Canadian Revenue Agency ruling on signing bonuses

[ManofSteel55]

And why would a person of considerable means want to stay in a country where they are taxed out the ass?

Especially Canada where you have the option of just going to the US especially if you have the means to do so.

So those people leave and then good luck with that 1 trillion/year government spending that needs to be paid (at least a big portion of it unless you want to run a monster deficet with huge interest payments).

Getting like 10% of your population to pay for the majority of social services that everyone gets to enjoy is already a pretty sweet deal, you start pushing beyond that and you'll shoot yourself in the foot with an exodus of high income people leaving. And then middle class people have to bear the burden of the tax cost, so who exactly is left happy?

Lots of people complain about leaving and threaten to leave, but a lot of people simply don't want to move. Even the wealthy like to live where they actually like what life is like. My comments were mostly in reference to the US - if they are going to leave to go somewhere with lower taxes, they are probably going somewhere with a very different quality of life. Money isn't everything after all. Yes, Canadians can move to the US if they get permission to do so, that happens already for some people. Some like it, some move back. People don't uproot their lives over higher taxes all that often though, and businesses aren't going to move their worldwide HQ's on a whim either - there is a lot more to that decision than "oh no, we have to pay taxes now".

The people who have the most disposable income should be paying more. That's how the middle class was born to begin with. The top 10% aren't paying for 90% right now though. The real issue isn't the income tax rates alone though. Capital gains tax needs to be higher. That's where the wealthiest dodge income tax.

He probably didn’t get the 183 days, assuming he went home when season ended in April, like he usually did. He definitely wouldn’t have been living in Long Island on July 1.

Unfortunately Tavares is in the right.


I'm in the reverse situation. I'm a Canadian working for a US company being paid into my US account.


I'm taxed on the Canadian side, due to my residency not the US side.

As long as Tavares spends 6 months of the year (183 days) in the US (including all of the time he spends on the road), he can still claim US residency. There is a tax treaty that prevents Canada from going after that money.

Just curious if anyone knows, when JT was living in NY to play, when on the road in Canada, do those count towards his 183 days? There's a couple of weeks of time right there just in road trips.

 

[x Tame Impala]

Lots of people complain about leaving and threaten to leave, but a lot of people simply don't want to move. Even the wealthy like to live where they actually like what life is like. My comments were mostly in reference to the US - if they are going to leave to go somewhere with lower taxes, they are probably going somewhere with a very different quality of life.

Agreed. Lots of people talk a big game about leaving. Oh yeah? Go ahead. You're really going to go live in Vietnam or Cancun or wherever? Not likely. Most will want to stay in the country where they speak the local language and can enjoy all of the amenities that living in Canada or the US have to offer.

Small businesses shouldn't be squeezed so hard however. It's the mega corporations skipping out on paying taxes that are the real issue here. I saw something online recently that highlights how much american taxpayers have to pay to offer Walmart employees welfare checks because Walmart pays them like garbage but enjoys these immense tax breaks. It's absurd. Fix these loopholes. Don't discourage people to work their ass off and have a successful business or become elite in their field and make $183k+ a year.

 

[ManofSteel55]

Agreed. Lots of people talk a big game about leaving. Oh yeah? Go ahead. You're really going to go live in Vietnam or Cancun or wherever? Not likely. Most will want to stay in the country where they speak the local language and can enjoy all of the amenities that living in Canada or the US have to offer.

Small businesses shouldn't be squeezed so hard however. It's the mega corporations skipping out on paying taxes that are the real issue here. I saw something online recently that highlights how much american taxpayers have to pay to offer Walmart employees welfare checks because Walmart pays them like garbage but enjoys these immense tax breaks. It's absurd. Fix these loopholes. Don't discourage people to work their ass off and have a successful business or become elite in their field and make $183k+ a year.

I agree fully on small business. It's too hard to keep a small business afloat to burden them too much with taxes. Multinationals not paying their share is the problem.

 

[Pablo El Perro]

So, I've actually had the CRA send me a letter one year on my bonus....which was a bit stupid. I received a normal annual bonus. I can't remember the question they were asking because it was dumb either way, it was simply income, not taxed any differently than salary....just add it on top of my salary and then work through the various tax brackets.

Tavares situation is different, it's a signing bonus, so like an incentive and tax cuts are given as it's a way to bring talent back into the country, etc. However, this has nothing to do with the actual law here, but if it was me, what would make sense is that you are trying induce someone to sign a contract with you.....the general market rate for their services is $500,000 per year, so I agree, I'm going to offer that person $500,000 per year and that will be taxed accordingly, but what sweetener can I give to convince that person to come? I'll offer a signing bonus, one time thing to convince that person to join.....gov't will agree to tax that differently because there are offsetting benefits of having that person come. Seems to make sense to me. But JT's scenario, and others, make no sense to me. His salary is basically $800K per year, $6M total and then the signing bonus is $71M. That clearly makes no sense, it's clearly structured that way to try to avoid tax....but I'd argue that a good portion of that $71M should clearly be considered salary for services rendered as the $800K is clearly not the market salary. Again, I'm not suggesting there is a law that says you determine market, etc. but that seems to make sense to me.

