equal the

taxes paid and no provincial foreign tax credit would occur. For baseball and basketball players,

the jock taxes would be paid, but as American residents they would not be claiming these taxes

75 Green, supra note 8, at 273, note 190. 76 See the survey of state tax authorities reported in Richard Hawkins, Terri Slay and Sally Wallace, “Play Here, Pay Here: An Analysis of the State Income Tax on Athletes”, Tax Notes (December 30, 2002), 1735, Table 1. 77 For example, Massachusetts only taxes athletes who are present in the state for more than 10 days in the year. Thus, Blue Jays players would be taxable but Raptors players and hockey players would not be. Smith, supra note 8, at 7. 78 A thorough account of sources for state tax research is given in Charles W. Swenson, Sanjay Gupta, John E. Karayan and Joseph Neff, State and Local Taxation: Principles and Planning , Second Edition (Boca Raton, Florida: J. Ross Publishing, 2004)., at 255-260.

28

as foreign tax credits on their Canadian returns as the taxes do not relate to their Canadian-source

income. Hence the total revenue loss for the federal government from foreign tax credits would

be as shown in the second column of Table 5.

The key result is that the revenue loss to the federal government is $3.3 million, which is

11% of the provincial revenue. Clearly, this is not even close to offsetting the provincial

revenue. The three reasons for this are noted in the previous section: the 15% proposed

provincial tax rate is higher than US state tax rates; the payrolls of Canadian teams are smaller

than those of American teams; and more players in cross-border games have American residence

than Canadian residence.

Because of the uncertainty surrounding key assumptions, we present alternative estimates

of foreign tax credit amounts. The optimistic alternative is that no states retaliate and the only

taxation of Canadian residents by US states is by the two states that do it now, which are

California and New Jersey. In this scenario foreign tax credits are about $700,000, or 2% of new

provincial revenues. The pessimistic alternative is that all states retaliate as before, but Jays and

Raptors players are actually Canadian residents rather than American residents. The effect of

this change in assumption is that they would be entitled to foreign tax credits on their US taxes

paid. This raises foreign tax credits to about $8 million, or 26% of provincial revenue. The

conclusion is that even in the pessimistic scenario, foreign tax credits are much less than

provincial revenue. This conclusion is reinforced by the fact there is a degree of upward bias

built into our foreign tax credit calculations.

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(8) Players on Canadian Teams Who Are American Residents

The proposed tax described above does not apply to players on Canadian teams who are

resident of the US because these athletes are already taxable in Canada. Their income is

considered income not earned in a province, so there is no provincial tax. Instead, section 120

imposes a surcharge of 48% of the regular tax. This approach might seem reasonable for some

types of property income or capital gains earned in Canada which it is difficult to allocate to a

province, but for the income of athletes earned from games played in particular cities, it is rather

obvious what province their income should be allocated to. Therefore, there is a case for the

federal government dropping its surcharge for these athletes and instead allowing the provinces

to include them in the proposed tax.

Under our base case assumptions on residency, the Jays and Raptors players are the only

players who affected by the tax on income not earned in a province. Thus, the amount of

provincial revenue that would be generated by allowing the provinces the tax room to tax this

income would be 15% of the total payrolls of the Jays ($96 million) and Raptors ($91 million),

or $27 million. All of this tax would go to Ontario. This is almost equal to the revenue raised

from taxing players on American teams calculated above.

The true figure could be even higher as the $27 million does not include the effect of

taxing American players in the Canadian Football League. However, the 15% flat rate might

perhaps be too high in this case as athletes in this league would have a lot of income which is

presently being taxed at less than the top marginal federal rate.

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5. The Choice Between Source-Based and Residence-Based Taxation

A voluminous literature has developed on the relative merits of source-based taxation and

residence-based taxation. The context has most often been international taxation rather than state

and provincial taxation, but the issues are not very different. 79 The more important distinction is

that the literature is more about corporate income taxation and capital flows than personal

income taxation and labor flows, and this difference does matter. This section of the paper

briefly reviews the arguments as they relate to athlete taxation by provinces in Canada.

We begin by noting that some arguments are inapplicable in the context of a provincial

tax on non-resident athletes. It is often argued that source-based taxation of athletes would not

raise a significant amount of revenue, but the tables above prove this argument would not apply

to Canada. It is quite possible that taxation of non-residents in other professions might not be as

productive, however. Also, as noted above, the proposed provincial tax on non-resident athletes

would not raise the tax burden on athletes because it should be fully creditable at the US federal

level;80 it simply changes the allocation of tax revenue among different governments, and the

fact that an athlete is paying tax to more jurisdictions should not matter (apart from the

compliance cost issue discussed below). This has several implications. First, it does not make

sense in the Canadian context to use non-neutrality as an argument either for81 or against82

source taxation. In particular, the introduction of the proposed tax would not influence an athlete

79 A recent reference is Stephen E. Shay, J. Clifton Fleming Jr. and Robert J. Perroni, “ ‘What’s Source Got to Do With It?’: Source Rules and International Taxation” (2002), 56 Tax Law Review 81-155. 80 This is quite different from jock taxes, which raise the athlete’s total tax liability if the tax rate in the source jurisdiction is higher than in the residence jurisdiction. See Green, supra note 8, Table 3, at 297 for some examples. 81 J. Andrew Hoerner, “A Nation of Migrants: When a Taxpayer has Income from Several States”, State Tax Notes (April 13, 1992), citing Wetzler, argues that source taxation is necessary to prevent athletes from avoiding the tax by moving to a low-tax state.

31

in any of the following dimensions: in which country or province/state to live; which team to

work for; and (assuming the athlete had any influence on this) where the team’s games are to be

played.83 Second, the discriminatory treatment of athletes (and artists and entertainers, who are

already taxed at 15% under current law) versus other employees providing personal services,

such as airline pilots, lawyers, surgeons and executives, is not a real economic burden. However,

it is certainly discrimination in appearance and it would be difficult to communicate the true

situation to the public.84 Presumably, it is only matters of administrative convenience that

prevent extending the nonresident tax to these groups. Finally, the idea that a jurisdiction that

switches to source-based taxation would then become a less attractive place to locate a sports

team is not convincing. 85 While all of these may be valid criticisms of the US jock taxes, they

are inapplicable in the context of the tax proposed in this paper.

