The legal battle between the CRA and the captain of the Toronto Maple Leafs could be pivotal for other professional athletes

Toronto Maple Leafs captain John Tavares has sued the Canada Revenue Agency over an $8 million tax bill in a case that experts say could be pivotal for some professional athletes, possibly affecting the teams they sign with.

The NHL star has filed an appeal with the CRA over his back tax and interest bill, dating back to 2018 when he signed a $77 million American contract to play for the Leafs.

“It’s a pivotal issue that everyone will be watching,” said Richard Powers, an assistant professor at the University of Toronto’s Rotman School of Management.

The case revolves around a $15.25 million American signing bonus, which Tavares says, under the US-Canada tax treaty, should be taxed at a much lower rate than the rest of his salary. The CRA disagrees.

Players throughout the NHL use signing bonuses as a way to structure their contracts so that they have limited tax liability and to spread out the value of the contract. Tavares’ first year of his seven-year contract saw him earn a total of US$15.9 million. Only $650,000 of that was his actual salary. The rest was his signing bonus.

Court documents show the CRA believes the entire compensation package should be treated as salary and taxed in the same way.

A sign appears with the words:
The CRA says in court documents that Tavares’ entire compensation package should be treated as salary and taxed the same way. (Chris Watty/Reuters)

“It’s an uphill battle when fighting the CRA,” said Rob Kricklewitz, a tax attorney with Millar Kryklewitz LLP, who was not involved in the case. “The burden of proof shifts to the taxpayer to disprove whatever the CRA assumes.”

Tavares’ notice of appeal says the bonus “served as an incentive to sign” and not “salary, wages or other remuneration” under the terms of the treaty.

The court documents, which provide a key argument in the case, say the bonus was payable “regardless of whether” the Leafs played him, traded him, if games were canceled due to a labor dispute, or if Tavares was injured…sent to the minor leagues “

This claim could be crucial to the ultimate outcome of the case and will depend at least in part on whether the contract language is as clear in the case as in the legal filings. CBC News has not reviewed Tavares’ contract.

The use of signing bonuses has become common practice in major sports leagues, so Tavares’ case concerns other players, other teams and other agents as well, Powers says.

“The players are all talking,” he said. “This will affect a lot of people because this is how they structure their trades.”

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 himself as a child sleeping under it. Bed sheets with Leafs logo that say: “You can’t live a childhood dream every day.”

Canadian sports teams already operate at a disadvantage to American franchises in low-tax jurisdictions like Florida. Every year, at the free agency deadlines, NBA and NHL stars evaluate offers from teams in their leagues.

This long-standing issue has been the subject of heated debate in the world of business and sports for many years.

A study published by the Fraser Institute nearly a decade ago highlighted how taxes can be a barrier to attracting new talent.

“Teams in non-competitive tax jurisdictions like Toronto and Ottawa will have a more difficult time attracting NHL free agents,” authors Sean Speer and Charles Lamam wrote. But they said this challenge is not limited to the world of sports.

Ice hockey captain lines up to face off.
Tavares grew up near Toronto, and in 2018 signed a seven-year, $77 million American contract to join the Maple Leafs. (Klaus Andersen/Getty Images)

“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 series of considerations when signing, including the chance to win a title, but also lifestyle and of course compensation.

Longtime NHLer Nick Kypreos says cases like Tavares’ are precisely why agents get the money they do. Kypreos, now the host of Sportsnet real keeper and porn, He says players will watch the CRA rule, but they also trust that their agents know the tax code fully.

“I don’t think anyone should get too scared just assuming that Canada is going to turn itself into a place where I can never play and think I can’t make a lot of money,” Kyprios said.

Kyprios noted that Tavares has made more than $100 million in his career, and said he decided to sign with Toronto so he could play at home and be close to family.

In his appeal, Tavares’ lawyers said 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 Communications Regulatory Authority did not respond to calls for comment on this story.

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