Toronto Maple Leafs captain John Tavares is suing the Canada Revenue Agency over a $8 million tax bill in a case that experts believe might be important for certain professional sportsmen, potentially influencing which teams they sign with.
The NHL player has filed an appeal with the CRA regarding the bill for back taxes and interest, which dates back to 2018, when he signed a $77 million US contract to play for the Leafs.
“It’s a pivotal case, and everyone will be watching,” says Richard Powers, an associate professor at the University of Toronto’s Rotman School of Management.
Tavares claims that under the US-Canada Tax Treaty, a $15.25 million US signing bonus should be taxed at a considerably lower rate than the rest of his pay. The CRA disagrees.
Signing bonuses are used by NHL players to structure their contracts in a way that limits their tax obligation and spreads out the contract’s worth. Tavares earned $15.9 million US in the first year of his seven-year contract. Only $650,000 US represented his actual income. The remainder was his signing bonus.
The court filings demonstrate that the CRA believes the full remuneration package should be considered as salary and taxed accordingly.
“It’s an uphill battle when fighting the CRA,” said Rob Kreklewetz, a tax lawyer at Millar Kreklewetz LLP who is not engaged in the case. “The burden of proof shifts to the taxpayer to disprove whatever the CRA has assumed.”
Tavares’ notice of appeal states that the incentive “was an inducement to sign” rather than “salary, wages, or other remuneration” under the terms of the treaty.
The court filings, making a major claim in the case, state that the bonus was payable “regardless of whether” the Leafs played him, traded him, if games were cancelled due to a labor dispute, or if Tavares “was injured… or he was sent down to the minor leagues.”
That allegation could be critical to the case’s eventual conclusion, and it will be determined in part by whether the contract language is as explicit on this point as the legal papers. Tavares’ contract has not been made available to CBC News.
According to Powers, signing incentives have become widespread practice in major sports leagues, therefore the Tavares case has implications for other players, clubs, and agents.
“The players all talk,” he stated. “This will affect a lot of people because it’s how they structure their deals.”
Tavares, 33, grew up in nearby Oakville, Ontario, and was one of the league’s most sought-after free agents in 2018. When he signed with the Leafs, the great centre uploaded a photo of himself as a child lying under bed sheets with the Leafs logo, captioned “Not everyday you can live a childhood dream.”
Canadian sports teams are already at a competitive disadvantage to American franchises in low-tax states such as Florida. Every year around the free-agency deadline, NBA and NHL players consider offers from teams in their leagues.
For years, the long-standing problem has been the subject of heated debate in both the business and sports worlds.
A report produced by the Fraser Institute about a decade ago demonstrated how taxes might be a barrier to attracting new talent.
“Teams in uncompetitive tax jurisdictions like Toronto and Ottawa will have a more difficult time attracting NHL free agents,” said authors Sean Speer and Charles Lammam. However, they stated that this difficulty is not exclusive to the sporting world.
“Ontario’s high personal taxes also erect roadblocks to attracting and retaining other skilled workers such as entrepreneurs, doctors, and engineers.”
Former players say today’s stars consider a variety of factors when signing, including the opportunity to win a championship, lifestyle, and, of course, salary.
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Long-time NHLer Nick Kypreos believes incidents like Tavares’ are exactly why agents make the money they do. According to Kypreos, who currently hosts the Sportsnet show The Real Kyper and Bourne, players will keep an eye on the CRA verdict while also trusting that their agents understand tax law.
“I don’t think anyone should be too scared right off the bat to just assume that Canada is turning itself into a place where I can never play and think I can’t make a lot of money,” Kypreos said.
Kypreos’ notes Tavares has earned more than $100 million in his career and has stated that he chose to join with Toronto in order to play at home and be near to family.
Tavares’ lawyers argue in his appeal that the signing incentive was “integral” to his decision to sign with the Leafs.
Tavares’ accusations have not been tested in court, and the CRA has yet to file a response.
The CRA did not return calls for comment on this story.