The primary argument given in the literature for source taxation is that source taxation is

fair because the jurisdiction in which the income is earned has normally provided significant

services to the person who earned in the income.86 In the case of athletes, this could involve

airports, roads, stadiums, policing, fire departments, etc. This is the well-known concept of

taxation according to the benefit principle, and has been characterized in the international context

as a “national rental charge” for the use of the country’s resources, interpreted in the broadest

sense.87 More recently it has been argued that source taxation should be regarded as charge for

82 Green, supra note 8, notes that jock-tax create an incentive for athletes to move to a low-tax state. 83 Smaller non-neutralities might exist, such as the possibility that the duty-day calculation might cause an athlete to want to leave the province right after a game to avoid creating another duty day (Lavitt, supra note 8, at 26). 84 For sample complaints of this type, see: Hoffman, at 10; Gordon Henderson, “All Aboard the Tax Express”, Tax Notes (January 25, 1993), 507. 85 Ekmekjian, supra note 8, at 278, describing the view of a past governor of Georgia. MLB has indicated that a baseball team would not be located in Washington, D.C. if there is a jock tax there. 86 See Chandler, supra note 3, and also James W. Wetzler, “Gordon Henderson’s Tax Express: A Reply”, Tax Notes (February 8, 1993), 803. 87 Peggy Musgrave, as quoted in Michael J. Graetz, Foundations of International Income Taxation (New York: Foundation Press (an affiliate of Carswell), 2003).

32

market access and the income earned in the jurisdiction can be regarded as a reasonable and

practical measure of the value of that access.88

One factor that supports source-based taxation of employment income is that it is

relatively easy to establish a connection to a country (nexus) for labor income than for capital

income, in that for labor income one can establish nexus just by the person being physically

present in the country to do the work. 89 Thus, in the case of an athlete, being present in the

country to participate in the sporting event establishes nexus. Also, the amount of the income

attributable to each source country is relatively easy to measure, at least by the admittedly

arbitrary method of a pro rata allocation by time spent in each source country.

One problem with the argument that source-based taxation is necessary to fund public

services in the source jurisdiction is that it ignores the fact that having one’s residence in a

jurisdiction also creates the need for public services. Thus, perhaps part of the revenue should be

going to the residence jurisdiction. 90

Also, source-based taxation presents some problems in defining the source of an athlete’s

income. One author argues that athletes earn their money at home rather than on the road, citing

the fact that teams earn revenues from broadcasting rights, ticket sales and merchandise

contracts, but the reply is that although the team may earn its income at home, the athlete earns

his income wherever he plays.91 More significantly, it has been argued that the game is only the

place of performance of the final skill, even though there may have been years of preparation in

88 Shay et al., supra note 79at 92. 89 Brian J. Arnold & Michael J. McIntyre , International Tax Primer: Second Edition (The Hague: Kluwer, 2002),, at 22. 90 See Henderson, supra note 86, at 1121. 91 See Hoffman, supra note 7, at 10-11 and the reply by Harley Duncan, “Jock Tax Analysis Was Way Off Base”, Tax Notes (December 16, 2002), 1489.

33

the residence country, so it should not be the case that 100% of the tax goes to the source

country. 92

Source-based taxation has been said to be “taxation without representation”, and hence it

is argued that a government could be too keen to establish a “tax on foreigners”. Although this

point may raise valid questions about voting laws, it is not an argument against taxing non-

residents.93

Source-based taxation has been criticized on the basis that one jurisdiction moving in that

direction could inspire the other jurisdiction to retaliate and do the same, either because of the

loss in revenue or the perception that “they are taxing our athletes, so we should respond”. As

discussed above, this prediction has certainly been true in the past. However, it is not so much

an argument against source-based taxation as a warning that jurisdictions contemplating a move

in this direction should expect that neighboring jurisdictions could respond in kind. Provided

this is taken into account and proves to be a small effect, as is shown in Table 5 above, it is not a

problem. California, New Jersey and St. Louis already tax Canadian athletes, so it is

unreasonable to suggest that the Alberta tax or the proposed tax constitute any kind of

unprecedented move that could cause “irritation” to the US.94

Another argument sometimes raised against source taxation is that residence countries

may find it easier to obtain information to ensure proper payment of tax. A study by the Auditor

General found that fewer than 2% of non-resident individuals who received payment for services

in Canada filed a tax return. 95 This is not likely to be a problem with league athletes, whose

92 Shay et al, supra note 79, at 138; also Gordon Henderson, “Henderson’s Tax Express: A Response to Commissioner Wetzler”, Tax Notes (February 22, 1993), 1121. 93 Li, supra note 2, at 56. 94 Brean and Forgione, supra note 9, at 23. 95 Auditor General of Canada, Report 2001 (Ottawa: Auditor General, 2002), at 18 (in chapter: “International Tax Administration: Non-Residents Subject to Canadian Income Tax”). On compliance problems, see also Organisation

34

schedules and salaries are publicly available, although there may be a problem with some of the

incentive and signing-bonus components of income.

The major argument against source-based taxation in Canada is the increase in

compliance costs for taxpayers and administrative costs for government. Although no formal

studies have been undertaken, these costs are likely to be higher since residence-based taxation

involves only one country’s tax system while source-based taxation involves both countries’ tax

systems, possibly with multiple tax returns in each country. For example, if the proposed tax

was implemented and in response states in the US moved to tax Canadian athletes, a Canadian

NHL player might have to file as many as 18 state tax returns.

It remains to be seen how much of the problem of compliance costs can be solved with

better tax design. US state jock taxes are almost a model of what not to do in terms of lack of

uniformity and resulting taxpayer paper burdens. Despite a 1994 report pointing the way, 96

much remains to be done and some have called for Congress to act and solve the “administrative

nightmare”. 97 The measures taken above to make the proposed tax simple, such as making it a

flat-rate tax that is withheld from athletes’ pay with tax returns being submitted by the team

rather than the athlete, should assist in this regard. One would think that such a tax need not be

costly to comply with or administer, since fewer than 5,000 taxpayers are involved and all of

them probably have professional assistance with tax matters.

