Canada Revenue Agency regards $15-million signing bonus as employment income, but Tavares says it was an ‘inducement’ to be taxed at a much lower rate.
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.
