Toronto Maple Leafs captain John Tavares has begun a legal battle with the Canada Revenue Agency (CRA) over an $8 million tax bill stemming from a $15.3 million signing bonus he received in 2018. Depending on how things develop, not only could Tavares be stuck with a huge bill, but Glen McGregor of the National Post writes Tavares may think twice about staying in Canada and re-signing with the Leafs. Not only that, but other NHL players may avoid Canadian cities too.
Tavares contends that the bonus, paid by the Leafs after his contract with the New York Islanders concluded, should be subject to a 15% tax rate as per the Canada-U.S. taxation treaty. They want him to pay at a 38% rate. That difference, and the interest that has accused since then has left quite a hefty outstanding balance.
McGregor writes:
“The dispute is over the signing bonus Tavares received for joining the team nearly six years ago. But the outcome could affect Tavares’s future in Toronto and, more broadly, the ability of Canadian professional sports teams to sign pricey top players.”
The two sides are now battling it out through the Tax Court of Canada. Tavares is going through his legal representatives, who have filed an appeal seeking to overturn the CRA’s reassessment of his 2018 tax return. He argues that the CRA miscalculated the tax owed on the signing bonus. They’re pointing to the treaty’s provision that mandates a lower tax rate for inducements, including signing bonuses for athletes.
As of now, the CRA has not responded formally to the appeal, and no allegations have been proven in court.
How Might This Tax Battle Affect the Maple Leafs and NHL Players in Canada?
The implications of this legal wrangling could extend beyond Tavares and the Leafs. While it’s possible this was a mistake by Tavares and his reps, and will not affect any other players who didn’t make the same mistake, this could also be a warning sign for other athletes thinking about signing with Canadian teams. Tax-free states already have a major advantage when signing NHL players. This situation will only make states like Florida and Nevada even more attractive.
Beyond that, this situation potentially raises questions about the tax treatment of large signing bonuses for athletes. Athletes are already subject to escrow in the NHL, giving back a good chunk of their salary to the league. It won’t be a surprise if players do all they can to avoid the extra expenses.
In Tavares’ situation — where the Leafs might be contemplating asking him to take a discount to stay with the team when his contract ends — he might decide all of this isn’t worth it.
The majority of Tavares’ compensation is structured as a bonus, and the dispute may factor into his future contract negotiations.
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