On an international level, it is clear that the arguments for source-based taxation have

won they day. As one article states, “We know of no country with an income tax that forgoes

for Economic Co-operation and Development, Thin Capitalization; Taxation of Entertainers, Artistes and Sportsmen (Washington: OECD, 1987). 96 Wetzler, supra note 43. 97 Paul Barger, “State Taxation of Professional Athletes: Congress Must Step In”, Tax Notes (October 11, 1999), 243-250, at 243. Congress has acted in many other areas to preempt state actions: Iris J. Lav, “Piling on Problems: How Federal Policies Affect State Fiscal Conditions” (2003), 56 National Tax Journal 535-554, at 549.

35

source taxation of nonresidents.”98 A leading text concludes: “By international custom, a country

has the primary right to tax income that has its source in that country.”99 Another concurring

opinion is that “The current international consensus is that the source country has primary

jurisdiction to tax income from business income and income from services…”100. At the

subnational level, source-based taxation seems to be less accepted. Perhaps because of their

apparent (and sometimes real) effect of discriminating against out-of-state athletes, US jock

taxes even made it onto a list of “strangest state tax laws”, despite the long tradition of non-

resident taxation from the point of view of a state.101

6. A Federal Tax on Non-Resident Athletes

The special provision in the Canada-US treaty exempting league athletes from tax as non-

residents could be considered somewhat anomalous as no parallel provision is found in other

Canadian treaties, other American treaties, or in the OECD model convention. 102 It is similar to

reciprocal agreements between US states, which allow income to be taxed in the state of

residence if it is earned in another state that is party to the agreement. However, such

agreements have proved to be acceptable only where the income tax rates are reasonably equal,

as is the income earned in each state by residents of the other state. 103 The analysis above shows

that these circumstances are not applicable in the Canada-US context; the treaty provision clearly

favors the US for all of the reasons discussed above for provincial taxation. Thus, consistent with

98 Shay et al., supra note 79, at 109. 99 Arnold and McIntyre, supra note 89, at 21. 100 Li, supra note 2, at 49. 101 CNN Money’s list is at http://money.cnn.com/2003/01/06/pf/taxes/q_oddtaxes/. 102 Bradley A. Sakich, “Inbound Personal Services” 1996 Conference Report (Toronto: Canadian Tax Foundation, 1997), article 15. 103 Hoerner, supra note 81. .

36

the reasoning about source-based taxation presented above, the Canada-US treaty could be

amended to delete this provision.

The effect of this change would be to make American athletes on American teams taxable

federally in Canada as non-residents on their Canadian-source income, with an extra 48%

surcharge for income not earned in a province. Of course, this would also make Canadian

athletes on Canadian teams taxable at the federal level in the US.

If by the time this occurred the proposal for flat-rate provincial taxes on non-resident

athletes had been adopted, it might make sense for compliance cost reasons for the federal

government to substitute the present non-resident rules on league athletes for a flat-rate tax at a

rate of perhaps 25% piggy-backed on top of the provincial tax. The revenue raised by this tax

would be directly proportional to the provinces’ calculated amount of $30 million above, so this

tax could be expected to produce 25/15 times $30 million, or $50 million. Against this would

have to be counted the foreign tax credits that would be given for US federal taxes on Canadians

for games in the US, which might also be proportional by the 25/15 ratio to the amounts shown

in Table 5. A more thorough athlete-by-athlete analysis using the US federal rate structure

would be needed to confirm the foreign tax credit amounts, however.

A problem with the federal version of this tax is that the combined 40% federal-

provincial rate exceeds US tax rates and therefore would not be fully creditable against US

federal income tax for US-resident players. Hence the tax would be an additional burden on

athletes, unlike the provincial tax proposed above. This means that many criticisms of the US

jock taxes would apply to the Canadian federal tax: it would create non-neutralities in athletes’

decision-making; the discriminatory treatment of athletes versus other employees providing

personal services would be a real economic burden; and Canada might be perceived as a less

37

attractive place to locate a sports team. On the other hand, the increased tax burden on US

athletes coming to Canada would at least slightly lessen the difference in tax burden between

Canadian and American athletes, which could make Americans less reluctant to come to Canada

to play for Canadian-based teams.104

7. Government Sport Subsidies

(1) Why Subsidies?

The Alberta NHL Players tax is one attempt of the government to provide financial

assistance to Canadian professional sports franchises that seemed to be acceptable to the public.

Contrast this with the negative reaction to John Manley’s (then the Industry Minister) plan to

offer financial aid to Canadian NHL teams of an estimated $20 million over four years in

January of 2000,105 which caused the government to retract the financial aid offer three days after

its announcement.106

A poll commissioned by the federal finance department in 1999 indicated that 50% of

Canadians were strongly opposed to helping NHL teams.107 In a more recent survey, 55% of

104 For documentation on this problem, see Koresky, supra note 8, at 101. However, Beam et al, supra note 55, contend that with proper planning the level of Canadian taxes may not be higher than the US in some circumstances. 105 See “Ottawa's NHL bail out gets icy reception”, January 18, 2000, online: CBC News <http://www.cbc.ca/storyview/CBC/2000/01/18/hockey000118> 106 Speaking Notes for the Honourable John Manley, Minister of Industry, “On the National Hockey League File”, January 21, 2000. online: <http://www.ic.gc.ca/cmb/Welcomeic.nsf/0/85256779007b79ee8525686d00502bc5?OpenDocument> 107 Hirshhorn, Cayrn. “Manley loses face-off, reneges on aid package”, January 28,2002. Online: Centretown News <http://www.carleton.ca/ctown>

38

respondents indicated that the government should probably or definitely move part way towards

reducing some of the tax disadvantage of Canadian teams competing with American teams 108.

