Why advisors need to watch the Tavares case

It’s been almost one year since Toronto Maple Leafs star John Tavares filed an appeal with the CRA over his roughly $8 million tax bill. He was handed the bill after the CRA reviewed his 2018 tax return and declared that his $15.3 million signing bonus — paid to him while he was still a resident in New York State and taxed at 15 per cent — was all salary income. While the appeal is not yet resolved, this case could come with some significant implications for Canadian advisors and the wider Canadian economy.

Darren Coleman, senior portfolio management, private client group of Portage Cross Border Wealth Management of Raymond James, explained why he’s paying such close attention to this case. While it has immediate implications for how Canadian teams can ever compete for talent with their US counterparts, he noted that this could severely hamper Canadian businesses’ ability to compete for executive talent. He added, too, that the tone of this case could add to the perception of Canada’s tax burden as too heavy and encourage more skilled and high earning Canadians to pursue opportunities in the US.

“The problem is that the perspective on tax policy cascades to other industries that might be trying to attract talent to Canada. Even if the specifics may not apply to a situation, the tone does,” Coleman says. “If you're an executive or somebody working in the United States, and you come across this Tavares case, you may not know if the details apply to you or not, but t doesn't make Canada look more appealing to you. So it becomes difficult for companies to attract talent when the tone or the style or the messaging seems to be we may not be as welcoming to capital as other places might be.”

Coleman explains that the tone of this case matters because it appears that the CRA changed its interpretation of the rules here. Tavares and Maple Leaf Sports and Entertainment (MLSE) would have been expertly advised on the structure of the contract, yet the CRA seems to have changed their perspective on the rules. While the CRA is well within its rights to do so, Coleman notes that it adds a degree of uncertainty to the system which makes anybody who could be subject to a similar tax bill quite wary.

That potential chilling effect on talent seeking opportunities in Canada could compound the trend Coleman now sees of Canadians seeking to move to the US for better paying work and lower taxes. He has even seen some remote workers relocate to lower tax jurisdictions while keeping their Canadian jobs. At a moment when Canada already appears somewhat less attractive from a tax and economic growth standpoint, especially compared to the US, Coleman believes this case gives talented Canadians one more reason to look elsewhere.

“We could have a brain drain, and we've already begun to see that,” Coleman says. “Capital is not really coming to Canada. We're negative on foreign investment across the board, so trying to find ways to increase our productivity, increase investment into Canada. I think one would fairly ask if the CRA is acting in a way that’s congruent with that.”

Financial advisors need to be watching the outcome of this case both for its immediate tax implications and what its example may prompt clients to decide. If and when clients come to their advisor saying they need to move and escape the current tax situation, Coleman says its crucial for advisors to outline the various implications. In working to ensure that clients can make the moves they want, their advisors need to explain what investments can and can’t move with them, what complicating factors may arise, and what additional expert advice from lawyers and accountants may cost.

While the topline tax numbers in the US certainly appear more appealing than Canada’s, Coleman notes that the two systems come with unique eccentricities advisors must be aware of. “It’s almost like we’re two different countries or something,” he jokes.

Coleman always works to ensure that his clients planning a move know the area they want to move to well. They need to be aware of the various taxes in the specific state they want to live in. He asks them if they have existing networks there, the sort of personal connections key in establishing a new home. As much as his job is to ensure his clients’ financial wellbeing, he wants them to remain as comfortable as possible.

As clients come with concerns about the Tavares case or new impetus to move as a result, Coleman believes that their advisors need to be ready to remind them that nothing can be taken for granted.

“In the Tavares case you have someone who was able to get very good information only for the application of the rules to change. Even if you are very well prepared you could still get a surprise,” Coleman says. “I think that if clients are concerned about the Tavares case, the question of does it apply to you should be key. And we will see when this is settled if any actual rules change.”