Allan Lanthier: Canadians want the Stanley Cup back in Canada. The CRA? Not so much

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Recent tax cases concerning signing bonuses and RCAs will make life even harder for Canadian teams

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The more you look at the Canada Revenue Agency’s case against Toronto Maple Leafs captain John Tavares, the more concern it raises.

It’s more than three decades since the Montreal Canadiens defeated the Los Angeles Kings four games to one to win the Stanley Cup in 1993. Since then, Canadian teams have only made it to the final six times — all in losing efforts. One reason is Canada’s exorbitant personal tax rates, which make it hard for Canadian teams to sign star players. Recent challenges by the CRA may make that task even more daunting.

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Canadian tax rates are among the highest in the world, topped by only four other OECD countries. For example, an Ontario resident pays 53.5 per cent on income above $250,000. The top U.S. federal rate is only 37 per cent. Additional state tax may apply, but nine states levy no personal tax at all.

For years, Canadian teams have used two plans to reduce the tax hit on players: signing bonuses and “retirement compensation arrangements.” The CRA is now attacking both.

Under the Canada-U.S. tax treaty, the tax rate on an inducement to sign an athletic agreement — a signing bonus — cannot exceed 15 per cent. To qualify, a player must be a U.S. tax resident and have a home in the U.S. while renting a place to stay in Canada during the season. But the CRA has now assessed Tavares for more than $8 million in tax and interest on a signing bonus he received to play for Toronto.

Its decision to do so is odd. After receiving the first instalment of the signing bonus — the one payment in dispute — Tavares moved to Toronto and therefore pays Canadian tax at 53.5 per cent on every other penny the contract pays him. And the CRA itself issued an interpretation letter in 1998 confirming the 15 per cent rate, provided a payment is a “true signing bonus.” Taxpayers like Tavares had a right to rely on that guidance.

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The difference between a “true signing bonus” and a salary for actually taking the ice may be subtle but if the CRA had misgivings about its 1998 interpretation, it should have put Canadian teams and players on notice years ago. Should Tavares lose in court, other players who received signing bonuses likely will receive CRA assessments for tax and interest and face the risk of double taxation: if they’ve already paid full U.S. tax on the bonus, it may be too late to obtain credit in the U.S. for the additional Canadian tax.

As for “retirement compensation arrangements,” or RCAs: the Canadian team contributes a part of a player’s salary to an RCA. For example, instead of receiving an annual salary of $5 million, a player might receive $4 million, with the team contributing $1 million to an RCA. The contribution is taxed at a flat rate of 50 per cent, but that’s fully refundable when the player leaves the team or retires and begins to receive payments from the RCA. These payments are taxable but should the player move to the U.S. on retirement the Canadian tax could be as low as 15 per cent, meaning overall Canadian tax of less than 46 per cent on the $5 million — which is better than 53.5 per cent.

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The CRA has not yet challenged NHL players with RCAs, but it has issued assessments for millions of dollars against three former Toronto Blue Jays — José Bautista, Josh Donaldson, and Russell Martin — disputing the basis on which the RCA rules apply. Should CRA prevail, it almost certainly will go after NHL players, too, making the competitive position of Canadian teams even more precarious.

What to do? The CRA should develop and publish guidelines regarding future signing bonuses and RCAs. And the Department of Finance should introduce rules to reduce the tax hit on professional athletes. Ottawa already offers tax breaks for activities of every size and shape. Is the viability of our national pastime any less important?

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In the meantime, our personal tax rates continue to drive entrepreneurs, doctors, engineers and others to the U.S., while almost guaranteeing there won’t be a Stanley Cup parade in Canada any time soon.

Financial Post

Allan Lanthier, retired partner of an international accounting firm, has been an advisor to both the Department of Finance and the Canada Revenue Agency.

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