From the survey, there appears to be two major factors that discourage taxpayers from

supporting the subsidization of NHL teams. 45% of respondents felt that sports economics in

general were out of hand (ie. ticket prices are too high), and 28% of respondents thought that

other issues/causes were more important109. It does seem difficult to justify the subsidization of a

private business when funding for essential services such as health care and education are being

cut.

One issue not addressed in the survey is that it is always possible for the NHL to take

action itself to help the position of financially weaker teams. Revenue-sharing among teams is

much more pronounced in leagues such as the National Football League, where even a small

town in Michigan named Green Bay can have its own team.

Given that the league is not going to solve the problem itself, there are two ways that the

government could justify the subsidization of Canadian hockey clubs – either they provide

economic benefits to the community or they provide intangible benefits from increased civic

pride among community members.

Consider the issue of economic benefits to the community. In promoting the

subsidization of sports teams and facilities, many government and supporters point to specific

cases where the building of a stadium has proved to revitalize the economic well-being of a

region. 110 However, there have been numerous academic studies that indicate the opposite is

108 National Post/COMPAS survey results: “The NHL Crisis: Hockey Patriotism Not Quite Strong Enough to Produce Majority for Tax Support”, January 13, 2003. online: <www.compas.ca/html/archivesdocument.asp?compasID=380> 109 ibid 110 Two frequently cited examples are Cleveland’s Gateway Project and Arizona’s Bank One Ballpark. See Andrew H. Goodman, “The Public Financing of Professional Sports Stadiums: Policy and Practice”, Sports Lawyers Journal, Spring 2002, v.9, p.207-208.

39

generally true – the additional labor and capital income a community obtains from a sports-

related facility is inadequate to justify public subsidy111. Findings include: little import

substitution occurs as a result of a professional sports team – most of the revenues generated are

merely a transfer of discretionary recreational money within a region; 112,of 32 cities where there

was a change in the number of sports teams, 30 showed no significant relationship between the

presence of the teams and real, trend-adjusted, per capita personal income growth;113 and the

presence of a professional sports team diverts economic development toward labor- intensive,

relatively unskilled, low-wage activities such as ticket and concession clerks, 114 slowing long-

term economic growth.

While professional sports do create jobs (it is claimed that 19,071 jobs resulted from the

presence of professional sports clubs in 1994-95115), historically government subsidization of

sports teams and facilities have been extremely expensive job creation programs. For example, a

government subsidy to the Arizona Diamondbacks to help finance the cost of a new stadium

created 340 full-time positions – at a cost of $705,800 per job.116 A recent analysis of the

Cincinnati area's investment of $300 million in sports facilities suggests that the $6 million in

new spending generated by the new facilities would create only 400 new jobs.117

The presence of a professional sports team might positively affect tourism in a region by

increasing the general awareness of Canada or by causing people to travel to Canada specifically

111 For a compilation of such studies, see Roger Noll and Andrew Zimbalist, ed. , Sports, Jobs & Taxes: the Economic Impact of Sports Teams and Stadiums (Brookings Institute: Washington), 1997. 112 Rosentraub, Mark S. (1997). Major League Losers: The Real Costs of Sports and Who's Paying For It . New York: Basic Books. 113 Ibid, pg 15 114 Robert A. Baade and Richard F. Dye, “The Impact of Stadiums and Professional Sports on Metropolitan Area Development, Growth and Change , Spring 1990, p. 12 115 Sport in Canada report, p. 6 116 Deloitte & Touche, Arizona Office of Sports Development, “Economic Impact Study of a Major League Baseball Stadium and Franchise,” December 1993.

40

to attend a sporting event; for example, in 1997, 728,000 overnight person trips from the U.S. to

Canada included attending a sports event.118 This contributes to the economy through tourist

spending on accommodation, food and related goods.

Now let us turn to the intangible benefits of a sports team. Sports teams and the facilities

they use could be important components of the efforts to establish regional identities.119 Benefits

also include the satisfaction and pride people get from living in a “big league” town, having a

common topic of conversation, reading about its successes and failures in the newspaper, etc.120

Major league teams could foster civic pride and community identity, and proponents argue that

sports is one of the few remaining aspects of society that transcends all strata of the

community. 121 These “social spillover benefits” were quantified in a study of the impact the

presence of various professional sports in the Indianapolis area.122 The results indicate that all

Indianapolis residents do enjoy substantial social spillover benefits from the presence of the

Pacers, Colts and the Indianapolis 500. However, more interesting is their findings of who most

benefits – there was a distinct positive correlation between attendance at an event and the civic

pride felt by the respondent. The results of the study also indicate that there are characteristics of

a public good in professional sports teams, albeit small, since one person’s consumption of the

civic pride generated by the team does not prevent another person from enjoying it.

117 Swindell, David, and John Blair (1997). "Measuring the Costs and Benefits from the Building of Two New Facilities for Cincinnati." In Roger G. Noll and Andrew Zimbalist, eds., Sports, Jobs and Taxes: The Economic Impact of Sports Teams and Stadiums Washington, DC: The Brookings Institution, 282-323. 118 Sport in Canada report, pl3 119 Danielson, Michael N. (1997). Home Team: Professional Sports and the American Metropolis. Princeton: Princeton University Press. 120 Thomas V. Chema, “When Professional Sports Justify the Subsidy: A Reply to Robert A. Baade,” Journal of Urban Affairs, vol. 18 (March 1996), pp.19-22 121 Rick Dodge, St. Petersburg city official, quoted in Whitford “Playing Hardball”, 175 122 Swindell, David and Rosentraub, Mark. Who benefits from the presence of professional sports teams? The implications for public funding of stadiums and arenas, Public Administration Review; v.58 (Jan/Feb 1998)

41

Civic pride is especially likely to be significant for hockey, given our recent and past

Olympic and world championship successes. National pride was the main reason given for

supporting NHL teams in Canada in a recent survey. 60% of respondents who supported

government NHL assistance did so because of Canadian pride/heritage motivations or because

hockey was our national sport. In the same survey, only 6% of non-supporters felt that the

government should not support hockey because hockey is not important.

