Tavares Hasn't Won His Tax Case Against The Cra Yet, But Here's Why Canada Gains If He Succeeds

You may have heard about the taxation issues that NHL star hockey player John Tavares and others (such as retired future Hall of Famer Patrick Marleau and several NBA players) have faced from the Canada Revenue Agency regarding the tax treatment of their signing bonuses they received while playing for Canadian professional sports teams.

The challenges first arose more than five years ago when the tax treatment of the signing bonuses for eight NHL players and two NBA players involving the taxation years from 2016 to 2020 were audited and ultimately — years later — reassessed by the CRA. Most of the players have filed objections with the CRA and are disputing their cases through the court system.

Overall, I have found some of the reporting on these cases a bit lacking. For example, one article initially reported that a recent Tax Court of Canada decision had, in effect, dismissed Tavares’ case, resulting in a big win for him. That is incorrect.

The decision involved a procedural matter compelling the CRA to disclose certain information requested by Tavares’ legal counsel. His case — along with the others — is alive and well. The article was recently updated to clarify that Tavares did not “win” his case. Many others, however, have not.

Other stories have made it sound like Tavares did some sort of “tax planning” or avoided paying more than $8 million in tax to Canada. I have two words for that kind of assertion: incorrect and misleading.

Why? Because all these cases involve U.S. tax residents, who are non-residents of Canada, playing for Canadian teams (that fact is never in dispute). If you’re a non-resident of Canada, you only pay income tax to Canada in limited circumstances, including on employment income if the players exercise such employment in Canada. Again, Tavares, for the year in question, was a non-resident of Canada when the signing bonus was paid. Ditto for Marleau and others.

Accordingly, all the players reported their worldwide income for tax purposes on their U.S. income tax returns, including the full amount of the signing bonuses. Canadian income tax was withheld from the players’ employment earnings for the proportion of their overall salary that was exercised in Canada by playing home games and other games in Canada. Otherwise, Canada had no right to tax the remainder of the employment income except for a limited amount of the signing bonuses received.

When a payor country of signing bonuses (Canada in these cases) pays those amounts to a resident of another country (the U.S. in these cases), the payor country is limited to collecting a tax rate of only 15 per cent — pursuant to Article XVI(4) of the Canada-U.S. tax treaty.

When the players report all their earnings (including the full amount of the signing bonuses) in their U.S. tax returns, they’re able to — for the most part (unless the player is resident in a state that does not respect the treaty) — claim the Canadian tax paid, comprising the amount ultimately liable for employment exercised in Canada plus the 15 per cent cap imposed on the signing bonus, as a foreign tax credit against their U.S. federal and state tax liabilities.

This means that all their income — including the signing bonuses — is subject to a combination of U.S. and Canadian taxes. The signing bonuses are not limited to 15 per cent overall taxation; just that Canada (in this case) is limited to that rate.

If you’re following this, then you will quickly realize that this dispute is not about milking more overall tax from the players (ignoring the obvious difference in tax rates between the two countries, with Canada being much higher).

This is about who has the right to tax the players more: Canada or the U.S.? The players are simply high-profile individuals caught in the middle since double taxation — with proper protective filings — should not be an issue.

With respect to the CRA’s position, the simple argument is that the signing bonuses are not “true” signing bonuses, but disguised employment income. In the CRA’s audit report for Tavares (which is now a public document), the CRA tries to support its weak argument by citing various case law on both sides of the border.

The Tax Court (or a higher court on appeal) will ultimately decide this, but I would suggest that if Canada has an issue with how signing bonuses are treated in a cross-border context, it should add that to the list of issues to discuss with the U.S. for the next time the treaty is amended or negotiated. It’s unfortunate that the players are caught in the middle.

For those who will inevitably have no sympathy for rich athletes, that’s a shallow take. These cases aren’t about rich hockey players avoiding tax; it’s about the CRA misapplying treaty principles in an attempt to grab more tax dollars.

The continued attack on higher-income earners by our government and related institutions has real-world fallout. If Canada wants to remain a competitive place to work and invest — whether you’re a hockey star, tech executive, entrepreneur or large company — we need clarity and certainty, not chaos. We need to make Canada an attractive place to come to for successful people, not the opposite.

Cases such as these have a chilling effect on such attraction.

As Albert Einstein once quipped, “The hardest thing in the world to understand is the income tax.” That’s forgivable for physicists and journalists, but it’s unacceptable when our own tax authority uses high-profile taxpayers as pawns in a policy fight they should be taking to the negotiating table, not the courts.

• Consumption-oriented taxes are a better option than those on labour or potentially robots
• A 1% tax cut isn't tax reform nor is it needle-moving for most Canadians

For the players’ sake, I’m hoping these issues can be quickly resolved so they can move on with their lives without the unnecessary distractions.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody.

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