John Tavares is taking the CRA to court. A ruling against him could change how NHL teams sign players

John Tavares, centre, poses with then-Toronto Maple Leafs General Manager Kyle Dubas, right, and President Brendan Shanahan after Tavares signed in 2018. (Chris Young/The Canadian Press)

John Tavares has taken more than 20,000 faceoffs during his 15-year NHL career, but it’s one with the Canada Revenue Agency (CRA) that may be the most consequential.

In July 2018, Tavares signed a seven-year, US$77-million contract with the Toronto Maple Leafs. Immediately upon signing that contract, he received a US$15.3 million signing bonus.

Tavares' lawyers argue that under the Canada-U.S. Tax Treaty, he should only be taxed at 15 per cent because he was a U.S. resident performing in Canada for the first year of the contract — despite being born in Mississauga, Ont., and representing Canada in international hockey tournaments, Tavares spent the previous nine years playing for the New York Islanders, the team that drafted him No. 1 overall in the 2009 NHL Entry Draft, making him an American resident.

However, the CRA argues the signing bonus is not a bonus at all, and should be considered regular income, meaning it would be taxed at more than 50 per cent. The CRA claims that because the signing bonus has certain conditions attached to it, it's not considered a guarantee under Canada's tax law.

One condition, for example, was if Tavares retired early, the Leafs would be able to claw back portions of his signing bonus. Because of this, the CRA says Tavares owes them US$8 million in unpaid taxes and interest, leading to the former Maple Leafs' captain filing an appeal in the Tax Court of Canada last January.

As the issue remains before the courts, it’s not just Tavares and fans of the Maple Leafs who are paying attention to the result. Everyone from the players, their agents and the teams themselves are keeping a close eye on the case, as a ruling in favour of the CRA could forever change how Canadian franchises negotiate with hockey's greatest talents.

From an agent's perspective

Allan Walsh has been a certified NHL player agent since 1996, representing hundreds of former and current players in the league, negotiating billions of dollars in compensation for his clients. As of the publishing of this story, his client list includes 27 active contracts totalling more than US$236 million, including Stanley Cup champions, Olympic gold medalists and future Hall of Famers.

Speaking with CTVNews.ca, Walsh says his initial reaction to the news of Tavares taking the CRA to court was that the player had received some really bad advice.

“It’s a very good example of why players need to surround themselves with the most competent representation,” said Walsh, whose agency, Octagon, represents basketball superstar Steph Curry. Walsh adds that the specific language used in the deal might be what makes the court rule in either Tavares or the CRA’s favour.

“The CRA has taken the position that since the signing bonus has conditions on it, and if a player does certain things, that’s no longer an inducement,” Walsh said. “By virtue of the language of the deal, it’s been converted to regular income, and can be taxed at a regular income tax rate.”

The ramifications of a ruling in favour of the CRA, Walsh says, means Canadian and American high-tax states will have to remove any language of bonuses being repayable to the club in future standard player contracts. This could mean a player retiring early or being forced to miss time with injury would have no bearing as to whether they would receive the promised bonus they signed for.

From a player's perspective

Danny Syvret spent 12 years playing professional hockey, including 59 games in the NHL and a little more than a season in Germany’s top league. After he retired from the game in 2017, Syvret founded Stoneface Financial, a wealth management firm dedicated to assisting athletes and other professionals in managing their finances, optimizing investments and planning for their long-term future.

Syvret, who was taken in the third round of the 2005 NHL Entry Draft by the Edmonton Oilers and wound up playing with the Philadelphia Flyers, Anaheim Ducks and St. Louis Blues, told CTVNews.ca that teams in Canada and high-tax states like New York and California are at a disadvantage when other teams can offer a lower-tax rate when negotiating salaries.

“You could ask anyone in your workforce, who wouldn’t want to pay 20 per cent less in tax? Getting the opportunity to make 20 per cent more with a team, I think that would be very advantageous for the player, regardless of the weather element, media pressure or fan pressure.”

Money talks

While he doesn’t represent Tavares or anyone on the Maple Leafs, Walsh currently has seven players who are signed with Canadian teams, including Calgary Flames forward Jonathan Huberdeau. The 31-year-old Huberdeau signed an eight-year, US$84-million contract extension in August 2022, carrying an annual average value (AAV) of US$10.5 million.

Taken third overall by the Florida Panthers in the 2011 NHL Entry Draft, Huberdeau spent the first 10 years of his career in the “Sunshine State,” evolving into one of the more productive forwards in the league. Had he signed the exact same contract with the Panthers, he would have paid US$1.1 million less in taxes, equating to a little more than US$9 million over the course of the deal.

Walsh says before the league instituted a hard salary cap after the 2004-05 lockout, state tax and how it would affect a player’s salary was never a factor. Now that every team has to keep salaries below a certain number — which will be US$88 million for the 2024-25 season — teams can use their tax rate, or lack thereof, to their advantage.

Walsh claims, on average, after you factor in taxes and escrow — escrow being a certain percentage of a player’s salary the NHL keeps, only giving back a certain amount if the league meets its predicted revenue — an NHL player only makes between US$300,000 and US$375,000 for every US$1 million in salary.

“When fans look at how much a player makes over the course of their career, whether it’s US$50 million or US$60 million, those numbers boggle the mind,” Walsh said. “They think, ‘Oh my God, these athletes are making so much money,’ and yes, it’s a great amount of money, but when you factor a player might only be making US$300,000 per million, and that money has to last the player their entire life after hockey, it’s really shocking.”

Favourable tax situation

The NHL has 32 franchises, seven of which are in Canada and 25 being in the U.S. Several American teams are from states with no income tax, meaning you only pay the current federal rate of 37 per cent. These teams include the Panthers and Tampa Bay Lightning, Vegas Golden Knights, Dallas Stars, Nashville Predators and Seattle Kraken.

“That’s part of the reality,” San Jose Sharks general manager Mike Grier told The Canadian Press last July. “I think it is an advantage for those teams: They can obviously pay guys a little bit less, and guys are happy to go there. So not to their fault or anything, those teams take advantage of the situation as they should.”

A recent example of a team benefitting from a favourable tax situation are the Panthers, who won their first Stanley Cup in June. When free agency opened July 1, and teams could sign any veteran player who didn’t already have a contract, one of the best available players was Sam Reinhart, who finished last season second in the league in goals with 57.

The market for a player like Reinhart — only 28, an elite scorer, championship pedigree, almost never injured — could put him in the US$11 million per year range, or even higher. However, the Vancouver native decided to sign an eight-year, US$69-million contract with the Panthers, paying him US$8.625 million per season.

In the state of Florida, Reinhart will pay just over US$3 million a year in taxes. He would pay an extra US$1.4 million in New York, US$1.3 million in Toronto and US$1.1 million in California.

Over the course of his eight-year deal, he would save more than US$10 million by playing for the Panthers instead of the Maple Leafs.

Walsh says when it comes to his clients, there’s a set criteria that goes into every situation, regardless of if they’re a top-line talent or a bottom-six role player.

“I spend a lot of time sitting down with a player and his family, because I’m sure there’s no right or wrong answer,” Walsh said. “It’s different for different players. I’ve had some say to me, ‘my number one priority is to play for a winning team,’ or ‘my top priority is to play for a particular coach, because he’ll allow me to play the game I want to play.’”