What it’s like to be a Canadian hockey player in the U.S.

Given the greater number of NHL teams in the U.S. versus Canada, it’s common for Canadian professional hockey players to live and play down south. And, when they do, those players need specialized cross-border financial advice, including immigration, tax, estate and investment planning.

Here’s what cross-border athletes need to know.

U.S. immigration issues

To live and play in the U.S., you need a U.S. work visa. The most common types for athletes are the O-1, P-1, H-2B and B-1 visas. In some cases, these visas can be extended, or the athlete can apply for permanent residence through a U.S. Green Card and, ultimately, for naturalized U.S. citizenship.

My company was involved with one athlete who had a P-1 visa (individual or team athlete) that was due to expire at the end of his season, when he’d become a free agent. He needed a new team contract so he could renew his visa, or else he’d have to return to Canada — a country he hadn’t lived in for four years. To make matters worse, his state driver’s licence would automatically expire along with his visa. So, although he could remain in the U.S. as a visitor, he would not legally be able to work or drive.

Before his season ended and he became a free agent, we worked with a U.S. immigration attorney so the player could get a U.S. Green Card to establish permanent residency. But, while that application was being processed, he was not allowed to leave the U.S. until he received a specific travel document (USCIS Form I-131), which generally takes three months to be issued.

This posed additional problems. He could not return to Canada in the off-season, even though many of his colleagues were able to. And, even though he was re-signed by his team, he needed to make sure that his travel document was issued before the team’s first game, which was in Canada.

Fortunately, he received the I-131 before his first game, allowing him to leave the U.S. He received his Green Card a few months after that.

The player is now able to live and work in the U.S., including after his playing career. After holding the Green Card for five years, he can then apply for U.S. citizenship through naturalization and become a dual citizen.

Expatriation

We’ve also had situations where a European or Canadian player has completed their career in the U.S., and then chosen to return to his home country. However, there can be onerous U.S. tax consequences when they do. The main one is the dreaded U.S. Expatriation Tax under provisions 877 and 877A of the Internal Revenue Code.

If a player holds a U.S. Green Card for more than eight years, he’s defined as a long-term resident. And, if he chooses to give up or abandon the card and his worldwide net worth exceeds US$2 million on the date of expatriation or termination of residency, he could face a hefty income tax hit when he leaves the U.S.

Two levels of tax would be imposed.

• The mark-to-market tax. The player would be deemed to have sold all property for its fair market value on the day before the expatriation date. This would create a capital gain (or loss). However, the player would be entitled to exclude US$690,000 (in 2015) from the gain for tax purposes. Any deemed gain would be subject to U.S. tax rates. Depending on the amount of the gain, long-term rates would be 15% or 20%, along with an additional net investment income tax of 3.8%.
• A 30% withholding tax would be imposed on deferred compensation plans (for instance, U.S. IRAs, 401(k)s, pension plans and stock options). This also applies to any RRSPs the player might have in Canada as well.

Also, current proposed U.S. immigration legislation could deny a person who expatriates from the U.S. the ability to return to the U.S. for any purpose.

U.S. income tax issues

Keeping a Canadian address on an account, even though you’re living in the U.S., can affect how tax is applied. Continuing to use segregated funds or Canadian-based life insurance products, considered by the IRS to be Passive Foreign Investment Companies (PFICs), creates onerous U.S. income tax results.

Few people understand the implications and treatment of short- and long-term capital gains or losses from a U.S. tax perspective. This can create adverse U.S. tax consequences, given the higher U.S. marginal rates and the 3.8% Obamacare surtax on net investment income.

Realized capital gains also create tax preparation headaches, as some Canadian custodians cannot report or track cost basis and transactions in U.S. dollars. If you’re a player in a high-tax state like California or New York, the use of tax-free municipal bonds could make sense as a proxy for fixed income. However, most advisors in Canada are not aware of such vehicles, or don’t have the ability to acquire them.

Maintaining RRSPs, TFSAs, segregated funds and other Canadian domiciled accounts creates additional U.S. tax compliance issues, and could require filing IRS Forms 8938, 8621, 3520, 3520-A and FinCEN114.

Estate planning issues

Players who live and work in the U.S. are likely considered domiciled there for estate and gift tax purposes. If the player marries a U.S. citizen, has children in the U.S. or has non-U.S. beneficiaries (parents or siblings back in Canada), planning is critical.

U.S. estate tax could be imposed at a player’s death if his worldwide estate exceeded US$5.43 million in 2015. Life insurance proceeds where the player has “incidents of ownership” (rights to change or benefit from the policy) are also part of the player’s worldwide estate. These rights could include the power to: change a beneficiary; surrender or cancel the policy; assign the policy; revoke an assignment; pledge the policy for a loan; or obtain a loan against the surrender of the value of the policy from the insurer.

Some Canadian players use life insurance policies to supplement their retirements. The policies are often overfunded and have large death benefits. Given that one of the primary objectives of the policies is to have a future cash value, the policies are usually included in the player’s worldwide estate. This causes the proceeds to be subject to as much as 40% in U.S. estate taxes at death.

Depending upon the specifics of the policy, it might even be considered a Modified Endowment Contract under U.S. tax rules, subject to alternative U.S. income tax results upon distribution and death. If Canadian insurance companies issue the policies, a U.S. Excise Tax of 1% of the premium must be paid. Also, estate planning documents, including wills, powers of attorney and health directives (also known as living wills), will need to be drafted to meet the player’s specific financial and family objectives. U.S. inter vivos trusts are fairly common for wealthy individuals. Eliminating probate on assets and asset protection are common objectives of these trusts, which are transparent for U.S. income, gift and estate tax purposes.