Judge calls CRA `absurd,' siding with ex-Leafs GM
Former Toronto Maple Leafs general manager Dave Nonis has scored an off-ice victory in a tax battle with the Canada Revenue Agency after a judge ruled that the agency's position in the case was “absurd.”
The subject of the dispute concerned the amount of Canadian income tax Nonis was required to pay related to the employment income he earned from the Leafs after he was fired by the club in 2015.
Nonis, who grew up in Burnaby, began his career as an NHL executive in 2004, when he became the Vancouver Canucks' youngest-ever general manager at the age of 37. After four years, he was relieved of his duties and joined the Anaheim Ducks briefly, before landing a job as senior vice-president and director of hockey operations with the Leafs in 2008. In 2013, he was named as the Leafs' GM, a position he held until April 12, 2015 when, as Nonis described in his court testimony by video link, he was told to simply “go home.”
Home, for Nonis, was always in the U.S. and he was considered a resident of the U.S. for tax purposes.
While employed with the team, he filed both Canadian and U.S. tax returns and paid Canadian income tax based on the prorated number of days he spent in Canada each year. After being let go, he never returned to Canada in any capacity for the Leafs.
Nonis's employment contract with the Leafs specified that, should he be terminated without cause, he would be guaranteed continued salary benefits for the balance of his contract, plus one year of medical coverage. His tax dispute centred around the appropriate proration formula that should be used for the 2015 and 2016 tax years, and, in particular, for the period of time after he was effectively let go.
When Nonis filed his 2015 and 2016 tax returns, he used the same formula that he used in 2013 and 2014, but adjusted it to the fewer days he spent in Canada in 2015 and 2016. In 2015, that was 37 days and in 2016, it was zero.
The CRA disagreed, and took the position that the tax treatment associated with his salary continuance should be taxed in the same manner as a signing bonus.
Originally, if a U.S. resident got a signing bonus prior to their arrival in Canada to play for a Canadian team, the entire bonus “would not become income earned in Canada.”
But in 1981, the Income Tax Act was amended by adding a special rule to deal with the contracts of professional athletes, who often can receive initial large signing bonuses, and then comparatively smaller annual salaries paid annually thereafter. The rule made signing bonuses taxable in Canada, and generally subject to the same proration formula used for the season.
The CRA felt that Nonis should have used the historical proration of days in Canada that he had used in 2013 and 2014 (39 per cent) as a “reasonable allocation” to be used to allocate the salary continuance income to Canada for 2015 and 2016. Nonis disagreed and took the CRA to Tax Court.
Fortunately for Nonis, the judge felt that the CRA's position was incorrect, calling the government's approach “absurd.”
Financial Post Jamie.Golombek@cibc.com
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director of tax and estate planning with CIBC Private Wealth Management in Toronto.