The puck is about to drop as John Tavares faces off against the CRA over signing bonus

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Or sign-in if you have an account.If Patrick Marleau and John Tavares lose their case, they will most certainly seek relief from the U.S. — after all appeals are exhausted — to avoid double taxation. Photo by Rene Johnston/Toronto Star via Getty ImagesWe independently select everything we recommend. Buying through us may earn us a commission, which supports our work.I love the anticipation of a hockey game starting: two centres crouch at the face-off dot, the referee holds the puck at arm’s length, waits half a beat and drops it. Nobody remembers the face-off itself as what matters is everything that happens after it.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountThis week, a very different kind of face-off happens in a Toronto Tax Court room. After years of battling, the Tax Court of Canada trial pitting former Maple Leafs captain John Tavares and former Leaf Patrick Marleau against the Canada Revenue Agency (CRA) is underway.The case isn’t really a fight about whether professional athletes should pay less tax; it’s about whether the CRA can effectively narrow a negotiated Canada-United States treaty provision and, in doing so, make Canadian professional sports teams less competitive.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againHere are the highlights for anyone who needs to get caught up. Part of Tavares’s seven-year, US$77-million contract with the Leafs in 2018 was a US$15.25-million signing bonus for that year, paid while he was still a U.S. resident. He said that bonus was an “inducement” to sign, taxable in Canada at a reduced 15 per cent rate under Article XVI(4) of the Canada-U.S. tax treaty.But the CRA said it was salary in disguise, fully taxable at Canada’s top marginal rate for any Canadian-sourced income. Marleau’s case raises the identical question.Part of the CRA’s argument turns on the fact that Tavares would only have kept a pro-rated share of the inducement and repaid the rest had he retired early or stopped playing before the contract ran its course.The CRA said that obligation makes the payment disguised salary. To me, that gets the logic backward: a repayment clause tied to future performance allocates risk, protecting the team if the player doesn’t deliver the career the bonus was paid to secure. That’s a feature of an inducement, not evidence it was never one.Signing bonuses aren’t exclusively used for tax reasons, either. They’re a standard tool for protecting a player against a labour stoppage or other disruption under the collective bargaining agreement since a player still collects the bonus even if the league doesn’t play.Some people seem to think that the 15 per cent tax rate Canada is limited to is the end of the story. In other words, Tavares and Marleau only paid that low rate on their signing bonus and thus they took advantage of that loophole.False. That’s simply Canada’s treaty-limited share of the tax. Both Tavares and Marleau were U.S. residents at the time and paid full taxation on those amounts. Accordingly, the treaty provision is simply an agreement between Canada and the U.S. as to how much tax each country is entitled to.If Tavares and Marleau lose their case, they will most certainly seek relief from the U.S. — after all appeals are exhausted — to avoid double taxation.The court is expected to hear from Tavares and Marleau directly over two weeks and from Brandon Pridham, the Leafs’ former assistant general manager and architect of the team’s salary-cap strategy through the Tavares era, former coach Mike Babcock, Tavares’ long-time agent Patrick Brisson of CAA Hockey and Robert DeGregory, associate counsel for the NHL Players’ Association.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.Obviously, this lineup of witnesses will try to establish how signing bonuses are actually negotiated and understood across the league and rebut the CRA’s theory.The word inducement is doing a lot of heavy lifting, and it’s why this case matters beyond two hockey players’ bank accounts. Article XVI(4) is reciprocal: a Canadian-resident athlete signing with a U.S. team gets the same 15 per cent treatment a U.S.-resident athlete gets signing here.But Canada’s top rates — the fifth highest among the 38-member Organization of Economic Co-operation and Development countries — run higher than the top U.S. rates, so the provision matters more on this side of the border: without it, a U.S.-resident athlete signing with a Canadian team could face Canadian tax on that bonus north of 50 per cent, with only partial relief through foreign tax credits on their U.S. return.Strip the treatment away and Canadian teams are worse positioned every time a free agent weighs where to sign, not because the treaty favours Canada, but because the country’s excessive rates make its protection matter more here.The CRA’s position, if it succeeds, doesn’t just cost Tavares and Marleau money. It risks substantially narrowing the practical application of Article XVI(4) for the group it was written to protect: athletes and entertainers with mobile careers who move across the border on a signing bonus. Watching the CRA litigate that away is particularly galling and aggressive.These cases are a referendum on professional sports in Canada. If the CRA wins, every Canadian NHL, NBA and MLB franchise loses a meaningful tool for competing against U.S. teams for the same pool of talent, especially given our cold-weather environment and non-competitive high-tax rates.For some, the instinctive reaction is that these are millionaire athletes who are hard to muster sympathy for. I understand the impulse, but it’s shallow.The main issue is whether the CRA gets to unilaterally narrow a negotiated treaty provision by simply asserting, after the fact, that a category of payment doesn’t mean what it says. And by doing so, it can materially and negatively impact the growth of Canadian professional sports franchises.Back to the face-off dot for a second. Winning the draw doesn’t win the game; it just starts the shift. After years of watching, we finally get to see whether the CRA’s theory holds up when it has to be proven, witness by witness, in front of a judge, rather than simply asserted by way of reassessments.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. _____________________________________________________________If you like this story, sign up for the FP Investor Newsletter._____________________________________________________________We apologize, but this video has failed to load.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.