Hiring bonus: the John Tavares case
Toronto Maple Leafs captain John Tavares signed a seven-year contract valued at US$77 million in 2018. The majority of the remuneration is structured in the form of bonuses distributed each year over the duration of the pact alongside 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 before the Tax Court of Canada reveals that the tax authorities judge that the tax treaty between Canada and the United States does not apply to the hiring bonus received by the player in 2018 and that the Leafs captain is not eligible for a reduced tax rate of 15%. A tax rate of 53% is therefore more appropriate in the eyes of the federal agency in this case.
The tax authorities point 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 a U.S. resident (he played for the New York Islanders before joining 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 by the New York Islanders first overall 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 the evaluation of 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 All-Stars are also locked in a battle with the Canada Revenue Agency. The tax agency is challenging how 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 ex-professional baseball players’ dispute with the IRS relates to contributions to a retirement settlement, a vehicle for providing future retirement benefits and deferring recognition of earned income until a later date.
PHOTO SEAN M. HAFFEY, ARCHIVES AGENCE FRANCE-PRESSE
Jose Bautista and Russell Martin while wearing Toronto Blue Jays uniforms.
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 agreement is a non-registered savings plan, under which a Canadian employer and, if applicable (which is not the case here with the ex-Toronto Blue Jays players), a employee contribute a reasonable amount to a trust to fund income for the employee when he or she retires. Tax lawyer Marie-France Dompierre explains that contributions paid by an employer to a retirement agreement are subject to a refundable tax of 50% withheld at source by the employer. “The tax on contributions will be payable at the time distributions from the retirement agreement plan are made. This can be very attractive if an athlete is a non-resident at the time, as these distributions will normally be taxed at a reduced rate. »
At the heart of the cases of Russell Martin and Joshua Donaldson is a disagreement over how to properly calculate the tax payable in Canada by them, Canadian non-residents, under the Income Tax Act.
“The question is how to divide the amount based on time spent in the United States and time spent in Canada. There are different ways to do the calculation. The athletes choose what works best for them and the taxman chooses what works 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 error is possible, but it seems more likely to me that the tax authorities are trying and taking a risk to see what can happen. It wouldn’t surprise me because it’s common to see the Canada Revenue Agency act aggressively in cases. » The tax authorities claim that there would therefore be a technical infringement, 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
While it could be several years before a decision or settlement is reached in all of these cases, if the tax authorities prevail, the task of Canadian professional sports teams seeking to attract high-calibre 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 the income of their residents .
This situation raises more and more questions because of the tax inequalities it causes. Coincidence 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).