Cross-border concerns for athletes

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 will need specialized cross-border financial advice, including immigration, tax, estate and investment planning.

You’d like to think that players of this calibre and income level would have the best advisors available. However, that’s not always the case. Here’s what you need to know.

U.S. immigration issues

To live and play in the U.S., the player will 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.

A few years ago, we were involved with one athlete who had a P-1 visa 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 license 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, working closely with his advisors and U.S. immigration counsel, he was able to receive 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.

Why wasn’t this initial problem addressed earlier on? Clients are focused on playing during the season, and sometimes forget to bring up these issues. So, it’s our job to be proactive for them.

Expatriation

We’ve 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$680,000 (in 2014) 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

We repeatedly see situations where advisors try to skirt compliance or CRA rules.

Advisors will often wrongly suggest players keep a Canadian address on an account, even though they’re living in the U.S. Or, they’ll continue to use segregated funds or Canadian-based life insurance products, thinking that these products fall under different tax and compliance rules compared to traditional mutual funds or investments. Both strategies cause problems for the player, and potentially for the advisor as well. But, with the implementation of FATCA this past July, doing either will become harder.

I was involved in a file a few years ago where a high-profile player was traded from a Canadian team to a U.S. one. He had been advised by Canadian tax advisors to sever his Canadian tax ties and become a U.S. income tax resident exclusively. The player had signed a long-term contract with the U.S. team, and was going to get a Green Card and move his family to the U.S.

His Canadian investment advisor was not too keen about losing this client or the assets that he was managing on behalf of the player. The advisor was not licensed in the U.S., and so to keep the funds, the advisor transferred the majority of the player’s non-registered assets into new segregated funds and Canadian mutual funds. This created new compensation for the advisor. And, to make it look like the player was still a Canadian resident, the advisor changed the address on the accounts to that of one of the player’s family members still living in Canada.

On top of the serious compliance violations, these actions created a number of adverse Canadian and U.S. income tax problems.

The player’s Canadian tax experts had filed an exit return for him for the tax year that he was traded. So, if the accounts were truly foreign, he should have had non-resident treaty withholding taxes imposed on the Canadian- source investment income. Further, the player should have also received NR4 slips from CRA.

Instead, CRA issued T3s and T5s, since the address was Canadian. Furthermore, from a U.S. income tax position, all of his holdings were considered to be Passive Foreign Investment Companies (PFICs), creating onerous U.S. income tax results.

Few advisors 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 new 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 have 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 8891, 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$5.34 million in 2014. Most advisors might think worldwide estate doesn’t include personal and financial assets. However, 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.

We worked with one player this year who had spent more than $40,000 on his U.S. estate plan, which included an inter vivos trust. Problem was, he had all of his financial assets with an advisor and firm located in Canada.

So, he was unable to settle the Canadian assets into his U.S. trust, and the bulk of his estate will be subject to probate in Canada. This defeats one of the primary objectives of setting up the trust in the first place.

The U.S. attorney didn’t realize the player’s Canadian assets couldn’t be settled in the trust, and his Canadian advisors didn’t want to lose the assets. More coordinated planning up front was needed for this player to ensure his overall objectives in Canada and the U.S. could be achieved.

Action Step If clients are truly U.S. residents, don’t advise them as if they’re Canadian.