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You may have heard about the taxation issues that NHL star hockey player John Tavares and others (such as retired future Hall of Famer Patrick Marleau and several NBA players) have faced from the Canada Revenue Agency regarding the tax treatment of their signing bonuses they received while playing for Canadian professional sports teams.

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The challenges first arose more than five years ago when the tax treatment of the signing bonuses for eight NHL players and two NBA players involving the taxation years from 2016 to 2020 were audited and ultimately — years later — reassessed by the CRA. Most of the players have filed objections with the CRA and are disputing their cases through the court system.

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Overall, I have found some of the reporting on these cases a bit lacking. For example, one article initially reported that a recent Tax Court of Canada decision had, in effect, dismissed Tavares’ case, resulting in a big win for him. That is incorrect.

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The decision involved a procedural matter compelling the CRA to disclose certain information requested by Tavares’ legal counsel. His case — along with the others — is alive and well. The article was recently updated to clarify that Tavares did not “win” his case. Many others, however, have not.

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Other stories have made it sound like Tavares did some sort of “tax planning” or avoided paying more than $8 million in tax to Canada. I have two words for that kind of assertion: incorrect and misleading.

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Why? Because all these cases involve U.S. tax residents, who are non-residents of Canada, playing for Canadian teams (that fact is never in dispute). If you’re a non-resident of Canada, you only pay income tax to Canada in limited circumstances, including on employment income if the players exercise such employment in Canada. Again, Tavares, for the year in question, was a non-resident of Canada when the signing bonus was paid. Ditto for Marleau and others.

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Accordingly, all the players reported their worldwide income for tax purposes on their U.S. income tax returns, including the full amount of the signing bonuses. Canadian income tax was withheld from the players’ employment earnings for the proportion of their overall salary that was exercised in Canada by playing home games and other games in Canada. Otherwise, Canada had no right to tax the remainder of the employment income except for a limited amount of the signing bonuses received.

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When a payor country of signing bonuses (Canada in these cases) pays those amounts to a resident of another country (the U.S. in these cases), the payor country is limited to collecting a tax rate of only 15 per cent — pursuant to Article XVI(4) of the Canada-U.S. tax treaty.

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When the players report all their earnings (including the full amount of the signing bonuses) in their U.S. tax returns, they’re able to — for the most part (unless the player is resident in a state that does not respect the treaty) — claim the Canadian tax paid, comprising the amount ultimately liable for employment exercised in Canada plus the 15 per cent cap imposed on the signing bonus, as a foreign tax credit against their U.S. federal and state tax liabilities.