[Signing] Ducks re-sign Frank Vatrano (3 years, $4.57m AAV, deferred salary)

[Jay Random]

Originally Posted by Jason14h

I fully expect California will alter their tax code to stop this

California is already trying to collect state income tax from everyone who leaves the state. They don't have jurisdiction, and the states where the ex-Californians now live are perfectly entitled to tell California to piss up a rope.

[Enoch Root]

Originally Posted by Jason14h

Sorry - Let me clarify . It isn't that the Dodgers (or another NHL team for example) are "investing" on their own. It's that they can get a better guaranteed ROI on the large amount they have to segregate to cover their obligations (or borrow the $$ at a lower rate then their can get off their cashflows ROI) then the interest rate 'offered' to the players when they want to defer.

For easy math take an $11 million contract, where the player wants to defer $10 million into 10 equal $1million payments starting in 2035.

While we say "They deferred $10 million of the contract" they reality is they deferred some unknown amount based on an interest rate negotiated between the team and them (OR - They said I want 1 million this year and $1 million each year from 2035-45) The "contract" value is calculated using CBA formulas (for both sports) but that rate isn't necessarily what the team and player used to negotiate. This is where the team can arbitrage a bit.

A professional sports team (especially the Dodgers) can get very favorable rates to borrow this money and put into the segregated account/lawfirm guaranteeing the future payouts. OR if they are using their own cash, they are getting a better ROI on the guaranteed "note" that pays $1 million in 2035-45 then they offered the player when they negotiated. IE - Dodgers would say we are offering 4% a year for deferral but can get 5.5% on the guaranteed note paying the $1million in the segregated account, meaning they put less real money into the segregated account/lawfirm to eventually equal $1million per year from 2035-45.

If they weren't deferring, they are paying that money up front/yearly to the player (Duh) . Effectively a team can lower the real payments over a long term on a contract by a few % points because of their ability to leverage better guaranteed ROI's then a player (And because players get the tax savings they can take a smaller yearly rate - Or potentially even NO interest rate if the tax savings are worth it)

On a small contract like this you are correct its probably $100K in savings, but if Anaheim convinces all their players to talk to Vartano's accountant and see the tax savingings and ends up deferring 50-60% of everyone's salary, a % point of 60 million a year adds up.

The only issue really could be the HOW CBA calculates the current value of the contract for cap purposes.

If California teams all convince their players to defer money into the future with a lower interest rate then is defined in the CBA (or discount the salary before applying the defined rate to zero sum it out for cap purposes) there is the opportunity for teams to gain a few % points on their cap.

I am just not sure who would raise this as a CBA concern. It's advantageous to owners and players. I guess low tax teams might complain they are losing their existing low tax cap advantage over higher tax jurisdictions ?

It doesn't work like that.

The team would have to deposit set funds in each of the 3 years of the contract (the discounted amount, which appears to be roughly $1.57M each year). They aren't 'segregating' it until the payments are due. The funds would be held in trust.

There is no opportunity to make money on it.

[Rutuu]

Since it's in the CBA, and our Owner is a Swiss citizen for tax purposes. It's probably a good idea to dig into it.

From my read Vatrano's contract would work in Canada, with my read of our rules.

https://www.canada.ca/en/revenue-age...angements.html

...but I'd love a tax lawyer or accountant to give their opinion from actual experience.

[The Cobra]

Originally Posted by Jay Random

So what? The CBA specifically allows deferred compensation under exactly this kind of arrangement. The owners and the PA agreed on these terms. It isn't cap circumvention when it is expressly spelled out in the rules of the cap.

Exactly.

And is won't be negotiated out of because there is no actual cap advantage to the team. The contract is not really for $18M, its value is really $14M, and the cap is calculated on that value. There is no harm or foul here.

[The Cobra]

Originally Posted by Rutuu

Since it's in the CBA, and our Owner is a Swiss citizen for tax purposes. It's probably a good idea to dig into it.

From my read Vatrano's contract would work in Canada, with my read of our rules.

https://www.canada.ca/en/revenue-age...angements.html

...but I'd love a tax lawyer or accountant to give their opinion from actual experience.

I don't think it does, as deferred salary in Canada is taxed when earned. Its not a prescribed plan.

[Jason14h]

Originally Posted by Enoch Root

It doesn't work like that.

The team would have to deposit set funds in each of the 3 years of the contract (the discounted amount, which appears to be roughly $1.57M each year). They aren't 'segregating' it until the payments are due. The funds would be held in trust.

There is no opportunity to make money on it.

Wrong (Probably)- they segregate the guaranteed note that pays the proper amount in those years.

So they are actually segregating 1.XX real cash ( some
Percentage less then 1.57) that they get a ROI of X% guaranteed - whatever rate they negotiated - with approved institutions from the league .

