The Westminster Principle and Athlete Bonuses

The Interesting Way that John Tavares' Tax Team Tries to Stickhandle His Tax Filing

There’s an article in this morning National Post regarding a tax conflict that hockey star John Tavares is in with the Canada Revenue Agency. From my understanding, Mr. Tavares, likely at the advice of his tax specialist advisors, entered into a contract with the Toronto Maple Leafs to provide his services with his compensation structured mostly as a signing bonus of $70.9m USD with the amount under review being $17.8m USD paid in 2018. The argument made by Tavares in his appeal to the Tax Court of Canada is as follows:

“the bonus is different from salary, because it would still be paid to him if he were traded, sent to the minors or injured, and it should not be considered normal income for tax purposes.

“At first blush this seems unfair to the average taxpayer”

As such, he argues, the 2018 portion of the bonus should be taxed at only the 15-per-cent U.S. inducement rate.”

At first blush this seems unfair to the average taxpayer whose tax rate exceeds 15% once they are over $55,000 CDN, and in an objective view, it probably is. However, in tax law there is a concept called The Westminster Principle, which allows a taxpayer to arrange their financial affairs in the manner that best (legally) reduces tax owing. This principle is open to all taxpayers but for most of us has minimal benefit because we don’t have access to the tax shelters and arrangements that the wealthy do.

The question then is, should the taxpayer in this case, John Tavares, a world class athlete who is in high demand from every professional hockey team in the world, be able to arrange his financial affairs in a manner that effectively reduces the average tax rate for the compensation that he has been paid to far below what most working taxpayers pay/contribute to our public tax system? Perhaps a legislative modification to the rules that tax the “bonuses” of stars should be the capping of the reduced tax treatment to something smaller, perhaps akin to the amount one can claim on the lifetime capital gains exemption.

With that said, a modification such as this could have the unintended consequence of dissuading international athletes from choosing to sign with Canadian teams and likely reducing their competitiveness, something many sports fans are unwilling to sacrifice for tax fairness.

I’m not an income tax specialist (GST/HST is my specialization) so my opinion is uninformed, but my guess is that the courts will determine that the amounts paid are disguised salary and taxable at the highest marginal rate. This is a tax court case I will follow closely.

For help with income tax appeals reach out to the team at ZheroTax