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Maple Leafs centre John Tavares tells court why he chose Toronto in tax battle over $77M deal
Toronto Maple Leafs centre John Tavares testified in the Tax Court of Canada yesterday about the strong passions and intensely pressured negotiations that led to him leaving the New York Islanders for his hometown team in 2018 in a blockbuster seven year, $77-million deal.
“You’re trying to earn a contract you deserve for where you are in the marketplace of the game and the comparables in the league,” Tavares testified.
But under cross-examination by counsel for the Crown, he failed to completely erase the impression that his “signing bonus” of $70 million over seven years — more than 90 per cent of the contract’s value — was simply part of his employment income, not a tax-exempt “inducement” to sign the deal.
That is the crucial distinction at the heart of this trial, and for Tavares it means $8 million is at stake.
Former Toronto Maple Leaf Patrick Marleau, who is set to testify Wednesday morning, is in a similar position, just with less money that he could be required to pay in tax if this case goes in favour of Canada. It is being heard by J. Scott Bodie, a judge of the Tax Court of Canada. No wrongdoing is alleged, simply differing opinions on how to interpret tax law.
A victory for Canada would threaten this curious but growing practice in the NHL of paying top players small annual salaries of less than $1 million, while also using “signing bonuses” to bring a contract’s annual average value up to the agreed upon multi-million-dollar level, in Tavares’s case $11 million, near the top of the league spectrum.
These signing bonuses make up the vast majority of their “front loaded” contracts, which are structured to give them as much money as soon as possible, a condition that only the most valuable players can command. The bonuses also protect a player’s income against the salary freeze of a lockout, which in recent NHL history has happened every few years.
Signing bonuses also protect the player’s money in the case of a buyout, by which a team can end a player’s contract early, pay a fraction of the remainder over a longer term, and thereby free up space for other players under the league-mandated salary cap.
For Tavares, the unusually sweet terms of his deal with the Leafs saw him receive $15 million of his signing bonus right away in 2018, while he was still a resident of New York, where he had played with the Islanders since being the number one draft pick in 2009.
As a resident of New York, he was subject to tax on his worldwide income, and he paid federal and New York tax on that bonus. The problem is that the tax treaty between Canada and the U.S. says signing bonuses paid by a Canadian team can be taxed in Canada as well, but only up to 15 per cent under a special exemption for “inducements” paid to get professional athletes to sign deals. He would then be credited that amount against his U.S. tax bill. This case began, however, when the Canada Revenue Agency reassessed his 2018 tax obligations and decided he should pay 53 per cent on that $15 million — or $8 million — on the grounds that this bonus was not an “inducement” at all, but simply employment income, taxable at the highest level.
So, in effect, this is about which country gets the tax money, but it is also about how tax law affects the career goals of the NHL’s best players.
Tavares and Marleau are represented by Justin Kutyan, Mark Feigenbaum, Kristen Duerhammer and Shara Sullivan of KPMG Law.
In his testimony, Tavares described growing up in Oakville, Ont., the son of a Portuguese immigrant welder father and a mother who worked in banking and later drove a school bus, and playing hockey since “as early as I can remember,” maybe five years old. He was playing Triple A by age eight, then Junior A, and was drafted into the Ontario Hockey League at age 15, and soon granted the novel distinction of “exceptional player status,” which let him start early. By 16, he had broken Wayne Gretzky’s record for most OHL goals by a 16 year old. He won gold twice at the World Juniors, and was firmly on track to be a pro superstar. He was drafted first overall in 2009, was captain of the Islanders by his fourth season, and won Olympic gold for Canada in 2014.
So when his contract with the Islanders was set to expire in 2018, leaving him free to sign anywhere, his career was at an inflection point, and he knew he was in a position to earn “life-changing money.”
“It was an opportunity to be truly in control of my future and where my career was at,” he testified.
He was a professional athlete who wanted to sign a contract that reflected his value, with a maximally long term of seven years and lots of money early in that term, and he was open to inducements to get that done. He described his main considerations as an opportunity to win the Stanley Cup, a lifestyle fit for his family wherever he played, and the financial incentives.
Although many teams came calling, and several pressed their case in meetings, it came down to either signing with the Islanders again, and maybe playing his whole career with the same team, or joining the Leafs.
New York was attractive, Tavares said. “You enter there as a teenager, grow into a young man, spend nine years there, you become really connected to it,” he said. “I had a really nice balance in New York.”
But the Leafs were putting on the hard sell, with new general manager Kyle Dubas texting him literally one minute into his free agency with an invitation to be a Leaf and a special video about why Toronto was the place for him.
Meeting in Los Angeles with Leafs president Brendan Shanahan, general manager Dubas, and coach Mike Babcock, Tavares testified that they discussed why the “fit” was right to play in Toronto, how he complemented both the veterans and the young players who were part of the Leafs’ rebuilding, and also “what it means to play in Toronto”
There was no follow up to that, as if everyone in this downtown Toronto courtroom could readily understand “what it means to play in Toronto,” that for a boy from Oakville, even for the captain of the New York Islanders who has twice won Olympic gold for Canada, to possibly break the long-running Maple Leaf Stanley Cup drought with the C on his jersey would be among the very highest goals for any hockey player.
Toronto was looking good, and his agent encouraged him to sleep on it. He was feeling strongly that Toronto was best, because of the “aggressive nature they had in wanting to sign me, and that the fit really made a lot of sense.”
“It was a heavy decision and there was a lot of emotion behind it,” Tavares said. “I woke up really having a hard time, I think, fully committing to leaving the Islanders because of my connection to there.”
He described the talks being at an impasse over the average annual value, and placing a call on his own to Dubas to ask why, if they want him so much, they could not find the money. Toronto is famously the richest team in the league, and they were well under their salary cap.
Under cross examination, Crown lawyer Devon Peavoy put it to him that Dubas said, “if we make 11, you’re a Leaf,” and Tavares said “yes.”
“I felt we were pretty well there,” Tavares said. “I understood it as we had a general agreement in place and obviously Pat (Brisson, his agent) would sort it out.”
He later answered a question from Justice Bodie, saying he had strategy discussions with his agents about what he wanted out of a contract, and the signing bonus came up because it was a key part of that.
“Yes it did, just that I was in a position to command the type of signing bonus I did,” Tavares testified. He said getting the large proportion of the contract’s value was “very important” because it protects his income against lockouts.
“I wouldn’t say it was the main reason, but I believe it was one of many reasons of what I was looking for in my next contract and where I was taking my career,” Tavares said.
Most of these facts are uncontested. Court has already heard evidence about the terms by which these signing bonuses could be withheld if Tavares failed to show up to play as agreed and otherwise fulfil his duties. So the court must now grapple with the basic question of whether this $70-million “signing bonus” for a $77-million contract was, in fact, an “inducement” as contemplated by the cross-border tax treaty, or whether it was simply employment income by another name.
The hearing continues with Marleau’s testimony on Wednesday.
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