(2) Alternative Subsidy Forms

For concreteness, suppose that the Ontario government wished to use all or part of its

proceeds from the proposed non-resident tax to aid the Ottawa Senators, which has historically

been one of the more financially-troubled Canadian teams. Obviously one method is to simply

give them the cash, as Alberta is doing. However, in case that is perceived to be too direct and

an improper use of public funds, there are other less obvious methods of achieving the same

purpose, particularly if the tax is announced at a different time. Three possible forms of subsidy

are a reduction of the infrastructure surcharge tax on ticket sales, exemption from the amusement

tax, and the allocation of lottery funds to the team (with the use of the proceeds from the tax to

replace the prior use of the lottery funds).

Reduce Ticket Surcharge : While other smaller Canadian NHL markets like Edmonton and

Calgary have property taxes of approximately $175,000 and $292,000 respectively, the Ottawa

NHL franchise pays approximately $700,000 in property taxes annua lly123. In addition, as part of

the building of the Corel Centre, a new highway interchange and additional infrastructure

123 Ottawa Senators Community Coalition, “Public Policy Subcommittee Report”, February 25, 2003, online: <www.oscc-ccso.net/media_en/feb25_2003.html>

42

services were required. The $21 million in funding for the interchange and services was made

available via public provincial dollars. The Senators are required to reimburse the Provincial

government for this funding together with interest. This repayment to the provincial government

is financed predominately through an infrastructure surcharge tax (IST). This IST equates to

$2.34 per ticket sold and represents an annual cost of approximately $1.9 million to the fan base.

The Senators have complained that they are the only Canadian NHL franchise where

public funds provided for capital expenditures have resulted in an IST, or "fan tax". 124 This tax

on tickets further works to diminish ticket sales for the Senators. Perhaps the new interchange

and infrastructure upgrades should be viewed as a public good, which should not be entirely

financed with private funds. Presumably, local businesses and residents also benefit from the

improved accessibility off of the highway and should bear some of the cost of these upgrades.

Amusement Tax Exemption: For non-exempt sporting events such as Ottawa Senators hockey

games, the Ontario Retail Sales Tax ("ORST") provides for an additional 2% tax on the standard

8% charged on most products and services purchased in Ontario.125 This combined tax of 10% is

often referred to as the "Amusement tax". This amusement tax raises the price of admission and

creates a competitive disadvantage for the Ontario NHL teams. The Senators are not exempt

from the additional 2% since they are classified as non-Canadian entertainment. Opponents of

this position believe that hockey games are Canadian entertainment that should be exempt.126

This position is particularly strong when taking into consideration the games played between two

Canadian teams in Ontario, which occurred 15 times in the 2002-2003 season. Given an average

124 Ottawa Senators Community Coalition, “Public Policy Subcommittee Report”, February 25, 2003, online: <www.oscc-ccso.net/media_en/feb25_2003.html> 125 Ontario Ministry of Finance, Ontario Retail Sales Tax Guide 303, “Admissions”, revised January 1997 126 For example, the Ottawa Senators Community Coalition holds this view.

43

attendance of 16,000127 per game played in Ontario and an average ticket price of $55128, $1.32

million of amusement tax is collected on these all-Canadian games.

The Ontario government recently announced a temporary exemption from the 10% retail

sales tax on amusement admissions for the period April 30, 2003-October 1, 2003.129 While this

exemption will have no impact on the Senators since this period does not fall within their season,

it may indicate a willingness on the part of the Province to abandon this tax to provide incentives

for people to frequent places of amusement such as Ottawa Senator hockey games.

Provide Lottery Funds: Along with the players tax, Alberta has introduced a “Breakaway to

Win” lottery to financially assist their NHL teams. Similarly, Ontario could introduce a lottery to

assist the Ottawa Senators. The idea of a lottery may be more acceptable than the imposition of a

tax – since it is voluntary, those who wish to support their local team can do so without placing

any additional burden on others. In support of the Alberta NHL lottery, Oilers president Patrick

Laforge pointed to the fact that provincial lotteries have long been profiting from the presence of

NHL teams through the Sport Select and Proline games, without the NHL teams seeing any

portion of the in gambling profits.130 The NHL included this recommendation in their 1999

assistance proposal to the Canadian government, saying the teams deserve a share of the $170

million annual pot because the games are the intellectual property of the NHL and its teams.131

In addition, while NHL Commissioner Gary Bettman was not in favor of sports gambling of any

kind, he was disconcerted by the fact that “the results of our game, which we spend $2 billion,

127 NHL average attendance per “NHL skating on thin financial ice”, The Halifax Herald Limited, January 11, 2003 128 Yahoo Sports “Ottawa Senators sell over 1,000 tickets Friday for game Tuesday night”, January 10, 2003 http://ca.sports.yahoo.com/030110/6/rak9.html 129 Ontario Ministry of Finance Information Notice, “Refund Information - Temporary RST Exemption on Accommodation and Admissions to Places of Amusement in Ontario”, May 2003 130 “$5M is a lotto money”, Report Magazine, June 11, 2001 http://report.ca/archive/report/20010611/p47i010611f.html 131 The New York Times, “N.H.L. Seeks Aid From Government to Keep Canada's Sport in Canada”, September 25, 1999.

44

Canadian, a year to put on are misappropriated by the lotteries so that they can make hundreds of

millions of dollars.”132

While the proceeds from the Alberta Breakaway to Win lottery to be shared among the

Oilers and the Flames have only ranged from $500,000 to $2 million annually, they hope that

that this number will increase in the future as the lottery gains more popularity. A similar scheme

in Ontario would be a start to cutting into the annual losses incurred by the Senators.

8. Conclusion

The Alberta NHL Players Tax has features which render it flawed in the eyes of many tax

policy analysts. It operates as a special tax surcharge on Canadian-resident hockey players, in

that Canadian player suffers an increased tax burden while an American is able to recover the

Alberta tax paid as a foreign tax credit on his US federal tax return. Also, it breaks with over 40

years of tradition and taxes a class of Canadians living in other provinces on their employment

income earned in Alberta. This precedent may raise concerns among the large number of

Canadians who are not athletes but who live in one province and work in another.

