Re: Tavares vs CRA
This is a big case that will have major implications for high earning professionals (athletes, artists, executives). UFA athletes are at the very top of the impacted scale based on how they can move from one team to another (from the USA to Canada) and how much control UFA athletes having picking their team and the terms of their contracts.
NOTE: It really only applies to a player who was a resident of the USA and then signs a contract to play in Canada, and it only applies to the FIRST year of his signing bonus. Also note: Tavares is fighting to save $1.3m not the $8m you see in headlines (He could owe CRA $8m but would get $6.7m back from the IRS)
The facts
- Tavares is a stud hockey player. He previously lived and worked in the USA.
- Tavares became an unrestricted free agent (“UFA”), he could sign with any NHL team of his choosing.
- Tavares had many suitors, numerous teams offered him contracts, any team would offer him a deal at league minimum (he had options!)
oWhile the broad strokes were likely the same (7 years, lots of $, NMCs) Every deal offered was slightly different terms.
oTavares ultimately signed with the Maple Leafs
o Tavares deal included a large amount of money classified as “signing bonus” under the NHL CBA
In total $70.89m of the $77m he makes is classified as “signing bonus”
Of particular importance is his first year he made a base salary of $650,000 and a signing bonus of $14.6million
o After signing Tavares moved his “domicile” (his legal “place he lives” for tax purposes you only ever have 1 domicile) from the USA to Canada, becoming a resident of Canada for tax purposes. This happened 1 year after the signing.
- The first year of his contract, Tavares was a resident of the USA for tax purposes(note: citizenship is almost irrelevant to this question so future Americans, Swedes etc will have largely the same arguments).
- Tavares was a resident of the USA, while earning income in Canada.
The Law
-This case is about HOW the $14.6million signing bonus should be classified and thus WHERE it will be taxed (NY or Ontario) once that is established the rate Tavares’ pays is set. If Tavares’ is successful he will save about $1.3million (USD) in taxes, not the $8million headline that is shown (He could owe CRA $8million but in that result would get approximately $6.8million back from the IRS).
- As a resident of the USA and also earning income in Canada Tavares’ income was subject to both USA and Canadian Tax laws.
- Canada-USA have a tax treaty (most countries have tax treaties), the overall purpose is to ensure that individuals are not “double-taxed” on any particular income.
-Ordinarily, the entire of Tavares’ $15.25 signing bonus would be taxable in Canada as “employment income” as it was earned in Ontario. If taxed this way Tavares would pay $8.121 million in Canadian taxes, a tax rate of $53.25%.
-There is a provision in the US-Canada Tax treaty which states that if an individual receives a “signing bonus” as an inducement to enter into employment in Canada, such signing bonus is not taxed as employment income (53.25%) but at a much lower rate of 15%.
-CRA says:
oAll $15.25m is employment income, taxed at 53.35% total tax paid: $8.12million
Tavares argues that in his 1st season he should be taxed:
-Employment income: $650,000 (53%)$340k to CRA
-Signing Bonus: $14.6 million (15%) $2.19 million to CRA
-Total tax (in Canada) $2.53 million
-NY tax paid: ($6.789 million -$2.53 paid to Canada) total paid: $6.789m
If Tavares is successful he will pay $1.33million less in taxes.
The Legal Question:
The legal question is simply “Was Tavares’ signing bonus a “true” signing bonus as defined under the tax treaty?
Did it induce him to sign with and move to Toronto over the other options, OR, was it merely called a singing bonus on paper (and for CBA purposes’ and does that matter) to avoid taxes. Would Tavares’ have signed the contract “but-for” the signing bonus?
A signing bonus is generally defined as a “sum of money paid to enticement or incentive to join a particular organization or sign a new contract”. It is generally guaranteed (or almost guaranteed) up front, on the signing of the employment contract, whether payable immediately or over time. This is opposed to salary, which is not ordinarily guaranteed and is subject to the terms of employment. The more conditions on the bonus, and the longer it is paid over, the more likely a court would find that it was not a “true” signing bonus at law.
The adage “if it looks like a duck and quacks like a duck, it is a duck” is in play here.
Signing Bonus’ are desired by NHL players for many reason other than taxation. They are FULLY guaranteed against: work stoppage, demotion, buyout etc. while salaries are guaranteed against performance they are NOT paid in full after a buyout or work stoppage.
Tavares will say the signing bonus meets the definition of a signing bonus under the tax treaty, it was fully guaranteed on execution of the contract and it induced me to sign the contract (“but-for” the bonus Tavares would have signed elsewhere).
CRA will say it is just another name for employment income, and that ALL salary is guaranteed under NHL contracts and that Tavares was going to sign in Toronto whether he was paid salary or signing bonus. I think the CRA will try and argue that since a large amount of the total compensation is signing bonus ($70 of 77 million) that it is not a true signing bonus, but just another form of employment income.
CRA may also argue the signing bonus should be classified as employment income under GAAR (the general anti-avoidance rules”) GAAR is essentially a rule where a tax benefit will be denied if the court finds: a tax benefit, transaction of avoidance and ABUSE of the tax code. GAAR is a always a very hot topic because while tax PLANNING is permitted, tax AVOIDANCE is not.
I am incredibly interested to see who the Court rules in this matter and whether or not it ends up in front of the Supreme Court of Canada and each Court’s thoughts on the case.
12 team H-2-H 1 year league, daily roster changes, 3 goalie start minimum/week
2xC, 2xRW, 2xLW, 4xD, 3xUtil, 2xG, 5 Bench
G, A, P, PIM, PPP, SHP, GWG, SOG, Hits, W, SV%, GAA, SVs
C: C. Keller, C. Mittelstadt, B. Nelson, R. Strome,
LW: K. Connor, B. Tkachuk, J. Gaudreau, J. Marchessault, E. Rodrigues, A. Lafreniere
RW: K. Fiala, J. Bratt, T. Jeannot V. Arvidsson
D: R. Josi, J. Trouba, E. Gustafsson,
G: L. Thompson, F. Gustavsson, V. Vanecek
NO IR
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Originally Posted by 2014olympicgold