A lot of recent contracts for top players are structured that way, it seems agents aren't useless. On the Panthers, Barkov makes 1 million a year in salary for 8 million total, and 72 million in bonuses over 8 years. Tkachuk is similar, around 1 million a year salary, and 68 million in bonuses. That's a steal in Florida, as the bonus isn't taxed for road games.

 

[Fish on The Sand]

Hmm... so the article is claiming the CRA are actually trying to argue the legalese of the definition of the type of income rather than the residency at the time? What a bizarre approach.

https://ca.rbcwealthmanagement.com/documents/2081581/2081642/Signing_Bonus.pdf/871a358b-3de9-4143-9f82-17c6dee3eac1

Here's a link in layman terms about the signing bonus. Tavares' camp does have a point if he is not considered a resident for tax purposes prior to receiving the signing bonus in cash. This is further supported by the fact he filed US taxes while playing for the Isles (IIRC it's been mentioned he was a non-resident of Canada for tax purposes prior to signing the TML contract). Even the above RBC link words things in a manner that points at this. So if he received cash on July 31 and he is considered a resident as of September, then he's OK. But if he received cash on July 31 and he is considered a resident as of July 31 or earlier, he is hooped.


The CRA arguing the money was up front compensation for his services for the remainder of the season is certainly bizarre. They're basically going off in a direction that hasn't been pursued before. Like I said, I assumed the entire fight about the specific date that Tavares' was considered a resident for tax purposes in Canada. If this goes through, this is going to mess up a ton of contracts (not just sports) in general and people are rightfully going to be pissed off.

Keep in mind, Canada doesn't tax based on citizenship. Canada taxes based on residency status for tax purposes.

CRA is 100% in the right here with how they consider signing bonuses.

 

[Pablo El Perro]

They can, but the fear mongering that these companies are going to move out their HQ's out of country is just that - fear mongering. It's not the same as laying off your grunt workers and opening up a new factory in the 3rd world, where you can pay your new staff a nickel an hour. If you move your HQ, you have to move it somewhere that your management will move to - and then pay for them to move - or lay them all off and try to find a new crew of managers in another region. And depending on what region that is in, it might be really hard (and expensive) to find the people with the right skills. It isn't as easy as you are suggesting for companies to relocate their entire operations outside of North America.


Aren't capital gains taxes relatively small though? 15% of a $50M sale might seem like a lot, but it's a drop in the bucket to the billiionare paying it.

Yes capital gains taxes are ridiculously small.

 

[Fish on The Sand]

They refused to accept a relative of mines deduction for his TTC transit pass because he didn't keep every single receipt from when he bought it monthly. He was a student at the time.

They hounded him for months about it, great use of resources I tell ya.

Well this definitely didn't happen.

 

[Perfect_Drug]

Just curious if anyone knows, when JT was living in NY to play, when on the road in Canada, do those count towards his 183 days? There's a couple of weeks of time right there just in road trips.

HA! I spoke to the lawyer at work.

Turns out as long as Tavares wife stayed in the USA while owning or leasing a house, that would be good enough as well.

 

[Cap'n Flavour]

Players are already getting a good deal with these buyout-proof bonus-heavy deals, it baffles me that anyone would be sympathetic to them trying to get tax advantages on top of that.

 

[Hockey Outsider]

I agree fully on small business. It's too hard to keep a small business afloat to burden them too much with taxes. Multinationals not paying their share is the problem.

This is getting off topic, but here's a good article about the challenges that small businesses face (in Canada) with taxation. The actual tax rates aren't overly high, but the challenge is the immense complexity of the legislation (which keeps on changing). The system is significantly more convoluted now, compared to even eight years ago.

 

[Silky Johnson]

Bonuses are covered by insurance? Why doesn't every team just toss bonuses around? This is news to me.

Cash flow. Bonuses are used to get players paid faster. They are also lockout proof.

Cash flow very important for businesses. So is the the time value of money.

 

[Beukeboom Fan]

Shouldn't the people making 90% of the wealth be paying 90% of the taxes? Seems fair to me.

Just from a math perspective, that is more than true. If you add up the earning for the large number of people who pay little to no income tax due to a low marginal rate and standard deduction/exemptions, that is a significant amount of earnings with a very low marginal tax rate.

And over the last 10 years there were a bunch of companies that fled the high corporate rate of the US. Will do some research and drop in names shortly.

