‘Anywhere but Canada’: How a tax ruling could hobble pro teams north of the

When John Tavares was a child, he’d sit on the couch beside his father in his family’s home in a Toronto suburb and watch their favorite team play.

The Maple Leafs colored the boy’s imagination. Like many kids in the area, he hoped to one day wear a blue and white jersey — to become a hometown hero.

On July 1, 2018, the opening day of NHL free agency, it happened. The star center signed a seven-year $77 million contract with the Maple Leafs.

After the blockbuster signing was announced, Tavares shared on social media a photo of himself as a child, sleeping in Maple Leaf sheets.

“Not every day you can live a childhood dream,” he wrote beneath the image.

But the nostalgic sentiment carried fine print. 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.

Millions of dollars lay in the balance. The outcome of the CRA’s challenges could have serious implications for professional athletes currently playing in Canada, and a long-term impact on the appeal of Canadian teams trying to lure players across the border, says Robert Raiola, a director of the sports and entertainment division with PKF O’Connor Davies, an accounting, advisory and tax firm.

“I always say when somebody is a free agent, players should not only look at the ‘gross’ value of the deal, but also the ‘net’ value of the deal,” he says.

If they do, the numbers often point to a player going, Raiola says, “anywhere but Canada.”

If you’re not an expert in international tax planning, here is a brief overview on how pro athletes playing in Canada are taxed — as explained by Mark Feigenbaum, a tax litigator and partner at KPMG Law LLP, who specializes in athlete tax planning.

A “U.S. person” is subject to tax on their worldwide income. That applies if you’re a U.S. citizen, a green card holder, or meet the criteria defined by a formula for residency.

In Canada, you’re considered a resident for tax purposes if you spend 183 days of the year in the country, or if you have facts and circumstances that tie you to Canada. Residents are subject to tax in Canada on their worldwide income.

If you play for the Toronto Maple Leafs and are a Canadian resident for tax purposes then you will be taxed more than 53 percent on your worldwide income, including any bonus and salary. Playing for a Canadian team while a tax resident of Canada would make you exempt from federal tax (and most state tax) in the U.S.

If you play for the Leafs, but are a tax resident of a U.S. state — like Florida — then you pay income tax in the U.S. Florida has no state income tax, so you would pay just the federal tax at a 37 percent rate. You would pay tax in Canada on a portion of your earnings based on the number of days you are in Canada, and then get a credit in the U.S. for the Canadian taxes paid, subject to limitations.

When J.P. Barry negotiates for his clients with teams in markets with lower tax rates, that difference is always aggressively pointed out. Along with an offer, a team will provide breakdowns of what it would be like in a higher tax-rate and cost-of-living market like Toronto.

“They’re using it as a tactical advantage,” says Barry, managing director of CAA Hockey.

Here are a few hypothetical examples of the difference, based on recent marquee signings.

Boyhood dreams aside, Tavares’ decision to sign with his hometown club was also heavily influenced by what was commonly understood about a U.S.-Canada tax treaty provision under which bonuses are taxed differently than the rules described above.

This is where Tavares’ disagreement with the Canadian tax authorities takes shape.

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.

So for players who are considered a U.S. person, that bonus is taxed in the state where they live. To stick with the Florida example, that means the player pays 37 percent on the bonus. But if he is a Canadian tax resident, he’ll pay approximately 53 percent. (Before the accountants hit the comment section, yes, this is a rough total before…