Luxury Tax in Sports
This article was written by Nav Pannu, CPA, from DMCL Chartered Professional Accountants, in the quarterly Canadian news overview, a newsletter published by Moore North America‘s Canadian firms. The article, brushing over the new alternative minimum tax rules, is part of our mission to be your allies in business by keeping you informed with ongoing news.
Luxury Tax in Canada
Effective September 1, 2022, the Canadian government implemented a luxury tax on the sale or import of specific vehicles, aircraft, and vessels. This luxury tax system bears similarities to those found in major North American sports leagues.
Why Have a Luxury Tax in Sports
In the realm of professional sports, the luxury tax system is established through negotiations between the player’s association and team owners, enshrined in each league’s Collective Bargaining Agreement (CBA). Its primary aim is to curb excessive team spending and promote competitive balance. While akin to Canada’s luxury tax, the sports version is notably more intricate, obliging owners to consider various factors when striving to assemble a championship-level team.
For instance, the National Basketball Association (NBA) sets a luxury tax threshold, which represents the predetermined limit of team salary expenditure beyond which teams become subject to the luxury tax. This threshold fluctuates annually based on league revenues. In the 2023-2024 season, the salary cap maximum is $136 million USD, with a luxury tax threshold of $165 million USD. The NBA operates with a “soft” cap, permitting teams to surpass the salary cap maximum through various means, such as retaining their own players through Bird rights and various contract exceptions. The NBA’s luxury tax system employs tiered rates, similar to Canada’s income tax system. Additionally, it incorporates higher rates for repeater teams, defined as those that have paid the luxury tax in at least three of the previous four seasons.
For the current 2023-2024 season, the Golden State Warriors are expected to incur a substantial luxury tax bill of $188 million USD, in addition to their $207 million payroll. The system primarily targets wealthy owners and teams that can, or in some cases, choose to outspend others. To promote parity, teams that fall below the luxury tax threshold share half of the total tax penalty, which amounted to $15 million USD in the 2022-2023 season.
In contrast, Major League Baseball (MLB) doesn’t have a salary cap, but it implements a Competitive Balance Tax (CBT), functioning similarly to the NBA’s luxury tax. The CBT tax rate increases for each consecutive year a team exceeds the threshold. In addition to financial penalties, teams surpassing the CBT threshold risk losing draft picks and international signing money, which can impede their ability to develop through young talent.
The implementation of a luxury tax is often advocated as a means to enhance competitive balance. Nevertheless, some contend that the National Hockey League (NHL) and the National Football League (NFL) are the two major North American leagues with the greatest competitive balance, and they employ a “hard” salary cap, preventing teams from surpassing a predetermined threshold on player salaries. This remains a topic of ongoing debate.
If you need more information, or to discuss sports with one of our team members, do not hesitate to contact us!