Or at least that’s how it works in baseball and I assume it’s the same for hockey

Edit - maybe I misunderstood - if they are depositing / segregating the discounted amount there has to be a ROI component to get the the eventual proper payout amount ?? I know the team doesn’t make money off it - but it pays interest towards the eventual payout amount to make the future amount correct

[Enoch Root]

Originally Posted by Jason14h

Wrong (Probably)- they segregate the guaranteed note that pays the proper amount in those years.

So they are actually segregating 1.XX real cash ( some
Percentage less then 1.57) that they get a ROI of X% guaranteed - whatever rate they negotiated - with approved institutions from the league .

Or at least that’s how it works in baseball and I assume it’s the same for hockey

In baseball, they may allow payments in the future ("we'll make you VP of public relations" or whatever), I don't know.

But deferring a contract like this does not allow or require segregating. The team would have to make the payments in year 1, 2 and 3. The money would be held in a trust account, earning whatever interest it is earning, so that it matures at $900k each year for the 10 years.

The team would have no access to those funds.

[Enoch Root]

Originally Posted by Jason14h

Edit - maybe I misunderstood - if they are depositing / segregating the discounted amount there has to be a ROI component to get the the eventual proper payout amount ?? I know the team doesn’t make money off it - but it pays interest towards the eventual payout amount to make the future amount correct

Correct.

The discount rate is set. From that they calculate the current values for each of the 3 years, in order to have the 10 payments of $900k each, from 2035-45 or whatever it is.

The team would have to make the payments in year 1, 2 and 3 (otherwise it wouldn't be a 3 year deal). Those payments would be somewhere around $1.57M each. And then that money would sit in the trust account until paid.

Well, not quite (the bold). The team wouldn't pay interest, the funds would earn interest

[Locke]

Originally Posted by Jason14h

I fully expect California will alter their tax code to stop this

Its possible, Cali does love them their taxes but it'll be a fight.

That being said, its interesting. Its creative.

Whats interesting to me though is...why? What is the Club's incentive here? They could have paid Vatrano the full amount. They have the cash and they have the 3rd lowest Cap hit in the League (just above us incidentally) so why do it?

Obviously I'm intrigued. It is astonishing the lengths people will go to save even a modest amount on their taxes. It is usually any individual's #1 expense, so it makes sense to minimize it, even if only to maintain their Disney+ subscription.

[Locke]

Originally Posted by Jay Random

California is already trying to collect state income tax from everyone who leaves the state. They don't have jurisdiction, and the states where the ex-Californians now live are perfectly entitled to tell California to piss up a rope.

This is hilarious. COVID really hooped California because you can now work for a Silicon Valley Company at 'not Silicon Valley living costs.'

And I understand the prime beneficiaries have been Texas, Colorado and Florida. None of whom are partial to throwing California any life preservers.

[Rutuu]

Originally Posted by The Cobra

I don't think it does, as deferred salary in Canada is taxed when earned. Its not a prescribed plan.

That's the part I was struggling with, like what defines a prescribed plan.

Canada does have the Retirement Compensation Arrangement (RCA). It looks like the withholding tax on the tax account portion is 30%.

https://www.canada.ca/en/services/ta...nts-guide.html

In plain language...kinda:
https://gblinc.ca/products-services/...-compensation/

[Enoch Root]

Originally Posted by Locke

Its possible, Cali does love them their taxes but it'll be a fight.

That being said, its interesting. Its creative.

Whats interesting to me though is...why? What is the Club's incentive here? They could have paid Vatrano the full amount. They have the cash and they have the 3rd lowest Cap hit in the League (just above us incidentally) so why do it?

Obviously I'm intrigued. It is astonishing the lengths people will go to save even a modest amount on their taxes. It is usually any individual's #1 expense, so it makes sense to minimize it, even if only to maintain their Disney+ subscription.

They are paying $4.57M/yr regardless. The deferral makes sense for the player, so they give it to the player. It also helps the team, because if they didn't defer, Vatrano would probably want more money (because he is paying higher taxes). So the team gets a better contract.

And it affects other teams, in that it helps California teams with player-attraction. If the Canadian teams can't do it, it just extends the gap further.

[FlamesAddiction]

This is confusing to me. Is he getting a guaranteed payout of $18 million to play hockey for 3 years or not?

I don't see why the cap shouldn't be be calculated using the same method of total $$$ divided by years of service. I didn't like it when the Canes did it with Jarvis either, even though his deferred payment comes in the day after his contract expires and only saves them ~$500k per year.

My other question is if he is being taxed on $3 million in earnings each year, or is the team paying him $4.57 million on paper and then deducting the $1.57 million and putting it aside? I think that is what is being implied, but is that in fact what is happening?

[Locke]

Originally Posted by Enoch Root

They are paying $4.57M/yr regardless. The deferral makes sense for the player, so they give it to the player. It also helps the team, because if they didn't defer, Vatrano would probably want more money (because he is paying higher taxes). So the team gets a better contract.

And it affects other teams, in that it helps California teams with player-attraction. If the Canadian teams can't do it, it just extends the gap further.

