Think again if you believed John Tavares’ career’s most major conflicts occurred on the ice. Instead of his customary jersey, the Toronto Maple Leafs centre entered a seventh floor courtroom on Queen Street West in Toronto this week in a grey and blue plaid suit, finding himself in a very different kind of arena. The stakes here may actually exceed anything he has encountered in the playoffs.
The 2018 contract Tavares signed with the Leafs, when he left the New York Islanders as an unrestricted free agent to join his hometown team, is at the center of the dispute. This contract was worth around $77 million over seven years, and here’s the clincher: a staggering 92 percent of that money was organized as a “signing bonus” that was paid in yearly payments. What was his real salary? Less than a million dollars per year.
The Tax Controversy That Is Being Closely Monitored by the NHL
Tavares owes over $6.8 million in taxes and $1.2 million in interest on a $15.25 million signing bonus he received in addition to his $650,000 salary for the 2018 season, according to the Canada Revenue Agency. The CRA’s stance is that the bonus is mostly employment income and should be taxed at more than 50%. According to Tavares and his legal staff, the money is an “inducement” under the Canada-United States tax treaty, which would allow it to be taxed in the U.S. at only 15%, a rate he claims to have previously paid.
Former Leafs player Patrick Marleau is also a party to the case. After spending two decades with the San Jose Sharks, he signed a similar deal with Toronto in 2017. Marleau’s contract was valued at $18.75 million over three years, with $14.5 million of it coming as a signing bonus.
Judge J. Scott Bodie of the Tax Court of Canada is presiding over the trial, which started on Monday and is scheduled to last for two weeks. James Nice, a Los Angeles-based agent who brokered both agreements, was the first witness. Nice testified that Tavares was in his prime at the time, at 27 years old, and was one of the few elite players to become an unrestricted free agent. His skills were in demand by teams from throughout the league, including the Islanders, Tampa Bay, Boston, Dallas, and Las Vegas. Tavares eventually chose Toronto because it offered the greatest chance to win a Stanley Cup and because it was home. He was raised in Oakville, which is west of the metropolis.
Devon Peavoy, an attorney speaking on behalf of the Crown, contended that the signing bonuses given to Tavares and Marleau were not considered inducements under the agreement. According to her, both players selected the Leafs because of their ideal family situation and average yearly contract value, not because of the specific structure of their incentives. She went so far as to quote Jonathan Swift, saying that a smart person should keep money in their head rather than their heart. She claimed that Marleau and Tavares had hockey in their hearts.
The issue of residency also needs to be taken into account. According to Tavares’ attorneys, he did not begin residing in Canada until September 2018. According to the Income Tax Act, an individual becomes a tax resident of Canada if they reside there for at least 183 days. Although specifics of the claim have not been disclosed, the CRA countered that Tavares “frequently visited” Canada and “maintained residential ties” totaling more than 183 days during the 2018 tax year.
Why this is Important Outside of Tavares
This case involves much more than just a single player’s tax payment. More and more teams throughout the NHL are arranging their contracts so that they include a lot of signing bonuses and little pay. Apart from taxes, there are good grounds for this. Even during lockouts, salary payments cease while signing bonuses are still made. Therefore, the outcome of this trial may significantly affect how agents and teams arrange agreements for the best players.
“There is no allegation of wrongdoing, dishonesty, or any form of a sham agreement,” said attorney Justin Kutyan, who represents Tavares and Marleau. No one claims that the bonus label was created after the fact or that the agreements were merely “window dressing.” The only disagreement is how these payments should be interpreted by tax law. In his argument, Kutyan said that there is nothing in the pact that specifies how an incentive should be paid, and that paying a bonus in installments tells nothing about why it was paid in the first place.
During Monday’s testimony, an intriguing piece of information surfaced: NHL Commissioner Gary Bettman signs each and every player agreement in the league.
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