Toronto Maple Leafs captain John Tavares is suing the Canada Revenue Agency over an $8 million tax bill in a case experts say could be crucial for some professional athletes, possibly affecting be the teams they sign with.
The NHL star has filed an appeal with the CRA over the back tax and interest bill, dating back to 2018, when he signed a US$77 million contract to play for the Leafs.
“This is a critical matter and everyone will be paying attention,” said Richard Powers, an associate professor at the University of Toronto’s Rotman School of Management.
At issue is a US$15.25 million signing bonus that Tavares said under the U.S.-Canada tax treaty should be taxed at a much lower rate than the rest of his salary. The CRA disagrees.
NHL players use signing bonuses to structure their contracts to have a limited tax liability and to spread contract value. The first year of his seven-year contract saw Tavares receive a total of US$15.9 million. Of this sum, only US$650,000 represented his actual salary. The rest was his signing bonus.
Court documents show the CRA believes all compensation should be treated as wages and taxed the same.
“It’s an uphill battle when you’re fighting the CRA,” said Rob Kreklewetz, a tax attorney at Millar Kreklewetz LLP, who is not involved in the case. “The burden of proof is on the taxpayer to refute what the CRA has assumed.”
Tavares’ notice of appeal states that the bonus “was an inducement to sign” and not “a salary, salary or other remuneration” under the terms of the treaty.
Court documents, making a key argument in the case, say the bonus was payable “regardless of whether” the Leafs played him, traded him, if games were canceled by a labor dispute or if Tavares “had been injured…or if he was injured.” sent to the minor leagues.
This assertion could be crucial to the final outcome of the case and will depend at least in part on whether the contract text is as clear on this issue as the legal documents. CBC News has not seen Tavares’ contract.
Powers says the use of signing bonuses has become common practice in major sports leagues, so the Tavares case also concerns other players, other teams and other agents.
“The players all talk,” he said. “It will affect a lot of people because it’s the way they structure their transactions.”
Tavares, 33, grew up in nearby Oakville, Ont., and became one of the league’s most sought-after free agents in 2018. When he signed with the Leafs, the star center posted a photo of him as a child, sleeping under sheets with the Leafs logo, writes: “Not every day you get to live a childhood dream. »
Canadian sports teams already operate at some disadvantage compared to American franchises in low-tax jurisdictions like Florida. Every year around the free agency deadlines, NBA and NHL stars evaluate offers from teams in their leagues.
This long-standing issue has been hotly debated in the business and sports world for years.
An article published by the Fraser Institute almost a decade ago highlighted how taxes can be a barrier to attracting new talent.
“Teams located in uncompetitive fiscal jurisdictions like Toronto and Ottawa will have more difficulty attracting NHL free agents,” wrote authors Sean Speer and Charles Lammam. But they stressed that this challenge was not unique to the world of sport.
“Ontario’s high personal taxes also create barriers to attracting and retaining other skilled workers, such as entrepreneurs, doctors and engineers.”
Former players say today’s stars take into account a range of considerations when signing, including the chance of winning a title, but also lifestyle and of course remuneration.
Longtime NHL player Nick Kypreos says cases like Tavares’ are precisely why agents make so much money. Kypreos, now host of the Sportsnet program The real Kyper and Bourne, says players will monitor the CRA’s decision, but will also trust that their agents are fully versed in tax law.
“I don’t think anyone should be too scared right off the bat to assume that Canada is turning into a place where I’ll never be able to play and think that I won’t be able to make a lot of money,” said Kypreos.
Kypreos notes that Tavares has earned more than US$100 million during his career and said he decided to sign with Toronto so he could play at home and be close to his family.
In his appeal, Tavares’ lawyers say the signing bonus was “an integral part” of his decision to sign with the Leafs.
Tavares’ claims have not been tested in court and the CRA has not yet filed its response.
The CRA did not respond to calls for comment for this story.