John Tavares’ battle with CRA underscores Canada’s tax competitiveness problem

Toronto Maple Leafs forward John Tavares recently took the witness stand in his court battle with the Canada Revenue Agency (CRA) over an alleged $8 million in taxes he supposedly owes on the signing bonus that helped entice him to leave the New York Islanders and sign with Toronto in 2018. The case rests largely on whether the bonus was an “inducement” (which would be largely taxed in New York and subject to a maximum Canadian tax rate of 15 per cent) or employment income (which would be fully taxable in Ontario at rates exceeding 50 per cent).

While it’s up to the lawyers to argue that distinction, the case underscores a broader issue in Canada that doesn’t only impact multi-millionaire athletes but other top performers in all fields. Simply put, Canada’s high tax rates make it harder for the country to attract and retain top talent.

Similar to how the Maple Leafs compete with 31 other teams in the NHL to attract the most talented players, Canada competes with other countries around the world (including the United States) to attract and retain high-skilled individuals such as doctors, engineers, scientists and entrepreneurs who all contribute disproportionately to innovation, job creation and stronger economic growth—all of which help foster better living standards for all Canadians.

In this competition, many factors influence where an individual chooses to move including climate, proximity to family, safety and recreational opportunities. And some, especially high-income earners, will consider taxes. As a result, jurisdictions that maintain relatively low tax burdens enjoy a competitive edge in attracting high-skilled individuals compared to jurisdictions with higher taxes.

This is where Canada has a problem. If you compare the top combined (federal and provincial/state) personal income tax rate in all 10 provinces and 51 U.S. states (including Washington D.C.), nine provinces rank in the top 10 for highest combined rate. Saskatchewan (15th) was the only province not in the top 10.

In Ontario, for example, top earners in the province face a combined personal income tax rate of 53.35 per cent, which is higher than top earners face in every U.S. state (including New York). Moreover, residents in most Canadian provinces also face higher sales tax rates than they would in most U.S. states. Simply put, the provinces may have a harder time attracting top talent from elsewhere, or convincing high-skilled people to stay, due to high tax rates.

Finally, in addition to making it harder to attract and retain top talent, high tax rates also reduce the incentives for Canadians to engage in productive activities that help promote a stronger economy. By reducing the reward (i.e. income) Canadians receive when they work, save and invest, high taxes can lead to fewer Canadians engaging in these kinds of activities, and the economy will suffer as a result.

No matter where you live in Canada—or whether or not you care about John Tavares, the Leafs or the NHL—Tavares’ battle with the CRA underscores a deeper problem that impacts all Canadians. Canada has a tax competitiveness problem, and fixing it should be a priority for policymakers across the country.