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John Tavares of the Toronto Maple Leafs is in a dispute with the Canada Revenue Agency that could impact pro athletes and high-income earners in general.
Financial advisor Darren Coleman, a cross-border expert, discussed the Tavares case in a recent episode of the podcast: Two Way Traffic. His guests were tax lawyer Shlomi Levy and tax accountant Kevyn Nightingale of Levy Salis LLP. The firm, which has NHL players as clients, is dedicated to U.S. and Canadian tax and estate planning for individuals, corporations, and those with cross-border interests.
In 2018 Tavares, then a US resident, left the New York Islanders to sign a seven-year, $77-million (US) contract with the Maple Leafs. For the first year of that contract his base salary was $650,000 (taxed in Canada at 53%) with $15.3 million a signing bonus (taxed in Canada at 15%). But now the CRA says that was all salary and wants back taxes. With penalties that comes to about $8 million US.
“The CRA says it was all employment income,” said Nightingale and his colleague Levy explained what a CRA win might mean. “It would make it harder for Canadian NHL teams to compete with American teams in lower-tax jurisdictions. But it goes beyond that.”
Link to podcast …
https://twowaytraffic.transistor.fm/episodes/game-night-john-tavares-vs-cra
Darren Coleman
Today I’m joined by my good friends, Kevin Nightingale and Shlomi Levy of Levy Salis LLP. Kevin is one of the top cross-border tax accountants and Shlomi one of the top cross-border tax attorneys in North America.
We’re going to talk about the John Tavares case and his tax issues with CRA. It’s getting a lot of press and attention. Tavares of the Toronto Maple Leafs is a hometown boy and it was a big deal in July 2018 when he went into free agency and signed with the Maple Leafs a seven-year contract that would have paid him $77 million [US] and $15 million of that was an upfront signing bonus.
Six years later, CRA wants millions of dollars of unpaid taxes because of the way the deal was structured. This can have an impact on how NHL teams recruit and could apply to every sports team, but also in the corporate world when trying to bring talent to Canada. I know you guys have players as clients but do not represent Mr. Tavares.
Kevyn Nightingale
The main issue is it’s expensive to get athletes to come to Canada. The tax difference between Canada and the U.S. is wide and has been widening over years, especially since 2015 when the then new Liberal government decided to raise tax rates, particularly on high earners, and they were thinking of your home-grown high earners. But in a world where talent is mobile, particularly in things like sport, if you raise tax rates you lower their effective income and what they care about is the after-tax income.
Compare coming to play for the Toronto Maple Leafs, where tax rates are 53.5% on the vast majority of their income, and going to Florida where the tax rate is 37%. That makes a big difference. Now there are other states where there are significant taxes. California is getting close and New York City is getting close, but there are ways of dealing with that in the US that still make the tax rate effectively lower for many players.
Darren Coleman
So the structuring of the Tavares contract was trying to give him some tax benefit by structuring a signing bonus vs. a salary. Shlomi, can you dig into why that mattered?
Shlomi Levy
Tax paid in the state of New York isn’t credited against the Canadian side, but is based on the Canada-US tax treaty and the potential tax savings were probably $1.3 million. But now, if CRA gets its way between penalties and interest six years down the road, it would be probably three or four times that amount in payment.
So you have to question the strategy. One of the things I like to discuss with clients and athletes is what’s the risk and what is the reward vs. the risk? You want to make sure people take those calculated risks. God knows how long this may take to settle and it might just not be worth it. I represent north of 50 NHL players come training camp and these guys can’t be bothered with legal discussions or tax discussions. They’re focused on playing hockey. This is going to be a huge distraction for John and his family if it doesn’t get settled quickly.
Kevyn Nightingale
He only had to pay Canadian tax of 15% on the signing bonus portion that he received prior to coming to Canada.
Darren Coleman
So I think his assumption was he was not a resident of Canada. I think that’s what CRA is challenging.
Kevyn Nightingale
He was by all accounts a non-resident of Canada because he was living in New York and playing for the Islanders, and had not yet come to Canada when he got this portion of the signing bonus. Now he ultimately did move to Canada, but that was after the fact. So we’re only talking about the part that he received prior to coming to Canada. The deal is if you have a signing bonus and it’s properly authorized as a signing bonus, and you’re a non-resident of Canada and it’s paid by a Canadian team, your Canadian tax goes down from 53.5% to 15% so that is a sizeable savings. As a resident of the US he has to pay US tax on his worldwide income. And he’s paying US tax, and he’s paying New York state tax because he lives in New York state. Now he will get a credit for the Canadian 15% but he’s still paying effectively US and New York rates that may go as high as 45% or even more. So Shlomi is right. The savings are about a million dollars.
