How John Tavares could save on taxes and how you can too

It’s official: hockey legend John Tavares is a Leaf now! By signing a 7-year contract with his hometown team, Tavares gave raving fans of the Toronto Maple Leafs the best Canada Day gift ever.

So how much will John Tavares make? Being one of the most desirable free agents in the history of the NHL, he managed to score a contract worth a cool $77 million. Almost $71 million of that will come in the form of guaranteed signing bonuses. That means Tavares will receive the money no matter what, even if games are cancelled or the season is put on hold for some reason.

Tavares loves his hometown team so much that he reportedly turned down offers of $90 million from the Islanders and $91 million from the Sharks so he could wear the iconic blue and white uniform.

Most NHL players in Canada are considered to be employees and their multi-million dollar pay cheques are taxed the same way as the rest of us. For John Tavares, that means a combined federal/provincial tax rate of 53.53%. Ouch!

However, since he has been playing for the New York Islanders since 2009, Tavares is currently considered a US resident for tax purposes. According to Article XVI of the US-Canada tax treaty, the signing bonuses paid to US-resident players would be taxed at only 15%. With a bit of planning, this move could save Tavares nearly $12 million.

But simply owning a property in one of the tax-free states like Alaska, Florida or Texas is not enough to make this work. To keep his tax residency, Tavares will have to physically spend at least a few off-season months in the US. Perhaps more awkwardly, he won’t be able to own a property in Canada or have a permanent lease here.

Maybe he can live at the Four Seasons?

If that doesn’t suit him, Tavares could consider setting up a Retirement Compensation Arrangement (RCA), which is like a super-RRSP for wealthy Canadians. He could put 40% of his salary into this type of plan, and 53.53% tax on the remaining portion of his income. That would translate into $8.8 million worth of savings.

Once the funds are placed into tax-deferred plans, they can’t be withdrawn unless the player has stopped playing hockey professionally. If at some point Tavares decides to return to the US, he can take all the money from the RCA and pay a flat tax of 25%.

There is no secret that the wealthiest people, including top athletes, usually have professional help with their finances. A recent US study shows that 82% of millionaires use the services of at least one financial advisor.

How do these advisors get paid? Most of the time, they charge an annual fee based on the client’s assets. This fee can be as high as several percentage points per year, but someone with $77 million to invest might pay somewhere in the range of 1.25% for a fancy private wealth manager to 2% for a hedge fund manager.

That translates to a million or two per year in fees, and the kicker is almost none of these advisors have a demonstrated track record of making their clients enough money to justify those fees.

Personal financial planning might seem overwhelming, especially if you’re not a multi-million dollar NHL star. However, financial planning is not a luxury, but rather a necessity. Consider it as your roadmap to wellness.

A good financial plan should tell you what to do on a monthly basis to maintain your lifestyle in the future. That means giving you guidelines on how much to invest, which insurance to buy, how to minimize interest costs on your borrowing, how to keep investment fees low, how to reduce taxes and more.

Planswell is a company that makes this type of financial planning incredibly easy. Instead of spending endless meetings and filling out a ton of papers, everything can be done from the comfort of your home in a matter of minutes.

You’ll see how to use accounts such as a TFSA, RRSP, and RESP to keep your taxes low, without having to move to the US or live in a hotel. In fact, Planswell does all the math to figure out how to maximize the after-tax dollars you’ll have in your pocket when you need it.

To create your fully integrated financial plan, start with answering these 40 questions.  You‘ll see exactly what steps you need to take to make your goals come true.