A court battle between the CRA and the Toronto Maple Leafs captain could be pivotal for other pro athletes

Toronto Maple Leafs captain John Tavares is taking the Canada Revenue Agency to court over an $8-million tax bill in a case experts say could be pivotal for some pro athletes, perhaps affecting with which teams they sign.

The NHL star has filed an appeal to the CRA over the bill for back taxes and interest, dating back to 2018 when he signed a $77 million US contract to play for the Leafs.

"It's a pivotal case and everyone will be watching," said Richard Powers, an associate professor at the University of Toronto's Rotman School of Management.

At issue is a $15.25 million US signing bonus which, under the U.S.-Canada Tax Treaty, Tavares says should be taxed at a much lower rate than the rest of his salary. The CRA disagrees.

Players throughout the NHL use signing bonuses as a way to structure their contracts so they have a limited tax liability and to spread out the value of the contract. Tavares's first year of his seven-year contract saw him receive a total of $15.9 million US. Only $650,000 US of that was his actual salary. The rest was his signing bonus. 

The court documents show the CRA believes the entire compensation package should be treated as salary and taxed the same way.

"It's an uphill battle when fighting the CRA," said Rob Kreklewetz, a tax lawyer with Millar Kreklewetz LLP, who is not involved in the case. "The burden of proof shifts to the taxpayer to disprove whatever the CRA has assumed." 

Tavares's notice of appeal says the bonus "was an inducement to sign" and not "salary, wages or other remuneration" under the terms of the treaty.

The court filings, making a key argument in the case, say the bonus was payable "regardless of whether" the Leafs played him, traded him, if games were cancelled by a labour dispute or if Tavares "was injured ... or he was sent down to the minor leagues."

That claim could be crucial to the eventual outcome of the case and will at least in part depend on whether the contract language is as clear on that issue as the legal filings. CBC News has not seen Tavares's contract.

Powers says the use of signing bonuses has become common practice in major sports leagues, so the Tavares case matters to other players, other teams and other agents as well.

"The players all talk," he said. "This will affect a lot of people because it's how they structure their deals."

Tavares, 33, grew up in nearby Oakville, Ont., and became one of the most sought-after free agents in the league in 2018. When he signed with the Leafs, the star centre posted a photo of himself as a kid sleeping under bed sheets with the Leafs logo, writing: "Not everyday you can live a childhood dream." 

Canadian sports teams already operate at something of a disadvantage to American franchises in low-tax jurisdictions like Florida. Every year around free-agency deadlines, NBA and NHL stars weigh offers from teams in their leagues.

The long-standing issue has been hotly debated in both the business and sports worlds for years.

A paper published by the Fraser Institute nearly a decade ago highlighted how taxes can be a roadblock to attracting new talent.

"Teams in uncompetitive tax jurisdictions like Toronto and Ottawa will have a more difficult time attracting NHL free agents," wrote authors Sean Speer and Charles Lammam. But they said this challenge is not unique to the sports world.

"Ontario's high personal taxes also erect roadblocks to attracting and retaining other skilled workers such as entrepreneurs, doctors, and engineers."

Former players say today's stars take in a series of considerations when signing, including the chance to win a title, but also lifestyle and of course compensation.

Longtime NHLer Nick Kypreos says cases like Tavares's are precisely why agents earn the money they do. Kypreos, now host of the Sportsnet program The Real Kyper and Bourne, says players will watch the CRA ruling, but also trust that their agents know tax law inside out.

"I don't think anyone should be too scared right off the bat to just assume that Canada is turning itself into a place where I can never play and think I can't make a lot of money," said Kypreos. 

Kypreos notes Tavares has made more than $100 million US in his career, and has said he decided to sign with Toronto so he could play at home and be close to family.

In his appeal, Tavares's lawyers say the signing bonus was "integral" to his decision to sign with the Leafs. 

Tavares's claims have not been tested in court and the CRA has yet to file its response.

"The confidentiality provisions of the laws we administer prevent the CRA from disclosing taxpayer information, and as a result, we do not comment on the specific details of court cases," a spokesperson for the CRA told CBC News.