Darren Coleman
The difference between the tax rate and what the Canadian tax rate would have been?
Kevyn Nightingale
Yes, he would have been ahead of the game, but not by a huge amount. It’s not like someone who’s living in Texas or Florida, which many athletes do. But CRA says we don’t care what the US aspect is. We lost the difference between 53.5 and 15. That’s what we care about.
Darren Coleman
You mentioned earlier it’s the characterization of a signing bonus. Is that also part of what CRA is saying? That it wasn’t a signing bonus? You received it as income?
Kevyn Nightingale
CRA is arguing that it’s really employment income but you call it a signing bonus. We’re still going to call it employment income. One of the factors that goes into it is whether the employee, in this case, the athlete, has to repay any of it if he doesn’t actually show up to work. So, injured, retired, not feeling like working that kind of stuff. Well, apparently that is not at issue here because if Tavares did not show, he would not get the signing bonus. So that argument is a loser for CRA because they just don’t have the facts on their side.
Shlomi Levy
The nature of the NHL contract is you signed a contract that’s guaranteed and you’re owed the money.
Darren Coleman
Where do you think CRA has ground to stand on this one?
Kevyn Nightingale
CRA is saying it’s just so big compared to everything else. The signing bonus in total is $70 million, almost $71 million and that cannot not be employment income. 71 million of the 77 million has to be employment income and that’s it.
Darren Coleman
How does this affect how you negotiate or how you talk to players about this?
Shlomi Levy
Until there’s a judgment on this, it definitely puts people on their back feet. I want to say only the first 15 million of the signing bonus is being contested here because the following bonuses were paid to him as a Canadian citizen and tax resident. So it’s not really contested. The bulk of the work I’ve done is mostly with Canadian athletes who are resident here. So we haven’t had any of these issues. We do deal with a lot of Canadian athletes who married American girls, so the complexity is still there, but I would say that a lot of free agents, especially when it comes to baseball, and even the CFL in Toronto, are going to be looking at this carefully.
Darren Coleman
Because as a group they have more Americans moving to Canada than hockey players, right?
Shlomi Levy
Correct. Look at Toronto. You’ve got Austin Matthews, who’s an American citizen and he’ll probably straddle that line. He’s never considered a Canadian tax resident. You’ve got some Europeans with Nylander in Toronto as well. Big contract, big signing bonuses. So a lot of people are going to be watching this, and the strategy for Canadian teams might change significantly depending on what this judgment produces.
Darren Coleman
I think fans are watching this because the tax thing can really affect the fortunes of how teams are going to be able to produce. Because if they can’t, if they’ve got such a huge tax hurdle, how are we ever going to recruit top talent if this is an issue?
Kevyn Nightingale
It is an impediment to hiring people, to doing business anywhere if you don’t know what the answer is going to be.
Shlomi Levy
In the US your individual tax rates at the federal level are low, and if you’re lucky enough to play in a state like Florida or Texas where there is no state tax, your maximum tax exposure is 37%. Now assume these guys are all making over a million bucks, so 37% versus 53.5%. There was an issue a few years ago in a Canadian team where a player was negotiating as an unrestricted free agent and ended up signing the same numerical deal, but one season less, with Dallas vs. the Canadian team, and everybody went up in uproars.
The argument is very simple. He was going to make net the same amount of money playing one year less. Agents and players are a lot more sophisticated. There’s a lot more that goes into negotiations, and not just the numerical value. 100 million in Montreal or Toronto is easily 85 million in the US, and add to that life, weather, taxes and probably paying less for the same amount of net money. At the end of the day, these athletes are phenomenal individuals. They’re well-tuned machines, but they also have an expiration date on their career, and they’re trying to optimize it.
Kevyn Nightingale
This is something many governments have trouble coming to terms with, and that is there are limits to tax. And this is the thin edge of the wedge, where you see at the top end, the talent is mobile. And you can’t just say, well, we’re going to raise their tax rates from 45% to 55% and we’re going to get 10 extra points. No. People respond. People respond to incentives.
And if you tell them you’re going to pay that much more here, they’ll say, I’ll go somewhere else where I can do better on a net basis. And that is not just the NHL and NBA and football and basketball and baseball. It is every sport, but it’s also more importantly in business. Business is more and more global, and employment is more and more global at the top end. Major Canadian corporations are hiring a CEO. They’re not just looking at Canada. They’re looking to the US as well. If you’re a new potential CEO coming up from the States you say, Well, I understand your taxes are that much higher. Pay me that much more if you want me. That makes the Canadian company much less competitive.
