Hiring bonus: the John Tavares case
Toronto Maple Leafs captain John Tavares signed a seven-year contract in 2018 worth $77 million. The majority of the compensation is structured as bonuses spread out each year over the life of the deal, along with an annual salary of less than $1 million per year.
The contract is essentially made up of US$71 million in bonuses and US$6 million in base salary.
The Canada Revenue Agency is seeking a total of CAD 8 million from John Tavares ($6.2 million in unpaid taxes and $1.2 million in interest).
A legal document filed this year with the Tax Court of Canada reveals that the IRS ruled that the Canada-U.S. tax treaty does not apply to the player’s 2018 signing bonus and that the Leafs captain is not eligible for a reduced 15% tax rate. A 53% tax rate is therefore more appropriate in the eyes of the federal agency in this case.
The taxman points out that John Tavares was a Canadian resident in 2018. The player says he received a portion of his signing bonus in July of that year while he was still an American resident (he played for the New York Islanders before to join the Leafs) and that he only became a Canadian resident two months later, in September 2018.
In a court document filed last month, the tax office specifies that if the Court concludes that John Tavares was a non-resident of Canada at the time of receiving his 2018 hiring bonus, the amount received was not paid to as an encouragement to sign an agreement relating to the provision of services under the Canada-United States tax treaty.
PHOTO DOMINICK GRAVEL, LA PRESSE ARCHIVES
John Tavares, captain of the Toronto Maple Leafs, was drafted first overall by the New York Islanders in the 2009 entry draft.
The IRS’s position suggests that the 2018 hiring bonus was not an “incentive” and was therefore part of Tavares’ salary, says independent tax lawyer David Rotfleisch.
The disproportionate nature of Tavares’ hiring bonus [environ 71 millions US payables sur six ans] compared to his salary [6 millions US sur six ans] is certainly a factor considered by the tax authorities in evaluating the file.
David Rotfleisch, tax law specialist at Rotfleisch & Samulovitch
The expert adds that tax experts have long wondered how to properly differentiate an incentive measure – such as a hiring bonus – from an athlete’s “normal” salary.
“The Canada-U.S. tax treaty provides a strong incentive for athletes to receive a greater proportion of their salary in bonuses in order to reduce Canada’s right to tax their compensation,” he says.
Tavares’ appeal therefore represents, in his eyes, an opportunity for the tax authorities to test in court the limits of the structure of professional athletes’ contracts in Canada.
The procedures are moving slowly in this case and the Tavares clan prefers to remain cautious in its comments. “This has become a very interesting case and we hope for a quick solution,” simply indicates to The Press Mark Feigenbaum, one of the KPMG lawyers representing Tavares.
Ex-Jays stars at odds with the taxman
Three former Toronto Blue Jays stars are also engaged in a battle with the Canada Revenue Agency. The IRS is taking issue with the way outfielder Jose Bautista, catcher Russell Martin – who grew up in Montreal – and infielder Josh Donaldson presented their situations when they played for the Jays a few years ago.
The former professional baseball players’ dispute with the IRS is over contributions to a retirement savings plan, a vehicle that provides future retirement benefits and defers recognition of earned income until a later date.
PHOTO SEAN M. HAFFEY, AGENCE FRANCE-PRESSE ARCHIVES
Jose Bautista and Russell Martin while wearing the Toronto Blue Jays uniform.
Retirement agreements are interesting plans for professional athletes who often have short careers and who must plan their retirement in advance of it, underlines tax lawyer Marie-France Dompierre, of the firm Davies Ward Phillips & Vineberg, in a text published as part of its practice.
She represents Russell Martin and Josh Donaldson before the Tax Court of Canada and therefore did not wish to comment further on their case.
What is a retirement agreement?
A retirement compensation arrangement is a non-registered savings plan whereby a Canadian employer and, if applicable (which is not the case here with the former Toronto Blue Jays players), an employee contribute a reasonable amount to a trust to fund an income for the employee when he or she retires. Tax lawyer Marie-France Dompierre explains that contributions made by an employer to a retirement compensation arrangement are subject to a 50% refundable tax withheld at source by the employer. “The tax on the contributions will be payable at the time the distributions from the retirement compensation arrangement are made. This can be very attractive if an athlete is a non-resident at that time, as these distributions will normally be taxed at a reduced rate.”
At the heart of the Russell Martin and Joshua Donaldson cases is a disagreement over how to properly calculate the tax payable to Canada by the latter, non-Canadian residents, under the Income Tax Act.
“The question is to establish the distribution of an amount according to the time spent in the United States and the time spent in Canada. There are different ways to do the calculation. Athletes choose what is best for them and the taxman chooses what is best for them,” says David Rotfleisch.
The case of Josh Donaldson and Russell Martin was taken under advisement by the judge.
In the case of Jose Bautista, the Canada Revenue Agency is denying him more than 16 million Canadian dollars in deductions from his income between 2014 and 2017.
The tax authorities contest the validity of the retirement agreement within the meaning of the Income Tax Act and rejects the deductions requested by the former Jays player.
“I find it hard to believe that Jose Bautista’s advisors could have been wrong about such a fundamental element,” says David Rotfleisch.
“The mistake is possible, but it seems more likely to me that the tax authorities will try and take a risk to see what might happen. It wouldn’t surprise me because it is common to see the Canada Revenue Agency act aggressively in cases.” The tax authorities claim that there would therefore be a technical violation, he summarizes.
Called to react for this report, the CRA prefers to stick to the information publicly available to the Tax Court of Canada. “The Canada Revenue Agency does not comment on the specific details of legal cases in order to protect the integrity of its work and to respect the confidentiality provisions of the laws it administers,” indicates the spokesperson. words Kim Thiffault.
Impacts for Canadian clubs
Although it could take several years to reach a decision or settlement in all these cases, if the tax authorities were to succeed, the task of Canadian professional sports teams wishing to attract high caliber players and unrestricted free agents – notably the Montreal Canadiens – could become more complex.
PHOTO DOMINICK GRAVEL, LA PRESSE ARCHIVES
A decision favorable to the Canadian tax authorities could well have an impact on Canadian teams, including the Montreal Canadiens, which wish to attract star players.
Especially since six NHL teams (Seattle Kraken, Vegas Knights, Tampa Bay Lightning, Florida Panthers, Nashville Predators and Dallas Stars) are now located in states that do not tax their residents’ income.
This situation is increasingly raising questions because of the tax inequalities it causes. Coincidentally or not, the Florida Panthers’ victory this week against the Edmonton Oilers just gave the NHL a fourth Stanley Cup champion in five years from a state that doesn’t tax its residents’ income (Vegas won the Cup last year while Tampa did so in 2020 and 2021).