Salary Cap/Transactions FAQs: Tax Differences, Luxury Cap, LTIR, Accruing Cap Space, And More

It’s time for more reader-submitted questions about the salary cap and the details and regulations behind day-to-day transactions. If you have more questions than the ones answered below, check out the first and second editions of our Salary Cap/Transactions FAQs from August.

PyramidHeadcrab: Has the league had any meaningful talks about cap equalization for differences in income tax in different territories? I’ve often heard that many Canadian teams can’t get top talent because the income taxes are higher, while Florida and Tennessee are popular destinations because the taxes are lower. It makes sense to modify the cap based on these numbers. If income tax is 25% in Ontario, the salary cap should be 25% higher, so the actual pay given to players is equivalent.

There’s been a rumbling occasionally, but I wouldn’t characterize any talks about tax-based salary cap adjustments as “meaningful.” If there were, especially given the big markets that would be affected (looking at you, Toronto), that would be snapped up by Sportsnet or TSN immediately and dominate a news cycle for weeks.

Given how the NHL calculates cap space (more on that later), I can’t see what you outlined as a feasible solution in practice, even though it makes sense on a macro level. It would require creating a whole new infrastructure for trades and waiver claims because a player’s cap impact for one team would be significantly different than another.

There’s likely a way for teams to deal with this on their own without the league needing to step in – changing their willingness to pay out excessive portions of contracts in signing bonuses rather than actual salary, as I believe they’re taxed differently in most jurisdictions. Some already do, so the actual dollar difference a player earns in Ottawa compared to Tampa, for example, isn’t as significant as it may seem.

Players also get taxed based on the city where the income is generated (so a Tampa player is getting taxed at New York rates if they’re playing the Rangers at Madison Square Garden, for example), so that would be an incredibly minute and complex day-by-day calculation that I don’t think the league (or teams) is willing to devote the time and money to deal with. I imagine that changes to local tax codes that go into effect during the season would complicate this further. Essentially, I don’t think it’s something that’s seriously being talked about, nor do I think it’s something that will ever be implemented.

FeeltheThunder: With the CBA discussions beginning early next year, there was a report on the NHL app that many NHL players would be open to the NHL having a luxury cap of sorts to help grow the pay rate for players (which hasn’t grown in the last 20 years or so). It didn’t explain precisely how that would work in the NHL, and I don’t think it would be a blank check for teams like those in MLB. But maybe the NHL does have a luxury cap for teams to be able to go over a certain percentage of the salary cap. Some teams that come to mind, like Tampa, Vegas, New York (Rangers specifically), Boston, Florida, and such, would be entirely willing to pay a luxury tax to bring more top-level talents to their roster. What are your thoughts on this luxury cap notion?

Again, I don’t think there have been meaningful discussions here among owners or GMs, but I believe this is at least in the realm of possibility. I don’t think it would be a considerable percentage – five percent, if that – at least not while Gary Bettman is still at the helm. It would defeat the purpose of the stone-cold hard cap he lobbied for and won in the 2004-05 lockout.

But I’m not sure if the owners would approve of it. I imagine the league would stipulate that “tax” money be added to the revenue-sharing pool, injecting even more cash for smaller-market, smaller-budget teams in the league with the most robust revenue-sharing program among the major North American leagues. If that’s where the league draws the line, I’m not sure the Bruins owner would approve of sending more of their generated revenue to the division-rival Senators, for example.

Zakis: I thought I saw an article in which the Avs would be able to bank space, but they are in LTIR. How is this possible, if at all? As an aside, can you demonstrate how LTIR works?

Matt Studley: How does accruing cap space during the season work? How does it affect trade deadline transactions? How significant is the benefit of teams like the Avalanche papering down players on off-days?

