High taxes already discourage athletes, doctors and entrepreneurs from choosing Canada — and now, CRA wants another $8M from Leafs captain
Many Canadians don’t cheer for the Toronto Maple Leafs, but we should all be cheering for the Leafs captain in his fight against Canada’s oppressive income tax regime.
The Canada Revenue Agency is chasing Jonathan Tavares for $8 million in taxes, including $1.2 million in interest, related to a US$15.3 million (C$21 million) signing bonus he received upon joining the Leafs in 2018 after the expiry of his contract with the New York Islanders. A tax treaty between Canada and the U.S. stipulates that “an inducement to sign an agreement relating to the performance of the services of an athlete” is different from “income from employment” and should not be taxed at more than 15 per cent, but the CRA considers the signing bonus salaried income and is ordering a tax rate of more than 38 per cent. Thus the $8 million legal scrap between the Leafs captain and the tax agency.
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In years past, the Canadian Taxpayers Federation has published reports on the effects of income taxes on NHL teams and players. In the 2014 off-season, it found that of 123 unrestricted free agents that moved teams, 57 per cent went to jurisdictions where they would pay less tax. In 2015, of 116 unrestricted free agents signing with new teams, 54 per cent moved to a lower tax jurisdiction.
Another interesting nugget from the 2015 Canadian Taxpayers Federation report: the NHL salary cap, after adjusting for tax rates, was 16 per cent higher that year for U.S.-based teams with no state income taxes (Dallas, Nashville, Tampa Bay and Florida) than for the Leafs and the Ottawa Senators. Taxes are not the primary reason why some teams can ice better rosters than others, and it would be difficult to pin Canada’s Stanley Cup drought on income taxes, but tax rates are not irrelevant, either.
Far worse than negatively affecting the ability of Canadian cities to attract top athletes, high tax rates also make Canada less attractive to highly productive workers of all kinds — corporate executives, doctors, entrepreneurs and many others. The problem was noted in the Financial Post last month by Kim Moody, founder of Calgary-based Moodys Tax and Moodys Private Client.
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“Do higher personal taxation rates really impact Canada’s ability to compete? You bet it does,” Moody wrote. “And it also causes successful and productive people to consider leaving Canada.”
Following Prime Minister Justin Trudeau’s federal income tax hike on top earners in 2016, and subsequent threats of other taxes on high-income individuals, Moody observed, “In my practice, the number of files I have worked on in the past five years for Canadians who are exploring leaving (or have now left) has far exceeded the cumulative number of files in my entire 30-year career to that point.”
The deleterious effects of high income taxes on top earners are well documented, including in government-commissioned reviews of tax policy.
The authors of the 1966 Report of the Royal Commission on Taxation wrote, “We are persuaded that high marginal rates of tax have an adverse effect on the decision to work.” Decades later, in 1999, the Saskatchewan NDP struck a committee led by business professor Jack Vicq to review personal income taxation and largely implemented its recommendations, which included lowering and flattening personal income tax rates.
Another example dates back to 2014, when the Nova Scotia Tax and Regulatory Review recommended eliminating the province’s top income tax bracket.
“High taxation discourages investment and growth in the province, which in turn drives graduates elsewhere to seek wider career prospects,” noted Nova Scotia’s final report. It added that, according to the Organization for Economic Co-operation and Development, “high top marginal tax rates reduce the payoff for risk-taking, so reducing them should boost entrepreneurship and innovative activity in the economy.”
Largely because of the Trudeau government increasing the top marginal tax rate from 29 per cent to 33 per cent in 2016, the top tax rate is now above 50 per cent in all provinces except Saskatchewan (47.5 per cent) and Alberta (48 per cent) — a threshold beyond which former NDP leader Thomas Mulcair said, “you’re not talking taxation; you’re talking confiscation.”
And such economically harmful confiscation doesn’t do good even for grasping politicians looking to fill the public treasury. A 2018 C.D. Howe Institute study found in its first year, the behavioural response (reduced work effort, tax planning or relocation of income or jobs outside Canada) to the Trudeau tax hike was so large that combined federal and provincial revenues actually fell. Other analyses from tax policy experts have confirmed that large behavioural responses to top tax rate hikes can be expected, and the response appears to be increasing over time.
Thus it is hard to see who benefits from Canada’s confiscatory personal income tax regime, whether its targets are star athletes, innovative entrepreneurs or other highly productive workers. Let us all therefore root for Tavares in his fight against taxation overkill. May he have more success in his anti-tax court battle than the Leafs usually have in the playoffs.
National Post
Matthew Lau is a Toronto writer.
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