The Canada Revenue Agency is disputing a claim by Toronto Maple Leafs captain John Tavares that the USD $15.25 million the team paid him in 2018 was a signing bonus, saying that that the amount was effectively a form of salary and should be taxed at a higher rate.

The star centre went to court in January to claim that the CRA had wrongly assessed his 2018 tax return. He maintains the payment from the Leafs should be taxed at the reduced rate of 15 per cent rate for signing bonuses paid to athletes and other performers, as set out in a tax treaty.

For Tavares personally, the outcome of the dispute could make a $8 million difference in taxes he owes to the Canadian government.

But the case could also have a bearing on the ability of Canadian professional sports teams to lure players north of the border by structuring their compensation with signing bonuses, an increasingly common practice in the big leagues.

The CRA “denies that any amount referred to as a ‘signing bonus’ was a signing bonus or an inducement payment,” the government said in a response to Tavares’ tax appeal, filed last week in the Tax Court of Canada.

It adds, “the amount of USD $70,890,000 was not paid to [Tavares] as consideration for entering into, or as an inducement to sign, the Contract.”

Under a Canada-U.S. tax treaty, signing bonuses and other inducements for athletes, artists, actors and musicians get special treatment and are taxed at a low 15 per cent rate. But if all of the money paid to Tavares under the seven-year deal with the Leafs was treated as normal income, it would likely be taxed at the top marginal federal rate of 33 per cent, plus the provincial Ontario tax.

“The 2018 Amount was salary, wages or other remuneration received by [Tavares] in the 2018 taxation year when he was a resident of Canada,” the response to the appeal says. “Accordingly, the entire 2018 Amount is to be included in [his] income.”

Tavares claimed in court that a USD $15 million payment he received from the Leafs in 2018 should be treated as a signing bonus, because he would still collect it were he injured, dropped from the roster or if there was a labour disruption in the NHL. He argued that he was U.S. resident at the time, having finished the season with New York Islanders.

But CRA isn’t buying that claim, writing in the court that, “if at any time during any League Year, [Tavares] breached the Contract, voluntarily retired, withheld his services (including a refusal to report, practice, or play), or left the Toronto Maple Leafs… the Appellant would only be entitled to retain a pro rata portion of the ‘signing bonus’…”

The CRA notes that Tavares’ contract is structured so that most of the compensation is paid through the so-called signing bonuses. Next season, the last under his current USD $77 million deal with the Leafs, he will earn a salary of USD $910,000 and another USD $7 million through a bonus payment.

Tavares’ tax lawyer could not be reached for comment. The Tax Court has not yet scheduled a hearing in the dispute. The Department of Justice lawyer handling the case declined to comment.

Canada Revenue Agency disputes Leafs captain John Tavares' argument in tax case

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