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

John Tavares of the Toronto Maple Leafs is contesting the CRA's claim that he owes $8 million in back taxes and interest. (Image credit: Derek Kane/Getty Images)

Toronto Maple Leafs captain John Tavares is suing the Canada Revenue Agency over an $8 million tax bill that experts say could be significant to some professional athletes, affecting which team they sign with.

The NHL star filed a complaint with the CRA about the back taxes and interest bill he owed in 2018 when he signed a US$77 million contract to play for the Leafs.

“It's an important event and everyone will be watching,” said Richard Powers, an associate professor at the University of Toronto's Rotman School of Management.

At issue is a $15.25 million signing bonus under the U.S.-Canada Tax Treaty, which Tavares says 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 they have limited tax liability and spread the value of the contract. In the first year of Tavares' seven-year contract, he earned a total of $15.9 million. Only $650,000 was his actual salary. The rest was his signing bonus.

Court documents show the CRA believes the entire compensation package should be treated as wages and taxed equally.

A sign is pictured outside the national headquarters of the Canada Revenue Agency (CRA) in Ottawa, Ontario, Canada on March 13, 2017.

The CRA says in court documents that Tavares' entire compensation package should be treated as salary and taxed the same. (Chris Wattie/Reuters)

“It's an uphill battle when dealing with the CRA,” said Rob Kreklewetz, a tax attorney at Millar Kreklewetz LLP, who was not involved in the case. “The burden of proof shifts to the taxpayer to rebut what the CRA has assumed.”

Tavares' notice of appeal said the bonus was a “signing inducement” and not a “salary, salary or other remuneration” under the terms of the contract.

In filing a key argument in the case, court filings state that the bonus “will be paid regardless of whether the Leafs play him, trade him, if games are canceled by a labor vote, or if Tavares is 'injured' … sent to the minor leagues.”

This claim may be crucial to the ultimate outcome of the case and will depend, at least in part, on whether the contract language is as clear as the legal pleadings on the matter. CBC News has not seen Tavares' contract.

Powers says the use of signing bonuses has become common practice in the major leagues, so the Tavares case is important to other players, other teams and other agents.

“All the players talk,” he said. “It affects a lot of people because that's how they structure their deals.”

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 picture of him sleeping under him as a child. Sheets with Leafs logo, caption: “Not everyday, you can live a childhood dream.”

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

The long-standing issue has been hotly debated in both the business and sports worlds for years.

About a decade ago, an article published by the Fraser Institute pointed out how taxes are a barrier to attracting new talent.

“Teams in uncompetitive tax jurisdictions like Toronto and Ottawa will have a harder time attracting NHL free agents,” authors Sean Spear and Charles Lammam wrote. But they said the challenge is not unique to the world of sports.

John Tavares signed a seven-year, $77 million US contract to join the hometown Maple Leafs in 2018. On appeal, it was argued that his signing bonus was entitled to a reduced tax rate of 15 percent under the provisions of the Canada-US Tax Treaty. lower rates for incentives paid to artists, musicians, actors and athletes.

John Tavares signed a seven-year, $77 million US contract to join his hometown Maple Leafs in 2018. The appeal alleges that his signing bonus is entitled to a reduced tax rate of 15 percent under the provisions of the Canada-US Tax Treaty. lower rates for incentives paid to artists, musicians, actors and athletes. — John Tavares signed a seven-year, $77 million US contract to join the hometown Maple Leafs in 2018. On appeal, it was argued that his signing bonus was entitled to a reduced tax rate of 15 percent under the provisions of the Canada-US Tax Treaty. lower rates for incentives paid to artists, musicians, actors and athletes.

Tavares grew up near Toronto and signed a seven-year, $77 million US contract to join the Maple Leafs in 2018. (Claus Andersen/Getty Images)

“Ontario's high personal taxes also hinder the attraction and retention of other skilled workers, such as entrepreneurs, doctors and engineers.”

Former players say today's stars take a number of considerations into account when signing, including the prospect of fame, lifestyle and, of course, compensation.

According to longtime NHL insider Nick Kypros, cases like Tavares' are why agents make money. Kypreos, now host of Sportsnet The real Kuiper and Bourne, players say they follow the CRA's decision, but also trust that their agents know the tax laws inside out.

“I think anybody should be immediately afraid to suggest that Canada has turned into a place where they can never play and I don't think they can make a lot of money,” Kypros said.

Kypreos noted that Tavares earned more than $100 million in career earnings and decided to sign with Toronto to play at home and be closer to his family.

Tavares' attorneys say in his appeal that the signing bonus was “integral” to his decision to sign with the Leafs.

Tavares' claims have not been tested in court, and the CRA has yet to issue its response.

The CRA did not respond to calls for comment on this story.

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