We actually have a different deferral loophole but most US Accountants wouldn't know it and it has some consequences of its own in terms of cash flow, interest rates and growth as its more of a retirement savings program.

But thats outside of the NHL and wouldnt affect a team's Cap.

[Jason14h]

Originally Posted by Enoch Root

In baseball, they may allow payments in the future ("we'll make you VP of public relations" or whatever), I don't know.

But deferring a contract like this does not allow or require segregating. The team would have to make the payments in year 1, 2 and 3. The money would be held in a trust account, earning whatever interest it is earning, so that it matures at $900k each year for the 10 years.

The team would have no access to those funds.

Agreed on all - but the interest rate the trust is earning is negotiable - not what the team and player agree is the discount rate they are applying /negotiating within to the contract

At the end of the day all Vatrano cares about is in the future he gets X$ on X date. He doesn’t care exactly how much is put into trust - just that amount Plus interest eventually equals the proper amount

This is where the Dodgers and their 1$ billion in deferred salaries can (and have ) negotiated a better interest rate then the used calculated rate for real
Value - or to put it another way - they have to put less in the trust because it earns more then they would have paid to the player up
Front because when they negotiate with the player they use a lower interest rate to calculate present / future values

This isn’t even including the teams ability to offer less to the player in deferred situations as the tax implications mean the player still takes home less

Basically the team can use this to negotiate a total lower contract because player and team end up ahead (and the state of California gets screwed )

[Enoch Root]

Originally Posted by Jason14h

Agreed on all - but the interest rate the trust is earning is negotiable - not what the team and player agree is the discount rate they are applying /negotiating within to the contract

At the end of the day all Vatrano cares about is in the future he gets X$ on X date. He doesn’t care exactly how much is put into trust - just that amount Plus interest eventually equals the proper amount

This is where the Dodgers and their 1$ billion in deferred salaries can (and have ) negotiated a better interest rate then the used calculated rate for real
Value - or to put it another way - they have to put less in the trust because it earns more then they would have paid to the player up
Front because when they negotiate with the player they use a lower interest rate to calculate present / future values

This isn’t even including the teams ability to offer less to the player in deferred situations as the tax implications mean the player still takes home less

Basically the team can use this to negotiate a total lower contract because player and team end up ahead (and the state of California gets screwed )

I suspect there is more wiggle room in baseball. The fact that the Dodgers have a billion in deferred contracts screams that there is incentive for them to do so - and real savings, from that flexibility.

The NHL has a hard cap and specifics on how to calculate the AAV. The teams will have to have made the payments in the years of the contract, in order to abide by the AAV calculations.

That being the case, the money would be in trust, as of years 1, 2 and 3 respectively, and there would be no opportunity to profit on it.

[The Cobra]

Originally Posted by FlamesAddiction

This is confusing to me. Is he getting a guaranteed payout of $18 million to play hockey for 3 years or not?

I don't see why the cap shouldn't be be calculated using the same method of total $$$ divided by years of service. I didn't like it when the Canes did it with Jarvis either, even though his deferred payment comes in the day after his contract expires and only saves them ~$500k per year.

My other question is if he is being taxed on $3 million in earnings each year, or is the team paying him $4.57 million on paper and then deducting the $1.57 million and putting it aside? I think that is what is being implied, but is that in fact what is happening?

He is getting $3M each of 3 years and being taxed on that amount. He is getting $3M deferred for each of those 3 years, until 10 years down the road.

But since he is getting the deferred money do much later, it's not worth as much as $3M today. It's worth $1.57M So, that's the cap hit, the present day calue of the deferred money plus the $3M each year.

There is no cap circumvention. It will cost the team about $4.57M per season.

[All In Good Time]

Originally Posted by The Cobra

But since he is getting the deferred money do much later, it's not worth as much as $3M today. It's worth $1.57M So, that's the cap hit, the present day calue of the deferred money plus the $3M each year.

It also should be noted that this cannot be applied to regular 7 or 8 year contracts because the value of a dollar never changes that rapidly


Sincerely
Everyone who earned Canadian dollars this past year

[dino7c]

Originally Posted by Jay Random

California is already trying to collect state income tax from everyone who leaves the state. They don't have jurisdiction, and the states where the ex-Californians now live are perfectly entitled to tell California to piss up a rope.

I know its cool to knock Cali these days but they are still a HAVE state and payout more federally than they get back. They have the largest economy of any state and if they were a country they would have the fifth largest economy in the World. Things will be sorted at some point...this is pretty shady he is earning the money while in Cali for more than half his season. Players already play different taxes based on their road games.

Also, reading is hard but nobody is saying they are breaking any rules...just that they will address this in a future CBA.

IMO

[The Cobra]

Originally Posted by dino7c

Also, reading is hard but nobody is saying they are breaking any rules...just that they will address this in a future CBA.

IMO

Actually, many posters were saying this was cap circumvention.

Not sure why this would get addressed. Nothing untoward is happening here.