Still, the Alberta tax is worthy of note in that 43% of its revenue comes from non-resident

athletes. In this, it is a foray into source-based taxation, which may be worth considering as a

charge for the use of public services in Canada. The Canada-US treaty has reduced revenue for

Canada by preventing the federal government from taxing the Canadian-source income of many

high-paid athletes who earn income here. Since provinces are not bound by the treaty, they are

much more free to innovate than the federal government.

132 Commissioner Bettman Conference Call Transcript: http://www.spaceports.com/~jve/hockey/bettman.html

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The paper develops a simple design for a flat-rate Canadian tax on non-resident athletes

that could be administered uniformly by all provinces. The proposed tax would collect $30

million in revenue for the provinces and would cost the federal government only about $3

million in foreign tax credits. Athletes would not suffer an increased tax burden, and all of the

net revenue from the tax would come from the US government treasury. A similar federal tax

could be imposed at a later date if the Canada-US treaty was changed to permit it.

46

Table 1: Estimated Revenues from the 12.5% Alberta NHL Players Tax

Payroll1 (in Cdn $

millions)Games in Alberta

% of income earned in Alberta

Alberta source income3 (%)

NHL Players Tax ($)

Calgary Flames 52.3 45 25.0 13,070,250 1,633,781Edmonton Oilers 48.5 51 28.3 13,745,350 1,718,169 Total - Alberta teams 3,351,950 48%

Montreal Canadiens 76.3 2 1.1 847,800 105,975Ottawa Senators 49.1 2 1.1 546,011 68,251Toronto Maple Leafs 85.3 4 2.2 1,894,467 236,808Vancouver Canucks 49.9 6 3.3 1,664,200 208,025 Total - Other Canadian teams 619,060 9%

Anaheim Mighty Ducks 61.2 4 2.2 1,360,667 170,083 Atlanta Thrashers 40.8 1 0.6 226,778 28,347 Boston Bruins 58.6 2 1.1 650,678 81,335 Buffalo Sabres 48.7 2 1.1 540,778 67,597 Carolina Hurricanes 61.5 2 1.1 683,822 85,478 Chicago Blackhawks 69.9 4 2.2 1,552,556 194,069 Colorado Avalanche 94.2 4 2.2 2,093,333 261,667 Columbus Blue Jackets 44.3 4 2.2 983,867 122,983 Dallas Stars 96.9 3 1.7 1,614,483 201,810 Detroit Red Wings 106.8 4 2.2 2,372,444 296,556 Florida Panthers 51.3 0 0.0 - - Los Angeles Kings 68.1 4 2.2 1,514,178 189,272 Minnesota Wild 32.2 7 3.9 1,251,639 156,455 Nashville Predators 39.6 4 2.2 879,200 109,900 New Jersey Devils 82.3 1 0.6 457,044 57,131 New York Islanders 65.5 1 0.6 363,717 45,465 New York Rangers 108.6 1 0.6 603,578 75,447 Philadephia Flyers 87.9 2 1.1 976,889 122,111 Phoenix Coyotes 69.6 4 2.2 1,545,578 193,197 Pittsburg Penguins 49.0 0 0.0 - - San Jose Sharks 75.0 4 2.2 1,667,689 208,461 St. Louis Blues 99.1 3 1.7 1,651,117 206,390 Tampa Bay Lightning 45.4 1 0.6 252,072 31,509 Washington Capitals 79.6 2 1.1 884,433 110,554

Total from US Teams 3,015,817 43%

Total from all NHL Teams 6,986,827 100%

Notes:1 2002-2003 payroll statistics provided in U.S. dollars from ESPN.com - http://sports.espn.go.com/nhl/powerranking?season=2003&week=12. Converted using Bank of Canada 2002 average exchange rate of 1.57 - http://www.bankofcanada.ca/pdf/nraa02.pdf2 2002-2003 preseason and regular season games from http://cbs.sportsline.com/nhl/teams/schedule/CGY and http://cbs.sportsline.com/nhl/teams/schedule/EDM3 Calculated as payroll multiplied by the ratio of number of games in the province over 180 duty days/year per Levitt.

47

Table 2. Hockey: Ontario Revenue from the Proposed Tax and US Jock Taxes Paid

PROVINCIAL REVENUES FROM ATHLETES ON US TEAMS JOCK TAXES PAID BY ATHLETES ON CANADIAN TEAMS(from games played in Ontario) (from games played in the US)

Team

Payroll1

(in $ millions)

Duty Days2 in

Ontario of US Players

Ontario Source Income of US

Players ($)

Tax Paid in Ontario by US

Players ($)

Income of Ontario Players from Playing

This Team3 ($)

Top State Tax Rate

4

(%)

Maximum State Tax Paid ($)