Darren Coleman
You run into a problem. One, it’s hard to recruit people in the lower-tax jurisdiction to come to our higher-tax jurisdiction. And then we have the way Canadians are taxed. I want to get into this because a lot of people don’t know this nuance. It’s easier for Canadians to leave our tax system. So we not only have trouble recruiting brainpower, but we also can lose talent and brainpower. It’s surprising to me how many people are surprised by this and it’s the difference between how Americans are taxed, which is on citizenship, and Canadians are taxed on residency.
Shlomi Levy
I want to go back to a statement made a bit earlier that one of the other big concerns we should have as Canadians is the attitude of our current government just grabbing as much as they can get. You look at the way the treaty works, and very often there’s a bit of IOU, you know, Canada to the US and US to Canada. It all works on an IOU system and it worked just fine until this current government came and started piling up all kinds of new catches and new grabs to make it much more difficult.
And the recent legislation they pushed forward about businesses and foreign affiliates doing business and foreign tax credits going up and down and the imposition it wishes to impose on dividends from a foreign affiliate and an extra 22% in Canada, and then one day issue a credit on extractions of dividends from that company. These are cash grabs that are telling a guy sitting in his office thinking about expansion to the US and thinking that he’s going to use corporate money and get that taxed like an individual. Next thing you know he says I’m not going to do it. And it takes away from our ability to expand our business and ideas into the US. Our Canadian government just wants to tax the jitters out of us.
Darren Coleman
So Canadian enterprises are being heavily disadvantaged against their American competitor who doesn’t have to deal with some of these complexities.
Shlomi Levy
That’s right.
Darren Coleman
Let’s go back to the the residency vs. citizenship thing for a second. We deal with a lot of executives that have the ability to remove themselves from Canadian taxation. So Kevin, do you want to handle that?
Kevyn Nightingale
Sure, and I think it’s very timely because as a result of the things we’ve been talking about. Shlomi and I have been seeing a huge uptick in the number of wealthy people who are looking to leave Canada. I was going to ask people who either sold their businesses or people who have successful businesses, and they say, You know what, I’m sick and tired of paying Canadian tax rates. They say, I’m going to move to the United States. And that is now a big piece of our business.
This comes and goes in waves. Right now, we’re seeing a wave of Canadians wanting to move to the United States. What Canada does is Canada taxes residents on their worldwide income. If you live in Canada then everything you earn as an individual, and sometimes stuff even that other entities earn, you have to pay tax on. If you’re a non- resident, you only pay tax on the income that is earned in that jurisdiction. So if I’m a Canadian and I have a rental property in Florida, I pay US tax on the rental income I make on that rental property in Florida, but I don’t pay US tax on anything else in Canada. I pay tax on everything I earn here, including on the rental property income from Florida, and then I get a foreign tax credit for what I pay, so I don’t get double-taxed.
Darren Coleman
I had the complexity of filing my tax return, but I don’t pay any extra tax.
Kevyn Nightingale
You don’t pay extra tax generally, right? It can happen, but mostly you don’t pay extra tax. So the idea is, when you’re not resident, you pay tax on the income. From a source in that country, but not on everything. When you are resident, you pay tax on everything. So if you’re a resident of Canada and you’re a well-to-do individual, you’re looking at a tax rate of 53.5% on pretty much everything. Not true in every in every province. Alberta has lower tax rates, but it’s true for the vast majority of Canadians. So, BC, Ontario, Quebec and all the Maritime provinces are higher.
Darren Coleman
A few years ago when the tax rate was getting close to 50 it was like 48 or 49 that was high, but it seemed like as soon as it crossed 50% that that became a really emotional threshold for people to say, Hang on a minute. The government’s getting more than I’m getting. Like it when it was 50-50, maybe that was a reasonable deal, but as soon as you went over that, that seems immoral.
Kevyn Nightingale
People stopped feeling as though it was acceptable. And remember, that’s before you pay HST and luxury tax.
Darren Coleman
So as a Canadian, you can exit Canada. Whereas Americans are taxed on citizenship, unless they go through a process of renouncing their citizenship, they’re stuck paying no matter where they go. But Canadians, if they choose to leave, they can go through a process, and they can now stop paying Canadian taxes. So what does the leaving part look like?
Kevyn Nightingale
Residency in Canada is a facts-and-circumstances question, which is a fancy way of saying, what does it look like, feel like, and smell like, and then, you know, or if it walks like a duck and quacks like a duck, it’s a resident. So if you want to move, you basically have to actually move how you live.