 

[Figgy44]

CRA is 100% in the right here with how they consider signing bonuses.

OK

HA! I spoke to the lawyer at work.

Turns out as long as Tavares wife stayed in the USA while owning or leasing a house, that would be good enough as well.

That'd be a residency tie case fact

 

[FerrisRox]

f*** the CRA

Hard disagree.

Millionaires absolutely should be their fair share.

 

[Soundwave]

A government should provide a basic social security net, decent health care, public education, some child care assistance, good roads, clean drinking water, adequate police and fire service, an ok senior's pension -- the basics. It shouldn't be a slush fund for every public spending fancy thought that pops into a government official's head. They should encourage business investment because having a wealthier tax base makes it easier to pay for these things.

If you want a certain quality of life beyond that then you can go work for it like anyone else. Plain and simple. You're not entitled to someone else's money past that threshold of basics.

 

[Perfect_Drug]

Hard disagree.

Millionaires absolutely should be their fair share.

He did pay his fair share. To the US government.

In which he can prove he was a resident of.

If you're asking me if Tavares and his legal team are dumbasses, or the CRA is incompetant, I'm gonna go with CRA being incompetent.

 

[eojsmada]

Hmm... so the article is claiming the CRA are actually trying to argue the legalese of the definition of the type of income rather than the residency at the time? What a bizarre approach.

https://ca.rbcwealthmanagement.com/documents/2081581/2081642/Signing_Bonus.pdf/871a358b-3de9-4143-9f82-17c6dee3eac1

Here's a link in layman terms about the signing bonus. Tavares' camp does have a point if he is not considered a resident for tax purposes prior to receiving the signing bonus in cash. This is further supported by the fact he filed US taxes while playing for the Isles (IIRC it's been mentioned he was a non-resident of Canada for tax purposes prior to signing the TML contract). Even the above RBC link words things in a manner that points at this. So if he received cash on July 31 and he is considered a resident as of September, then he's OK. But if he received cash on July 31 and he is considered a resident as of July 31 or earlier, he is hooped.


The CRA arguing the money was up front compensation for his services for the remainder of the season is certainly bizarre. They're basically going off in a direction that hasn't been pursued before. Like I said, I assumed the entire fight about the specific date that Tavares' was considered a resident for tax purposes in Canada. If this goes through, this is going to mess up a ton of contracts (not just sports) in general and people are rightfully going to be pissed off.

Keep in mind, Canada doesn't tax based on citizenship. Canada taxes based on residency status for tax purposes.

So there's one issue with all of this. Tavares claims he is tie-broken from Canada before receiving the signing bonus. Which may be true. But once he, a Canadian citizen, signs that contract for a Canadian entity, he is no longer tie-broken and is considered a resident from that point forward because it is assumed that he would have to reside in the country for him to do his job. And if he flew back to Canada for the press conference, his passport stamp would validate his residency.

This is an extraordinary situation and not a "cataclysmic" situation that the media is making it out to be. Most Canadians would not tie-break but rather simply file returns in both countries to avoid just this exact situation. You receive a tax credit and only pay the higher of the two tax returns which is almost always going to be the US portion because of the exchange rate. Tavares chose to tie-break, but once he put pen to paper, he was no longer tie-broken and any money received as such is subject to Canada Revenue. CRA is well within its rights to make a claim for that revenue

 

[eojsmada]

HA! I spoke to the lawyer at work.

Turns out as long as Tavares wife stayed in the USA while owning or leasing a house, that would be good enough as well.

This is incorrect as every individual files a separate return in Canada.

 

[Golden_Jet]

So there's one issue with all of this. Tavares claims he is tie-broken from Canada before receiving the signing bonus. Which may be true. But once he, a Canadian citizen, signs that contract for a Canadian entity, he is no longer tie-broken and is considered a resident from that point forward because it is assumed that he would have to reside in the country for him to do his job. And if he flew back to Canada for the press conference, his passport stamp would validate his residency.

This is an extraordinary situation and not a "cataclysmic" situation that the media is making it out to be. Most Canadians would not tie-break but rather simply file returns in both countries to avoid just this exact situation. You receive a tax credit and only pay the higher of the two tax returns which is almost always going to be the US portion because of the exchange rate. Tavares chose to tie-break, but once he put pen to paper, he was no longer tie-broken and any money received as such is subject to Canada Revenue. CRA is well within its rights to make a claim for that revenue

What is tie-broken, google didn’t help, other than the obvious in a tied sporting event game.