Ottawa Players

Toronto Players

Anaheim Mighty Ducks 61.2 2.4 699,771 104,966 1.2 0 280,571 9.30 26,093 Atlanta Thrashers 40.8 4.8 933,029 139,954 2.4 2.4 1,536,000 6.00 92,160 Boston Bruins 58.6 6 1,673,171 250,976 1.2 1.2 768,000 5.30 40,704 Buffalo Sabres 48.7 7.2 1,668,686 250,303 3.6 3.6 2,304,000 6.85 157,824 Carolina Hurricanes 61.5 4.8 1,406,720 211,008 1.2 1.2 768,000 8.25 63,360 Chicago Blackhawks 69.9 0 - - 1.2 1.2 768,000 3.00 23,040 Colorado Avalanche 94.2 2.4 1,076,571 161,486 1.2 1.2 768,000 4.63 35,558 Columbus Blue Jackets 44.3 1.2 252,994 37,949 1.2 1.2 768,000 7.50 57,600 Dallas Stars 96.9 1.2 553,537 83,031 1.2 1.2 768,000 - - Detroit Red Wings 106.8 2.4 1,220,114 183,017 1.2 2.4 1,255,429 4.10 51,473 Florida Panthers 51.3 4.8 1,173,463 176,019 2.4 2.4 1,536,000 - - Los Angeles Kings 68.1 2.4 778,720 116,808 1.2 0 280,571 9.30 26,093 Minnesota Wild 32.2 2.4 367,829 55,174 0 0 - 7.85 - Nashville Predators 39.6 2.4 452,160 67,824 1.2 0 280,571 - - New Jersey Devils 82.3 4.8 1,880,411 282,062 2.4 2.4 1,536,000 6.37 97,843 New York Islanders 65.5 4.8 1,496,434 224,465 2.4 2.4 1,536,000 6.85 105,216 New York Rangers 108.6 4.8 2,483,291 372,494 2.4 2.4 1,536,000 6.85 105,216 Philadephia Flyers 87.9 4.8 2,009,600 301,440 2.4 1.2 1,048,571 2.80 29,360 Phoenix Coyotes 69.6 2.4 794,869 119,230 0 0 - 5.04 - Pittsburg Penguins 49.0 4.8 1,119,634 167,945 2.4 2.4 1,536,000 2.80 43,008 San Jose Sharks 75.0 2.4 857,669 128,650 0 0 - 9.30 - St. Louis Blues 99.1 0 - - 1.2 1.2 768,000 6.00 46,080 Tampa Bay Lightning 45.4 4.8 1,037,097 155,565 1.2 2.4 1,255,429 - - Washington Capitals 79.6 4.8 1,819,406 272,911 2.4 2.4 1,536,000 4.75 72,960

Average 68.2

TOTAL 3,863,277 1,073,588

Ottawa Senators 49.1Toronto Maple Leafs 85.3Vancouver Canucks 49.9Montreal Canadiens 76.3Calgary Flames 52.3Edmonton Oilers 48.5

Average 60.2

Notes:1 2002-2003 payroll statistics in U.S. dollars from ESPN.com - http://sports.espn.go.com/nhl/powerranking?season=2003&week=12

Converted using Bank of Canada 2002 average exchange rate of 1.57 - http://www.bankofcanada.ca/pdf/nraa02.pdf2 Duty days are calculated as games played*1.2, per Hoffman report. Games played includes 2002-2003 preseason and regular season games.

Schedules from www.ottawasenators.com and www.torontomapleleafs.com. 3 U.S. source income is calculated by multiplying the payroll of the Maple Leafs and the Senators by their respective ratios

of duty days divided by total duty days (assumed to be 210 per Hoffman article).4 The maximum tax rate on personal income for each state has been used. Rates from Hoffman (2003).

5 Although the revenue effects are calculated at the team level for simplicity, the tax would actually be levied on each individual player.

Duty Days of Ontario Players

Playing This Team

48

Table 3. Baseball: Ontario Revenue from the Proposed Tax and US Jock Taxes Paid

PROVINCIAL REVENUES FROM ATHLETES ON US TEAMS JOCK TAXES PAID BY ATHLETES ON CANADIAN TEAMS(from games played in Ontario) (from games played in the US)

Payroll1 (in

$ thousands)

Duty Days2

in Ontario of US Players

Ontario Source Income of US

Players ($)

Tax Paid in Ontario by US

Players ($)

Duty Days of Ontario Players

Playing This Team

Income of Ontario Players from Playing

This Team3 ($)

Top State Tax Rate

4

(%)

Maximum State Tax Paid ($)

MLB Team

Anaheim Angels 130,679 3.9 2,426,898 364,035 7.8 3,567,414 9.30 331,769 Baltimore Orioles 118,538 13 7,338,090 1,100,714 13 5,945,689 4.75 282,420 Boston Red Sox 164,652 13 10,192,716 1,528,907 14.3 6,540,258 5.30 346,634 Chicago Cubs 135,926 3.9 2,524,331 378,650 0 - 3.00 - Chicago White Sox 111,998 7.8 4,159,910 623,986 3.9 1,783,707 3.00 53,511 Cincinnati Reds 149,281 2.6 1,848,236 277,235 5.2 2,378,276 7.50 178,371 Cleveland Indians 91,231 3.9 1,694,287 254,143 5.2 2,378,276 7.50 178,371 Detroit Tigers 92,641 5.2 2,293,965 344,095 9.1 4,161,983 4.10 170,641 Houston Astros 125,517 1.3 777,008 116,551 1.3 594,569 - - Kansas City Royals 76,106 3.9 1,413,402 212,010 3.9 1,783,707 6.00 107,022 Minnesota Twins 102,551 5.2 2,539,353 380,903 5.2 2,378,276 7.85 186,695 New York Yankees 283,106 15.6 21,030,744 3,154,612 16.9 7,729,396 6.85 529,464 Oakland A's 88,857 5.2 2,200,264 330,040 3.9 1,783,707 9.30 165,885 Philadephia Phillies 149,682 2.6 1,853,203 277,980 2.6 1,189,138 2.80 33,296 Pittsburgh Pirates 97,834 6.5 3,028,199 454,230 1.3 594,569 2.80 16,648 Seattle Mariners 144,861 3.9 2,690,273 403,541 5.2 2,378,276 - - St. Louis Cardinals 159,867 0 - - 3.9 1,783,707 6.00 107,022 Tampa Bay Devil Rays 49,707 16.9 4,000,242 600,036 15.6 7,134,827 - - Texas Rangers 166,856 7.8 6,197,519 929,628 3.9 1,783,707 - -

Average 128,415

TOTAL 11,731,296 2,687,749

Toronto 96,046

Notes:

1 Payrolls provided in U.S. dollars from: http://espn.go.com/mlb/news/2003/0721/1583823.

Converted using Bank of Canada 2002 average exchange rate of 1.57 - http://www.bankofcanada.ca/pdf/nraa02.pdf.2 Duty days are calculated as games played*1.3, per Hoffman report. Games played include preseason and regular season games.

Schedules from: www.baseball-almanac.com/teamstats/schedule.php?y=2002&t=TOR.3 U.S. source income is calculated by multiplying the payroll of the Blue Jays the ratio of duty days divided by

total duty days (assumed to be 210 per Hoffman article).4 The maximum tax rate on personal income for each state has been used. Rates from Hoffman article.