So if you’re married and you have kids, then your spouse and your kids have to go with you. If you have a home in more than one place, then you have to spend substantially all your time in that other place. You have to make it look like you live somewhere. You can’t just do it for appearances. And that’s what moving to Canada mostly looks like. There is a Canada-US treaty that has more specific rules but when people say, I want to move, sometimes they come to me and they say, Well, I have a home in both places, and I have kids. And I want to keep my kids at school here, but I want to spend lots of time down there. And then it gets dicey.
Darren Coleman
And if you go through the process and you move, you stop paying, right?
Kevyn Nightingale
That’s it.
Shlomi Levy
You got to pack up and leave.
Kevyn Nightingale
Now there’s a cost to getting out.
Darren Coleman
It’s not free. So that’s the part we should also do. There is a one more time they get you, right?
Kevyn Nightingale
Yeah. Why don’t you talk about the team disposition, Shlomi?
Shlomi Levy
The Canadian government basically contacts you in three occasions when you sell something, when you die or when you depart. In order to pack up and leave, Canada will deem that you have sold all your assets at fair market value. And here comes the extensive and interesting calculation of what it’s going to cost you to pack up and leave and move to Florida or Arizona or California.
And that’s where it becomes tricky. For a lot of people, especially on the wealthier side, there are complex structures. There’s complex planning that’s in place and often not thinking about a potential move. But some of the newer generation is already integrating these types of ideas into their plans. So somebody who is going to pack up and leave will be looking at, take an example, where they have $20 million worth of assets, and $10 million of it is pure capital gains. And in terms of packing up and leaving, they’ll need to write the Canadian government a cheque for almost $3.5 million today with the new inclusion rates. So it’s a lot of money.
Darren Coleman
On that new inclusion rate thing, when the government recently changed the capital gains rate, we saw this a lot, they did it purposely to get people to trigger capital gains earlier. So a lot of people went through this exercise and they just made the deem disposition, or they did that, they sold the asset, so they’re going away.
Kevyn Nightingale
If they were planning on going away, that’s one thing. But there are a lot of people who didn’t know if or when they would be going.
Darren Coleman
I know people, especially in their portfolios, where it’s just about selling a stock or a security. It was pretty easy to hit a button. But some people said, You know what, let me clear out some of my embedded capital gains if I’m at risk of them being over the threshold. I imagine if I work with smart folks like you to help minimize tax, because there’s got to be some strategies to minimize that deemed disposition hit.
Shlomi Levy
There are ways to minimize, provided that your fact pattern aligns and your strategies align. There’s also a way to defer. The Canadian government does give you an opportunity to seek permission to defer. But at the end of the day, it’s a question of determination. How determined is the person to leave? I dealt recently with a gentleman who went through the exercise, realized how much money it was going to cost him, but also realized how much money he was going to save over the next 10-year period, and then did the math. If you’re going to spend $3.5 million on departure tax, but your overall tax savings on your assets over the next 10 years will amount to, let’s say, $7 or $8 million. Well, guess what? You’re leaving your kids an extra $4.5 million while enjoying a different lifestyle, not getting aggravated with this tax system, and most of the time that particular client went to Florida with the weather and all the other stuff. There’s a lot of reasons why people pack up and leave.
Darren Coleman
I would argue that after the pandemic a huge number of people work just as we are. They work remotely. They’ve got a laptop and a camera. We’re seeing countries that have had remote worker visas and other things to attract you to those jurisdictions, and their tax rates are vastly lower than even the United States.
Kevyn Nightingale
They are. There’s one thing you had to warn people about here. Money is a tool that allows you to live the way you want to live. And the place where you live has a huge impact on how you live. If you choose to buy because you’ll save the most amount of tax by going to Dubai, but you hate Dubai. So you’re not making your money work for you. Most of our clients are choosing places that are more like home than far away. We’re seeing people go to familiar places like Florida and Texas and California, sure, Arizona, then they are going to places like Dubai and, you know, Portugal, for a long time, had a golden visa, but most people don’t speak Portuguese.
Darren Coleman
My point is that as other countries are competing for that capital, people may take advantage of it. So I think back to what you talked about the Canadian tax authorities, and if they want to squeeze too hard, the goose can go.
Kevyn Nightingale
I remember learning that parable when I was five years old. Killing the goose had laid the golden egg. It seems like this government never got that message. There’s one more thing I want to add. If you’re thinking of moving somewhere, make sure you have the legal ability to move there before you actually do.
Darren Coleman
Very good point. You can’t just show up in Florida and say, I want to stay. You guys have touched on something else, which we talk about in our practice, which is I married an American and there’s a lot of Canadians that don’t maybe realize that I may have married for love, but I also married a tax regime, and what comes with that. Especially things like if you’re going to sell your home, it may wind up being a much more expensive exercise than you thought if you didn’t plan carefully.