 

[JianYang]

How international athletes are taxed in Canada: Toronto Maple Leafs' captain John Tavares embroiled in tax litigation with CRA

The issue is a very binary one.

www.canadian-accountant.com

Here is an article written by a CPA/tax lawyer, in it you’ll find that the basis of the CRA’s claim is that because of the wording in the contract, his signing bonus should be considered compensation rather then inducement meaning it wouldn’t be subject to the article in the tax treaty which provides for more favourable taxation for the athlete. Now these are extremely complex matters that are certainly above my level of knowledge so it could be that his residency could also be a factor in the dispute.

Regardless, the result of the disputes the CRA has brought against pro athletes could impact the already tenuous willingness of players in major sports to sign in Canada. They could be inadvertently chasing off hundreds of millions in future taxable earnings just to claw back a few million and while burning through resources to do so.

Sounds like a major oopsy from tavares' accountant/tax lawyer..... even negligence.

 

[eojsmada]

What is tie-broken, google didn’t help, other than the obvious in a tied sporting event game.

A Tie-Break is when you have no financial obligations in Canada to include any investments/bank accounts/property/income. You have to declare said break when you "depart", with a form to Canada Revenue. It absolves you from having to file an income statement with Canada Revenue every year. Otherwise, any Canadian Citizen would have to file both a US and Canadian tax return every year.

 

[PULSATING]

Doesn’t the top 10% earners pay half our federal income tax?

Crazy how elite skills and work ethic “isn’t paying their share” when they pay for most of the government services they don’t use. Then entitled lazy people milk the system and nobody batts an eye.

No question why entrepreneurs stay out of Canada. Same applies for athletes. Who wants to make 15% less to live here where it’s cold, full of crime, tent cities and cost of living crisis.

Taxing players even more here isn’t helping the Stanley cup drought…

Won’t someone think of the suffering rich people!

 

[Honour Over Glory]

I'm curious how this affects say someone like Leon Draisaitl for example.

He's earning 15.5m in bonus with a 1m actual salary in his new deal (first 3yrs), that moist tax rate CRA wants is going to definitely be comical no? Because if they win against Tavares, then I mean...doesn't Leon get taxed the same for his even bigger singing bonus of 15.5m for the first 3 years? Does it have massive implications on say what someone like McDavid would want in his next deal to off set the massive tax hit he is going to have to answer to as well? Because the argument that the bonus isn't a bonus for Leon is valid, it's a salary structured to show as a bonus and that won't fly in court either if the CRA wins against Tavares, Leon is looking at a pretty rough income tax.

Gonna need more cap space to make everyone happy.

 

[theVladiator]

If you make $80K a year filing single, put 5% into your 401K, and take the standard deduction, your federal tax burden for the year is 22% of $61,400 or $13,508. The long term capital gains rate that would be triggered by a multi-million dollar sale is 20%. Selling $50M of gains in stock brings a federal tax bill of $10 million, which is 740 times greater than what the employee making $80K contributed while only earning 625 times greater in income.

I'm not trying to carry water for billionaires, but the narrative of how they need to pay a "fair share" doesn't mathematically work in my estimation.

There are a couple of extra factors for you to consider though:

1. 20% tax is a larger burden on somebody who has to spend another 50% of his/her income on shelter and putting food on the table. So for someone on average salary the tax may bring their savings/luxuries budget from 50% down to 30% of their income. Whereas for a millionaire the effect is more like 99% -> 79%. So "you pay 20%, I pay 20%" may not seem fair to everybody.

2. There are many loopholes that are available to rich. Some are only to super-rich. For example, recently I was surprised to learn that the super-rich are estimated to pay only 8% in taxes. This is because, as attractive as capital gains taxes are, you do not have to pay them under some circumstances. So, while upper-middle class guy may pay 40%, a millionaire will pay 20% cap gain, and the billionaire may pay less than 10% still.

 

[eojsmada]

I'm curious how this affects say someone like Leon Draisaitl for example.

He's earning 15.5m in bonus with a 1m actual salary in his new deal (first 3yrs), that moist tax rate CRA wants is going to definitely be comical no? Because if they win against Tavares, then I mean...doesn't Leon get taxed the same for his even bigger singing bonus of 15.5m for the first 3 years? Does it have massive implications on say what someone like McDavid would want in his next deal to off set the massive tax hit he is going to have to answer to as well? Because the argument that the bonus isn't a bonus for Leon is valid, it's a salary structured to show as a bonus and that won't fly in court either if the CRA wins against Tavares, Leon is looking at a pretty rough income tax.

Gonna need more cap space to make everyone happy.

It doesn't effect him as he doesn't reside in Germany. Canada, to my recollection, is one of if not the only country that allows for tie-breaking from their country. The US doesn't even allow it for its citizens.

Again, this is a VERY particular and exceptional issue that is occurring between Canada and Tavares. It has no effect on anyone else, except any Canadian who tie-breaks from Canada, to go and live and work in the US, and then returns to play for a Canadian-owned entity and receives a signing bonus.