5 Although the revenue effects are calculated at the team level for simplicity, the tax would actually be levied on each individual player.

49

Table 4. Basketball: Ontario Revenue from the Proposed Tax and US Jock Taxes Paid

PROVINCIAL REVENUES FROM ATHLETES ON US TEAMS JOCK TAXES PAID BY ATHLETES ON CANADIAN TEAMS(from games played in Ontario) (from games played in the US)

Payroll1 (in

$ thousands)

Duty Days2 in

Ontario of US Players

Ontario Source Income of US

Players ($)

Tax Paid in Ontario by US

Players ($)

Duty Days of Ontario Players

Playing This Team

Income of Ontario Players from Playing

This Team3 ($)

Top State Tax Rate

4 (%)

Maximum State Tax Paid ($)

Team

Atlanta Hawks 85,187 2.4 1,947,142 292,071 2.4 1,666,701 6.00 100,002Boston Celtics 89,589 2.4 2,047,744 307,162 2.4 1,666,701 5.30 88,335Chicago Bulls 84,389 3.6 2,893,324 433,999 3.6 2,500,051 3.00 75,002Cleveland Cavaliers 72,960 2.4 1,667,652 250,148 3.6 2,500,051 7.50 187,504Dallas Mavericks 123,610 1.2 1,412,684 211,903 1.2 833,350 0.00 0Denver Nuggets 53,402 1.2 610,304 91,546 1.2 833,350 4.63 38,584Detroit Pistons 83,120 3.6 2,849,827 427,474 2.4 1,666,701 4.10 68,335Golden State Warriors 75,581 1.2 863,784 129,568 1.2 833,350 9.30 77,502Houston Rockets 75,077 1.2 858,024 128,704 1.2 833,350 0.00 0Indiana Pacers 90,350 2.4 2,065,153 309,773 2.4 1,666,701 3.40 56,668Los Angeles Clippers 52,238 1.2 597,000 89,550 1.2 833,350 9.30 77,502Los Angeles Lakers 100,599 1.2 1,149,698 172,455 1.2 833,350 9.30 77,502Memphis Grizzlies 90,853 1.2 1,038,318 155,748 1.2 833,350 0.00 0Miami Heat 71,010 2.4 1,623,084 243,463 2.4 1,666,701 0.00 0Milwaukee Bucks 81,357 2.4 1,859,585 278,938 2.4 1,666,701 6.75 112,502Minnesota Timberwolves 111,025 1.2 1,268,859 190,329 1.2 833,350 7.85 65,418New Jersey Nets 104,639 3.6 3,587,606 538,141 2.4 1,666,701 6.37 106,169New Orlean Hornets 69,941 2.4 1,598,658 239,799 2.4 1,666,701 6.00 100,002New York Knicks 129,617 2.4 2,962,668 444,400 2.4 1,666,701 6.85 114,169Orlando Magic 68,990 2.4 1,576,921 236,538 2.4 1,666,701 0.00 0Philadelphia 76ers 82,881 3.6 2,841,621 426,243 1.2 833,350 2.80 23,334Phoenix Suns 100,791 1.2 1,151,898 172,785 1.2 833,350 5.04 42,001Portland Trail Blazers 134,309 1.2 1,534,961 230,244 1.2 833,350 9.00 75,002Sacramento Kings 103,068 1.2 1,177,924 176,689 1.2 833,350 9.30 77,502San Antonio Spurs 69,457 1.2 793,799 119,070 1.2 833,350 0.00 0Seattle SuperSonics 78,830 1.2 900,916 135,137 1.2 833,350 0.00 0Utah Jazz 45,232 1.2 516,940 77,541 2.4 1,666,701 7.00 116,669Washington Wizards 70,936 2.4 1,621,388 243,208 2.4 1,666,701 0.00 79,168

Average 85,680

TOTAL 6,752,622 1,758,869

Toronto Raptors 90,280

Notes: 1 Salaries provided in U.S. dollars from: http://www.hoopshype.com/salaries.htm. Converted using Bank of Canada 2002 average exchange rate of 1.57 - http://www.bankofcanada.ca/pdf/nraa02.pdf2 Duty days are calculated as games played*1.2, per Hoffman report. Games played includes preseason and regular season games. Schedule from CBS Sportsline: http://www.cbs.sportsline.com/nba/teams/schedule/TOR.3 U.S. source income is calculated by multiplying the payroll of the Raptors by the ratio of duty days divided by total duty days (assumed to be 105 per Hoffman article).4 The maximum tax rate on personal income for each state has been used. Rates from Hoffman article.

5 Although the revenue effects are calculated at the team level for simplicity, the tax would actually be levied on each individual player.

50

Table 5: Summary of Revenue Effects for All Leagues: Provincial and Federal Governments

Provincial Revenues

Base Case Scenario1

Only California & New Jersey2

Change in Residence

Assumption3

OntarioNHL 3,863,277 1,073,588 123,936 1,073,588 MLB 11,731,296 - - 2,687,749 NBA 6,752,622 - - 1,758,869

QuebecNHL 2,088,952 660,034 136,646 660,034

AlbertaNHL 3,722,380 988,511 250,948 988,511

British ColumbiaNHL 2,061,769 526,905 150,834 526,905

Totals 30,220,296 3,249,038 662,364 7,695,656

Net Revenues ForEach Assumption 26,971,258 29,557,932 22,524,640

Notes:

1Base Case Scenario Assumptions:1. All NHL players are resident where their employer is located2. All MLB and NBA players are non-resident in Canada.3. All U.S. states which have a personal income tax and a professional sports team levy a jock tax on visiting Canadian players.

2Only California and Jersey calculation assumes that no other states will impose a retaliatory jock tax on visiting athletes.

3Change in Residence Assumption calculation assumes that all players of all leagues are resident where they play.

4 The Montreal Expos are not included in the analysis because of their impending departure from Canada.

Federal Foreign Tax Credits