Former Leafs players join John Tavares in fight against Canada Revenue Agency (CRA)

This past offseason Dan Robson of The Athletic reported that Toronto Maple Leafs forward John Tavares owes over $8 million to the Canada Revenue Agency (CRA), an amount that Tavares himself argues.

The CRA contends that Tavares owes $8 million sheets while Tavares maintains that a provision in his contract entitles him to millions in tax savings. It's an ongoing case and one that could set a precedent for pro athletes in Canada.

From Robson's column for The Athletic back in June:

A key part in Tavares’ decision to sign with Toronto was the belief that a provision in the U.S.-Canada tax treaty commonly used by professional athletes would essentially allow him to pay a lower tax rate on a initial $15M signing bonus.

Six years later, as the Leafs’ captain enters the final year of that contract, Tavares faces an $8 million tax bill for his homecoming.

Tavares has disputed the Canada Revenue Agency’s assessment. It’s one of several ongoing cases challenging ways that pro athletes have traditionally navigated higher tax rates north of the border.

The amount owed is specific to Tavares' $15 million signing bonus, which he believes is subject to a provision in his contract entirely contrived for tax purposes.

Again from Robson:

Under that provision, a bonus paid from a team in one country to a resident of another is taxed at 15 percent to the country of the team paying the bonus. The athlete still must pay full income tax where they are a tax resident, but they are then eligible to receive a foreign tax credit for that 15 percent.

The deal Tavares signed with the Leafs in 2018 was structured so that the majority would be paid as an annual lump-sum bonus, with a smaller portion as salary.

In the first year of his contract, Tavares was given a bonus of $15,250,000 and a base salary of $650,000.

From that bonus, Maple Leafs Sports and Entertainment paid $1.75M to escrow and just over $2M to the Canada Revenue Agency — 15 percent as required by the U.S.-Canada tax treaty. Tavares then received the balance of the signing bonus — roughly $11.4 million.

As a U.S. tax resident in 2018, Tavares paid United States federal tax and New York state tax, a combined 46 percent, on the gross amount of the bonus, less escrow. The foreign tax credit then applied in the U.S. for the Canadian income tax already paid.

In total, Tavares paid roughly $5.9 million in taxes on that initial bonus.

However, in late 2022, the CRA reassessed Tavares’ 2018 tax obligation, saying​​ he owes $6,847,428 in further taxes — plus more than $1.2M in interest. That interest would still accrue if Tavares had not paid the tax bill immediately.

- Dan Robson

The CRA maintains that even though Tavares filed taxes in USA for 2018, he was actually a Canadian citizen and subject to Canadian income tax law. Tavares and his representation insist that they have been given no evidence of this claim.

Now, two former Leafs players are joining Tavares in their fight against the CRA and will reportedly fight their own cases in court.

Both Patrick Marleau and Jake Muzzin have filed separate cases against CRA, citing the same provisions that Tavares has used in his own filing.

From The National Post:

What's most interesting to me is that in his filing Marleau reveals that during the free agency period in 2017 he was fielding offers from 10 teams and chose the Leafs' offer because he was led to believe that the bonus structure would be taxed at 15% and not the higher bracket that the CRA is claiming.

“The signing bonus was consideration for this sought after unrestricted free agent, Marleau — a veteran NHL player who had garnered widespread respect for his skill, versatility, dedication and leadership — committing to the three-year Contract with the Toronto Maple Leafs,” reads his appeal.

“Marleau’s signing bonus is not salary, wages or other remuneration in respect of an employment.”

To me, this is both a complete fumbling of things by Marleau's representation and by Leafs' management, who at that time was headed up by GM Lou Lamoriello and assistant GM Kyle Dubas.