NHL freeloaders
By Benjamin Alarie and Matt Sudak
This commentary was first published in the National Post on Mar 9, 2005.
Locked-out players receive a tax-free subsidy of US$10,000 a month courtesy of the Income Tax Act. Now that's offside
In 2002, the average Canadian family paid $12,800 in personal income taxes on average household income of $73,300. Given that tax season is fast approaching, most Canadians would probably like to know how it is that some individuals have been banking US$10,000 monthly tax-free.
Beginning last November, the NHL Players' Association (NHLPA) has been providing each of the league's 730 players with monthly payments of US$10,000 and advising that the payments are exempt from income taxes in Canada (but not in the United States). This raises two important questions. First, how can some of the most prodigious income earners in Canada be eligible for this great big tax holiday while U.S.-resident players are being taxed on identical payments? Second, does this reflect sound tax policy for Canada?
The tax break works as follows. First, like all taxpayers who are required to pay union dues, players are eligible to deduct annual dues paid to the NHLPA. So far, so good. Second, the NHLPA doesn't pay taxes on the dues as they are received from players or reinvested, since the NHLPA qualifies as a "labour organization" under section 149 of the Income Tax Act, and labour organizations (i.e. unions) are generally exempt from paying income taxes. Finally, the NHLPA's monthly payments to players are tax-free as a result of Fries v. Canada, a 1990 judgment of the Supreme Court of Canada, which held that payments made by unions to members who are on strike (or, equivalently, locked-out) are not taxable.
Union members naturally have an interest in maintaining the tax- free status of strike pay to reduce the net costs associated with acting as a check against employer bargaining power, which was of course the original union raison d'etre. However, from an economic point of view this tax exemption operates as a subsidy to union members--including the members of the NHLPA--delivered via the Income Tax Act.
Several aspects of the NHL labour dispute make justifying this tax subsidy particularly difficult. First, a monthly stipend in five figures (U.S.) can hardly qualify as a sustenance payment. NHL players lead a comparably lavish lifestyle, are not living from paycheck to paycheck, and are in little need of the stipend in order to get by during the lock-out. Canadians working at low-income jobs and battling to make ends meet, while still having to remit income tax, would be a more appropriate target for tax relief than the NHL players receiving tax advantages for not playing this season.
Second, the preferential tax treatment of these NHLPA stipends violates the two conceptions of fairness -- vertical and horizontal - - that are the bedrock of sound tax policy. Vertical fairness dictates that individuals at different income levels should contribute different amounts of tax, such that those with higher levels of income should shoulder proportionally more of the tax burden. Horizontal fairness, on the other hand, requires individuals earning the same income to pay the same amount of tax. Locked-out Canadian NHLers, in what amounts to a remarkable violation of both vertical and horizontal fairness, are not paying any income tax at all on these payments.
Third, since this preferential tax treatment decreases the costs to unions of going on strike or being locked-out, the policy generates the potential for strikes and lock-outs to be both more frequent and lengthier than they otherwise might be. Of course, in many cases decreasing the costs of going on strike could be regarded as socially desirable--for instance if workers are subject to unjustifiably harsh working conditions or are paid a non-living wage. However, in the case of the NHL labour dispute, it is unlikely that siding with the players through the Income Tax Act will produce a "better" result. The average income in the NHL last season was above US$1.8-million, with some star players making considerably more. Jaromir Jagr, the NHL's top-paid player, earned US$11-million playing for the Rangers last season.
The bottom line is that it's unfair that some of the highest- earning Canadians are benefiting from an inequitable tax break for not performing the duties of their employment. As a policy choice, the non-taxability of strike and lock-out pay is dubious. It increases the incidence and length of labour disputes and constitutes a subsidy to those on only one side of the bargaining table. After deftly dodging the politically sensitive issue of strike pay following the Supreme Court of Canada's decision in Fries v. Canada, the time has come for the federal government to address it by legislating changes to the Income Tax Act reflecting Canadians' preference for fairness and efficiency in our income tax.
Sadly, with the season now officially cancelled, the great big tax holiday is just one more reason to imagine how things should have been different.
