How John Tavares’ tax case could impact the future of professional sports in Canada

The Tavares’ case will provide much for sports business, legal minds and political analysts to consider. Pictured: Maple Leafs Captain John Tavares. Photo Credit: John Tavares Foundation/X. 

There is almost a universal sentiment in the Great White North that our nation is in need of more professional sports teams. Extensive research has concluded time and again that Canada boasts enough sports fandom to house an additional three to five NHL franchises, two expansions for the NBA and MLB respectively, and if an agreement could be reached that would guarantee the preservation of the CFL, four to six NFL clubs. In spite of these facts, executives from each of the major four leagues have been hesitant to approve northern expansion. Moreover, the success of our existing franchises has been infamously limited in both size and scope. 

Understanding both of these phenomena requires a careful recognition of what it takes to create an environment in which major league sports can thrive. In reality, what is happening off the ice, court and field has a great deal of influence in attracting the best talent to a club and securing the necessary investment to birth new teams. Economic opportunity, financial stability and tax structure competitiveness are make or break factors for these kinds of ventures. With all of this in mind, there is a pivotal moment currently unfolding in the Canadian court system that is worthy of our attention. 

John Tavares, captain of the Toronto Maple Leafs, signed a seven-year $77,000,000 USD contract with the club on July 1, 2018. A key component of the deal was a $15,250,000 signing bonus that was made available to Tavares immediately. Signing bonuses have long served as a widely used tool for general managers when they are courting professional athletes. In the case of Tavares, it may have played a key role in convincing him to sign with the team. In addition, unlike base pay, signing bonus earnings can be spread out over the duration of the contract, freeing up salary cap space in the shorter term. In the 2018-19 season, specifically, $15.25 million of Tavares’ $16.9 million payment was delivered to him through the bonus. 

The U.S.-Canadian Tax Treaty states that signing bonuses can only be taxed up to 15 per cent. However, the Canada Revenue Agency, upon reviewing Tavares’ records from the 2018 fiscal year, believe that his signing bonus is taxable as salary. They argue that the Maple Leafs’ star would have only retained a pro-rata portion if he had withdrawn his services from the team during any point of this contract, as well as the fact that he had been back in Canada for more than 183 days by the end of 2018, making him a de-facto resident. Tavares and his financial representatives at KPMG are appealing the findings of the CRA, on the basis that he was not a Canadian resident at the time that the bonus was made available to him, and that he paid the gross amount on his US taxes. They also say that if an NHL labour stoppage were to have commenced at any point during the deal, the signing bonus would have still been paid to Tavares in full. 

At this juncture, the matter is being considered by the Tax Court of Canada. A hearing date is expected to be announced in the near future. Many legal experts believe that KPMG will be able to effectively argue Tavares’ case. If they are ultimately unsuccessful, however, signing bonuses may no longer serve as the efficacious strategy to Canadian franchises seeking to woo professional athletes that they have been historically. 

There is no doubt that sports stardom, like almost every other industry, seeks to maximize economic rewards. This largely explains why teams in Florida and Texas have been enjoying a high level of success in recent years. It should not be said, of course, that lower taxes are the only consideration. High quality and easily accessible public services, low crime rates, a reasonable cost of living and ideal year round weather are also huge factors. Canada has a limited ability to influence our meteorology. In all other regards, continuous improvement should be achievable. 

If the Conservatives are entrusted to form the next government, Pierre Poilievre may have a chance to hold the Premiership during a golden era of Canadian professional sports team expansions and championships. He would not have control over the decision making of players, management and league executives. He would, however, encounter the opportunity to facilitate the conditions that are necessary for these multi-billion dollar industries to be successful nationwide. The first order of business in this regard may be determining whether to pursue explicit tax protections for signing bonuses of professional athletes.

If he were to move forward on such a proposal, Poilievre might face backlash from the part of his populist base that views sport stars as elite millionaires that are unworthy of tax breaks. There is a potential counterargument, however, in the fact that attracting the best players to Canada increases the likelihood of post-season success for existing teams, as well as the viability of additional franchises landing in our major cities. In this scenario, thousands of well-paying jobs and billions in innovative revenue streams could provide innumerably more sources of taxable income than signing bonuses. If applied prudently and responsibly, the funds could go much further in tangibly improving essential national services like health care and national defence. And, as a side note, sports are one of the few things that can actually unite Canadians, while creating a greater sense of national identity, both of which are desperately needed. 

The Tavares’ case will provide much for sports business, legal minds and political analysts to consider. The implications are significant, especially heading into a fresh federal campaign, as well as the uncertainty of Connor McDavid continuing to play in a Canadian market, both of which will come to a head over the next one to two years. Stay tuned.

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