Former Leaf John Tavares paid 15% tax on his $15.25M signing bonus. The CRA says he owes more than 50% — now a judge decides. Is that fair?

In the years since, the deal has unfortunately soured for Tavares as its tax implications became more clear, which has culminated in an appeal to a seven-figure Canada Revenue Agency (CRA) tax bill and a subsequent court case.

What the CRA had to say about the deal

When Tavares received and accepted the offer initially, he was still living in New York and paid a 15% tax on the signing bonus to the U.S, which both he and the team considered the payment an inducement.

However, in 2022, the CRA reassessed his tax filing and claimed that he owed an additional $6.85 million in tax, as well as $1.2 million in interest. That would effectively equal nearly half of his signing bonus being owed in taxes.

The steep reassessment was based on the agency concluding the bonus is more akin to a regular salary due to how it would be paid out over multiple years alongside other specific provisions.

Traditionally, according to the CRA, a bonus is fully taxable in the year an employee receives it (or is entitled to receive it), just like a regular salary. It’s then added to any other employment income and taxed at a person’s marginal rate — there’s no special lower “bonus tax rate” that permanently applies. Any perception of a higher bonus tax rate usually comes from how withholding is calculated, not the actual tax owed.

Employers typically use the CRA’s bonus method to calculate how much tax to withhold from a bonus, rather than the regular periodic method. Since the bonus is added on top of regular income for this calculation, it often pushes withholding into a higher marginal bracket for that calculation — which is why bonus paycheques can look heavily taxed. This is just withholding, though; it reconciles when a person files their return. If too much was withheld, they will get it back as a refund; if too little, they will owe the difference.

In Tavares’ case, the 15% paid initially was deemed insufficient by the CRA, which is why he is expected to pay more for what he earned.

Tavares’s defence

During his August 18 court date, Tavares chronicled the initial negotiation involved in his eventual signing, stating how, at the time, he was approached by several teams once his contract with the Islanders was up.