By now, many know about the taxation issues that NHL star hockey player John Tavares and others (like retired future Hall of Famer Patrick Marleau and several NBA players) have faced from the Canada Revenue Agency regarding the Canadian tax treatment of signing bonuses they received while playing for Canadian professional sporting teams.  The challenges first arose over 5 years ago when the tax treatment of the signing bonuses for 8 NHL players and 2 NBA players involving taxation years from 2016 to 2020 were audited and ultimately – years later – reassessed by the CRA. Most of the players have filed objections with the CRA and are disputing their cases through the court system.

Overall, I have found some of the reporting on the cases a bit misleading or outright incorrect.  For example, a recent newspaper article initially reported that a recent decision of the Tax Court of Canada had in effect dismissed Mr. Tavares’ case resulting in a big win for him.  However, that was incorrect. The decision involved a procedural matter compelling the CRA to disclose certain information requested by Mr. Tavares’ legal counsel. His case – along with the others – is alive and well.  The newspaper recently updated its article to clarify that Mr. Tavares did not “win” his case. Many others, however, have not.

Other reportings have made it sound like Mr. Tavares did some sort of “tax planning” or avoided paying over $8 million in tax to Canada.  I have two words for that kind of assertion:  Incorrect.  Misleading.

Why?  Because all of these cases involve US tax residents playing for Canadian teams that are non-residents of Canada (that fact is never in dispute).  If you’re a non-resident of Canada, you only pay income tax to Canada in limited circumstances including on employment income if the players exercise such employment in Canada. Again, Mr. Tavares, for the year in question, was a non-resident of Canada when the signing bonus was paid.  Ditto for Patrick Marleau and others.

Accordingly, all of the players reported their worldwide income for tax purposes on their US income tax returns including the full amount of the signing bonuses.  Canadian income tax was withheld from the players’ employment earnings (that did not include signing bonuses) for the proportion of their overall salary that was exercised in Canada by playing home games and other games in Canada.  Otherwise, Canada had no right to tax the remainder of the employment income except for a limited amount of signing bonuses received.

When a payor country of signing bonuses (Canada in all of the players’ cases) pays those amounts to a resident of another country (the U.S. in these cases) the payor country is limited to collect a tax rate of only 15% – pursuant to Article XVI(4) of the Canada-US tax treaty.

When the players report all of their earnings (including the full amount of the signing bonuses) in their US tax returns, they’re able to – for the most part (unless the player is resident in a State that does not respect the Treaty which there are some States that do not) claim the Canadian tax paid – comprising the amount ultimately liable for employment exercised in Canada plus the 15% cap imposed on the signing bonus – as a foreign tax credit against their US federal and state tax liabilities.  This means that ALL of their income – including the signing bonuses – is subject to a combination of US and Canadian taxes.  The signing bonuses are NOT limited to 15% overall taxation….just that Canada (in this case) is limited to that rate.

If you’re following this, then you will quickly realize that this dispute is not about milking more overall tax from the players (ignoring the obvious difference in tax rates between the two countries with Canada being much higher).  This is about who has the right to tax the players more:  Canada or the US?  The players are simply high-profile individuals caught in the middle since double taxation – with proper protective filings – should not be an issue.

With respect to the CRA’s position, the simple argument is that the signing bonuses are not “true” signing bonuses but rather disguised employment income.  In the CRA’s audit report for Mr. Tavares (which is now a public document), the CRA tries to support its weak argument by citing various case law on both sides of the border.  While ultimately the Tax Court (or a higher court on appeal) will decide this, I would respectfully suggest that if Canada has an issue with how signing bonuses are treated in a cross-border context, they should add that to the list of issues to discuss with the U.S. for the next time the Treaty is amended / negotiated.  It’s unfortunate that the players are caught in the middle.

And for those that will inevitably say – and have – that they have no sympathy for “rich athletes”, that’s a shallow take. These cases aren’t about rich hockey players avoiding tax. It’s about the CRA misapplying treaty principles in an attempt to grab more tax dollars.

The continued attack on higher income earners by our government and related institutions has real world fallout.  If Canada wants to remain a competitive place to work and invest – whether you’re a hockey star, tech executive, entrepreneur or large company – we need clarity and certainty, not chaos. We need to make Canada an attractive place to come to for successful people, not the opposite.

Cases like this have a chilling effect on such attraction.

As Albert Einstein once quipped, “The hardest thing in the world to understand is the income tax.” That’s forgivable for physicists and journalists. But it’s unacceptable when our own tax authority uses high-profile taxpayers as pawns in a policy fight they should be taking to the negotiating table, not the courts.

For the players’ sake, I’m hoping these issues can be quickly resolved so they can move on with their lives without the unnecessary distractions.

This past weekend, I had the pleasure of spending time with one of my coaching groups at a strategy retreat.  We had a number of great guest speakers speak to us on various leadership topics.  One of the speakers, former NHL’er, Stanley Cup winner and leadership guru Ryan Walter, spoke to our group on the Six Mindsets That Change Everything, a topic that is both the subject of and title of his new book.

I’ve had Ryan speak to my partnership group in the past and he has always been insightful.  He certainly didn’t disappoint this time as well with my group leaning in to listen, learn and discuss both during and after the session.