Why professional athletes in the US and Canada care so much about the John Tavares tax case

As Tavares’ battle with the CRA wends its way through the courts, it’s fair to say the Leafs captain has all professional hockey players cheering for him

The CRA is arguing the signing bonus of Leafs captain John Tavares is not a bonus at all, and therefore not subject to a lower rate than regular income. If the CRA wins, Tavares would owe up to $8 million in taxes and interest.

As John Tavares’s battle with the Canada Revenue Agency over his residency and the tax rate for signing bonus money wends its way through the courts, it’s fair to say the Maple Leafs captain has all professional hockey players rooting for him.

And maybe athletes in baseball, basketball and soccer, too.

The CRA continues to argue before the Tax Court of Canada that Tavares’s signing bonus — including $15.25 million (U.S.) in 2018, the only year in question — is not a bonus at all, and therefore not subject to a lower rate than regular income. If the CRA wins, Tavares would owe up to $8 million in taxes and interest.

“We will obviously be monitoring what’s going on in the Tavares situation closely,” NHL deputy commissioner Bill Daly told the Star in an email. “At this stage, I think it would be premature to have any long-term concerns or to make predictions on long-term effects.”

Government lawyer Cecil Woon said he couldn’t comment because the matter was still before the courts. In an email, Tavares’s lawyer Mark Feigenbaum, a partner in KPMG Law LLP, wrote: “We await the court’s decision in this case, and its potential impact on other athletes across Canada and the United States.”

Indeed, Tavares isn’t the only player affected, and hockey isn’t the only pro sport worried about how the CRA interprets the U.S.-Canada tax treaty.

“It’s obviously a very big issue for John Tavares and several other players who are also in a similar position,” said Steve Bartlett, a tax expert at player management agency Bartlett Hockey. “But even more so, teams. Obviously hockey primarily, but Major League Baseball and any sport that has a major-league team primarily in Canada. It could have an impact in terms of their ability to attract high-profile free agents.”

Bartlett’s firm doesn’t represent Tavares but does work with about 40 players, including Leafs Bobby McMann and Jake McCabe. He said Canadian teams already have enough trouble trying to compete for free agents with clubs in states with no income tax, including Florida and Tennessee.

For someone in Tavares’s financial bracket, the combined federal and provincial tax rate in Ontario is 53 per cent. The combined New York state and U.S. federal tax rate where Tavares filed is lower, but not by much.

The fact that signing bonus money is taxed at 15 per cent thanks to the U.S.-Canada tax agreement is an important equalizer.

“The teams are watching closely, the agents are watching closely,” said Bartlett. “It’s going to be very interesting to see how this battle eventually plays out, and whether or not it drastically changes the landscape of one element that we have been able to use in the past to try to reduce some of the tax burden and make the Canadian market a little more attractive.”

After nine years with the New York Islanders, the Toronto-born Tavares signed a bonus-rich contract with the Leafs as a free agent in July 2018: seven years, $77 million. Of that total, $71.15 million was designated — by the NHL, the Leafs and Tavares’s camp — as signing bonus, including $15.25 million in 2018. He has paid all taxes to the CRA for subsequent years.

Because Tavares was in the U.S. in 2018 and signed with a Canadian business, the CRA was entitled to tax related to the signing bonus — no more than 15 per cent, according to the treaty.

So in 2018, Maple Leaf Sports & Entertainment, which owns the Leafs, paid $1,753,750 into escrow (a portion of player salaries withheld during the season as a way to ensure teams and players achieve a 50/50 split of hockey-related revenue) per the NHL collective agreement and $2,024,438 to the CRA — 15 per cent of what was left of the signing bonus for that year after escrow ($13,496,250).

• The bonus wasn’t really a bonus, but closer to salary — which should be taxed at 53 per cent. Tavares’s appeal states the bonus money was “integral” to his decision, since other NHL teams were bidding on his services.

• As a resident of Canada for tax purposes, Tavares should therefore face a tax of 53 per cent, not 15 per cent.

There are two standards for residency.

One is cut-and-dried: If someone spends 183 days or more in Canada in a calendar year, taxes should be filed to the CRA. The Tavares camp argued he spent more than enough time in the U.S., including much of his final season with the Islanders, to qualify as an American taxpayer.

The other is less clear: facts and circumstances that tie a person to Canada. The CRA is using that one, claiming Tavares “regularly visited” Canada and “maintained residential ties” totalling more than 183 days.

“Tavares’s appeal represents a high-profile opportunity for the CRA to test the limits to structuring the salaries of professional athletes in Canada in court,” tax lawyer David J. Rotfleisch wrote about the case in the journal ”Canadian Accountant.”

If Tavares wins, his reassessment will be overturned. If the CRA prevails, Tavares may be able to refile in the U.S. to claim additional foreign tax credits. The U.S. Internal Revenue Service may not agree, however, and Tavares could invoke a clause in the treaty forcing the CRA and IRS “to find a mutually agreeable solution to avoid double taxation,” Rotfleisch wrote.

The case could take a long time to play out. Kyle Stich, a tax planner for athletes at AFPTax, called it a “sticky” situation.

“There’s actually a lot of players that got hit by this; no one (else) quite as high profile as Tavares,” said Stich. “I’ve heard there’s about 100 guys or so that are caught up with us. The lower-profile guys are letting the high-profile guys put forward the legal weight and money and then fall in line, but it’s pretty wide-reaching.

“If basically (the CRA) deny the idea of a signing bonus, it’s going to affect every single athlete. It’ll affect a guy who’s looking to sign up in Toronto or anywhere up in Canada. It also could have a level of impact down in the U.S. … if the CRA rules one way as it relates to athletes, that maybe the U.S. will follow suit.”