Toronto Maple Leafs star centre John Tavares is set to take the witness stand in a Toronto courtroom Tuesday, in a trial over the taxation of his signing bonus for leaving the New York Islanders to join his hometown team in 2018.
At stake for Tavares is $8 million the Canada Revenue Agency says he owes as tax on a “signing bonus” of $15 million, which it regards as employment income, taxable at over 50 per cent. Tavares says it should be regarded as an “inducement” to sign with the Leafs, and therefore taxed in the U.S. at just 15 per cent, which he has already paid.
But for the NHL and its teams, this trial that began Monday morning is a major challenge to the increasingly common practice of paying superstar athletes in contracts that are light on salary, and heavy on signing bonuses, in part because of favourable cross-border tax treatment, but also as protection from lockouts, which stop salary payments but not bonuses.
Judge J. Scott Bodie of the Tax Court of Canada, who will hear the case over two weeks, is faced with some problems that seem closer to the world of finance than hockey.
What is a bonus? Colloquially, it means a surplus of good fortune, an extra little bit. But for many high earners, from hockey players to bankers, it is a regularly scheduled annual influx of money, undetermined in advance, but expected as part of the pay package. Crucially, it is not salary.
Tavares’s 2018 contract that is at issue here, for example, was worth about $77 million, of which fully 92 per cent was to be paid as a “signing bonus,” in annual instalments over the seven-year term. His salary, in the broader context, was modest, under a million dollars a year.
Last year, Tavares signed a four-year contract extension with the Leafs worth about $17.5 million. He used to be captain and is now alternate captain.
One question here is whether this curious “bonus” setup was agreed back in 2018 with a wink about the taxman. But there is no allegation of wrongdoing or dishonesty. It is simply a matter of interpreting tax law.
“What is an inducement? That is the question before you. You would think that the answer to that question would be straightforward, or should be straightforward,” said lawyer Devon Peavoy, for the Crown, as the trial began.
But it is not straightforward, not when the “inducement” is a “signing bonus” that gets paid out annually for years after the actual signing, indeed for the full term of the contract.
Former Leafs player Patrick Marleau is also a party to this appeal, allied with Tavares. He signed with the Leafs in 2017 after 20 years with the San Jose Sharks, some of that as captain. His contract was smaller but similar, $18.75 million over three years, of which $14.5 million was “signing bonus,” much of it “front loaded,” or paid early in the term.
This case is not about whether bonuses can ever be paid in this way. As Peavoy argued, the only question is whether the signing bonuses paid to Marleau and Tavares in 2017 and 2018 qualify for tax relief “as an inducement to sign an agreement relating to the performance of the services of an athlete,” under a treaty called the Canada-United States Convention With Respect To Taxes On Income And On Capital.
“The respondent’s position is that they do not,” Peavoy said. The Crown is the responding party in this appeal against an earlier determination of the CRA.
The trial’s first witness was James Nice, a Los Angeles-based agent who represented Tavares and Marleau in negotiating these contracts in 2017 and 2018.
“John was in his prime, 27 years old, and had the leverage to command the longest term available,” Nice said. “He was an elite player, one of the few players of his stature who was available on the market…. Of all the perks that are allowable in the (collective bargaining agreement), he was in a position to command the most.”
It is unusual for a player of Tavares’ stature to become an unrestricted free agent, as he was, free to sign wherever he wished, because most big stars resign with their teams. So the interest was at a fever pitch. They met with the New York Islanders, for whom Tavares had played since being the top draft pick in 2009, and also Tampa Bay, Boston, Dallas, Toronto, Las Vegas, and others.
Tavares’ main concern was the opportunity to win the Stanley Cup, and although that has not yet happened, at the time Toronto looked best.
Comparing him to other elite players such as Steven Stamkos, Sidney Crosby, Evgeni Malkin and Jonathan Toews, Nice said they felt Tavares could get an average value of $11 million a year, and he did.
Marleau, on the other hand, was 37, at “the back end” of his career, as Nice put it. He retired in 2021, having played more regular season games than any player ever. He also wanted to win a Stanley Cup, and he wanted a place where he could play a bigger role as a veteran leader. One of the main attractions of the Leafs contract was that it was three years long, rather than the two years other teams were offering.
A signing bonus is not automatically an “inducement,” Peavoy said in opening remarks. Some signing bonuses in the NHL may well operate as inducements, she said. “It is just that these particular signing bonuses did not.”
She quoted Jonathan Swift, the 18th century Anglo-Irish writer, that a wise person should have money in their head but not in their heart.
Tavares and Marleau had hockey in their hearts, she said, and they chose the Leafs not because of the specific terms of their signing bonuses but because the team fit their goals for themselves and their families. They decided based on “fit” and the average annual value of the contract, she said, not the signing bonus.
“For Mr. Tavares in particular, it was home,” Peavoy said. Tavares grew up in Oakville, just west of Toronto.
The signing bonuses were paid in tranches, “front loaded” such that Tavares got $30 million in the first year alone. They were conditional, and would have to be repaid according to strict formulas if the player failed to live up to the contract terms. The signing bonuses, therefore, were not inducements to sign the contract in the first place, Peavoy argued.
Lawyer Justin Kutyan, for Tavares and Marleau, said there is no allegation in this case that calling the payments “signing bonuses” amounted to “window dressing” or a hidden agreement, or a label invented after the fact, or that the contracts were a “sham.”
“We’re trying to attack the Crown’s case on all fronts,” Kutyan told the judge. There is nothing in the treaty about how an “inducement” should be paid. Paying a bonus in tranches says nothing about why it was paid, he said.
One of the quirks that emerged in Nice’s testimony Monday was that NHL Commissioner Gary Bettman personally signs every player contract in the league.
Tavares is set to testify first thing Tuesday morning.
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