John Tavares is entering the last year of his current mega-deal with the Toronto Maple Leafs. The narrative surrounding Tavares’ future has revolved around his renunciation of the team’s captaincy, fuelling speculation about his future with the team.
In the past, I’ve spoken out regarding the Toronto Maple Leafs need to trade Tavares in order to avoid any awkward situations within the team. Moreover, moving on from Tavares hands the team's newly-anointed captain, Auston Matthews, a clean slate to work with.
But there’s another factor that’s flown under the radar, one that could determine John Tavares’ future with the Toronto Maple Leafs.
Let’s take a look at how a legal case could determine Tavares’ future, and that of other professional athletes.
Legal case could decide John Tavares’ future with the Toronto Maple Leafs
When Tavares left the New York Islanders during the 2018 offseason, he inked a seven-year, $77 million deal with the Leafs. That deal included a $15.25 million signing bonus.
Those sorts of bonuses are standard among mega-deals. Now, here’s where things get tricky. Tavares, a Canadian citizen, was an American resident given his time playing with the Islanders. As such, he was subject to American tax laws, not Canadian ones.
When Tavares moved to Toronto, his contract was signed with a Canadian team, making him subject to Canadian legal jurisdiction. Nevertheless, Tavares claimed that he was still an American resident at the time of signing the contract, making American taxation rules applicable to the signing bonus.
Well, the Canadian Revenue Agency (CRA) begs to differ. Given that Tavares signed with a Canadian employer, he was now on the hook for a 50% income tax bracket. In other words, the Federal Government wanted its cut of the $15.5 million bonus.
But Tavares didn’t pay it. In fact, the CRA sued Tavares claiming that his 2018 tax filing was incorrect, demanding payment of the back taxes and applicable penalties. Now, here’s the kicker. Per Tavares’ contract, the signing bonus would not be paid out to him if he retired early, or walked away from the team before the contract’s termination.
In other words, if Tavares breached his contract, the Leafs could claim a portion of that signing bonus, either by withholding future payments, or demanding he repay the owed amount.
However, if Tavares suffered a career-ending injury, he would keep the signing bonus. That’s the core of Tavares’ argument against the CRA. The signing bonus is an “inducement” and not part of regular, taxable income.
Now, I don’t want to get too far into the weeds, here. The main point is that there is an $8 million pickle between Tavares and the government. As such, the outcome of the suit Tavares brought against the government could determine if Tavares stays or leaves.
Two Possible Outcomes in the John Tavares Tax Saga
Let’s look at the positive outcome first. If Tavares wins the suit against the CRA, he keeps his $8 million and walks away from court having won a major victory for all NHL players in Canada.
If that’s the case, Tavares could be motivated to stay with the Leafs, signing a multi-year deal to potential end his career in the blue and white, regardless of the deal’s financial value.
Let’s now consider the negative and likeliest outcome. The courts have already ruled against Tavares. A ruling in January ordered Tavares to cough up the dough. Of course, Tavares appealed the decision.
If the next ruling comes down against him, which it most certainly will, Tavares could be discouraged to re-sign in Toronto. He may opt to sign with an American team, preferably one in Florida, where the tax rate is much lower.
Incidentally, Tennessee is one of the US states with the lowest tax rates. Ditto for Florida and Texas. That’s why it wasn’t a surprise to me when Steven Stamkos left Tampa Bay (Florida) for Nashville (Tennessee).
If and when the hammer comes down on Tavares, Canadian NHL teams’ lawyers will need to work over time in order to ensure that future contracts eliminate the possibility of issues such as the one Tavares currently faces.
Ultimately, utilising a deferred payment structure could be one of the smartest ways to skirt high-income tax brackets. But that’s just me putting that out there.