I’ll answer these questions together, mainly because of the misconceptions about how the Avalanche are using paper transactions. Zakis, you’re on the right track. The Avalanche’s paper transactions this year (constantly reassigning and recalling players like Nikolai Kovalenko and T.J. Tynan) have day-to-day salary cap implications but no long-term ones. They’re not accruing cap space because they use long-term injured reserve to stay compliant.

That doesn’t mean that these transactions are without benefit, though. Keeping veteran players like Tynan who aren’t waiver-exempt on the roster for as few days as possible helps extend their temporary 30-day, 10-game exemption until they must clear waivers again to return to the AHL. In Kovalenko’s and Ivan Ivan’s case, they’re waiver-exempt, but since they’re on entry-level contracts and, by extension, have a two-way salary structure, stashing them in the minors for a couple of days at a time on non-game days does save the Avalanche organization actual money, because they’re paying out their prorated minor-league salary for those days instead of their NHL salary. That’s often significant financial savings daily – for example, Kovalenko’s NHL base salary this season is $775K, but his minors salary is only $70K.

For “how LTIR works,” let’s keep using the Avalanche as an example. It’s not cut and dry. The Avalanche have $9MM worth of cap hits on LTIR in Gabriel Landeskog ($7MM) and Tucker Poolman ($2MM), but they can only exceed the cap by $8.938MM while staying compliant, not the full $9MM.

That has to do with something called LTIR capture, which is why you’ll see teams making a bunch of small moves for their opening night rosters before reversing them the next day. How much space you gain from LTIR is directly related to your current cap space when entering LTIR. Some teams do well with this – the Maple Leafs are consistently among them. Essentially, for teams needing to use LTIR, the goal at the beginning of the season is to construct a roster as close to the upper limit ($88MM) as possible. If a team could enter the season with exactly $0 in cap space, they would have full access to the cap hits they’re placing on LTIR. In the Avs’ case, they started the season with $62.5K in cap space, which was deducted from their LTIR “pool.”

As mentioned earlier, the accruing cap space discussion can be thrown out for teams who stay in LTIR the whole season up to deadline day to remain compliant. For most teams that don’t, though, it’s essential to know that cap space is calculated by the league daily, meaning all those paper transactions add up significantly. If a team starts the season with $1MM in cap space and makes no changes to their roster, they could have banked enough cap space to acquire a player with a $2MM cap hit on the 96th day of the season, exactly halfway through the 192-day in-season calendar. Making little changes to increase their cap space on non-game days where extra players aren’t required could add up and give them significantly more flexibility to add (I won’t bore you with the actual math, but I hope that’s broken down well conceptually).

Raymond: With so many teams nearing the cap limit, shouldn’t the NHL finalize the new salary cap limit sooner so these clubs can better plan?

There’s not a whole lot of choice in the matter, at least with how the upper limit is currently calculated. It’s derived directly from a percentage of hockey-related revenue from the previous season, so the upper limit for 2025-26 can’t be determined until there’s an accurate enough figure for 2024-25’s HRR. That’s why the cap for the following season is usually announced multiple weeks before free agency, enough time to give teams enough planning for draft-day trades, RFA extensions and UFA pickups, but not any earlier – they don’t have the numbers necessary to make an exact determination.

Dan Mar: Could a team hypothetically put themselves in a position where they can’t field a 20-man on-ice roster due to salary cap shenanigans? For example, if the year before, they had a lot of 35+ contract/ELC bonuses they rolled over, bought out/retained salary on transactions, then had suspensions, putting their allowable max at something like $15MM? What would happen in that case, just an automatic forfeit?

I assume you mean a cap situation so dire that they wouldn’t be able to ice a full roster of league-minimum players at any point during the season. Teams have had to play games a skater short because of day-to-day cap restraints, actually relatively often in recent memory. As far as I can tell, there’s no clear-cut language regarding the situation in the CBA, assumingly because it’s operationally impossible with an NHL-level management group. The solution/result would be at the commissioner’s discretion; without precedent, it’s not easy to speculate what that would be.

Image courtesy of USA Today Sports.