The Canada Revenue Agency is disputing a claim by Toronto Maple Leafs captain John Tavares that the USD $15.25 million the team paid him in 2018 was a signing bonus, saying that that the amount was effectively a form of salary and should be taxed at a higher rate.

The star centre went to court in January to claim that the CRA had wrongly assessed his 2018 tax return. He maintains the payment from the Leafs should be taxed at the reduced rate of 15 per cent rate for signing bonuses paid to athletes and other performers, as set out in a tax treaty.

For Tavares personally, the outcome of the dispute could make a $8 million difference in taxes he owes to the Canadian government.

But the case could also have a bearing on the ability of Canadian professional sports teams to lure players north of the border by structuring their compensation with signing bonuses, an increasingly common practice in the big leagues.

The CRA “denies that any amount referred to as a ‘signing bonus’ was a signing bonus or an inducement payment,” the government said in a response to Tavares’ tax appeal, filed last week in the Tax Court of Canada.

It adds, “the amount of USD $70,890,000 was not paid to [Tavares] as consideration for entering into, or as an inducement to sign, the Contract.”

Under a Canada-U.S. tax treaty, signing bonuses and other inducements for athletes, artists, actors and musicians get special treatment and are taxed at a low 15 per cent rate. But if all of the money paid to Tavares under the seven-year deal with the Leafs was treated as normal income, it would likely be taxed at the top marginal federal rate of 33 per cent, plus the provincial Ontario tax.

“The 2018 Amount was salary, wages or other remuneration received by [Tavares] in the 2018 taxation year when he was a resident of Canada,” the response to the appeal says. “Accordingly, the entire 2018 Amount is to be included in [his] income.”

Tavares claimed in court that a USD $15 million payment he received from the Leafs in 2018 should be treated as a signing bonus, because he would still collect it were he injured, dropped from the roster or if there was a labour disruption in the NHL.  He argued that he was U.S. resident at the time, having finished the season with New York Islanders.

But CRA isn’t buying that claim, writing in the court that, “if at any time during any League Year, [Tavares] breached the Contract, voluntarily retired, withheld his services (including a refusal to report, practice, or play), or left the Toronto Maple Leafs… the Appellant would only be entitled to retain a pro rata portion of the ‘signing bonus’…”

The CRA notes that Tavares’ contract is structured so that most of the compensation is paid through the so-called signing bonuses. Next season, the last under his current USD $77 million deal with the Leafs, he will earn a salary of USD $910,000 and another USD $7 million through a bonus payment.

Tavares’ tax lawyer could not be reached for comment. The Tax Court has not yet scheduled a hearing in the dispute. The Department of Justice lawyer handling the case declined to comment.

The Canada Revenue Agency (CRA) has recently challenged professional hockey player John Tavares’ tax argument in a dispute that has garnered significant attention in the sports world. Tavares, who currently plays for the Toronto Maple Leafs, is facing allegations from the CRA that he improperly claimed certain expenses as tax deductions.

The dispute centers around Tavares’ tax filings for the 2018 and 2019 tax years, during which he reportedly claimed deductions for expenses related to his training and fitness regimen. Tavares has argued that these expenses are necessary for him to maintain his status as a professional athlete and should therefore be considered legitimate business expenses.

However, the CRA has taken issue with Tavares’ claims, arguing that the expenses in question do not meet the criteria for tax deductions under Canadian tax law. Specifically, the CRA has raised concerns about the nature of the expenses, questioning whether they are truly necessary for Tavares to perform his job as a professional athlete.

This dispute highlights the complexities of tax law, particularly when it comes to deductions claimed by high-earning individuals such as professional athletes. While it is common for athletes to claim deductions for expenses related to their training and fitness regimens, the CRA has strict guidelines in place to ensure that these deductions are legitimate and necessary.

As the dispute between Tavares and the CRA continues to unfold, it serves as a reminder of the importance of proper tax planning and compliance for all individuals, including professional athletes. It also underscores the need for individuals to seek professional advice when claiming deductions on their tax returns, particularly when those deductions are likely to be scrutinized by tax authorities.

In conclusion, the dispute between John Tavares and the CRA over his tax deductions highlights the complexities of tax law and the importance of proper compliance. As the case progresses, it will be interesting to see how it ultimately resolves and what implications it may have for other professional athletes facing similar challenges with their tax filings.