Former Leafs Marleau and Muzzin in fight with CRA over millions in taxes

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OTTAWA — Toronto Maple Leafs captain John Tavares isn’t the only hockey star taking a shot at the taxman. Former Leafs Patrick Marleau and Jacob Muzzin are also facing off in court against the Canada Revenue Agency (CRA) over tax bills worth millions.

In separate appeals filed to the Tax Court of Canada in recent months, Marleau and Muzzin argue roughly the same thing: that their multimillion-dollar signing bonuses with the Leafs should be taxed at only 15 per cent and not at the top income tax bracket (over 50 per cent).

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Their cases raise nearly the same issues as an appeal filed by Tavares last year. In January 2024, National Post first reported that CRA and the Leafs’ captain were fighting over $8 million in taxes and interest the tax agency said the player owed them.

The disagreement with CRA is also worth millions to both Marleau and Muzzin. The courts’ decisions could also have a significant impact on Canadian professional sports teams’ ability to use signing bonuses as a tax incentive to attract foreign athletes.

In both cases, the players said in their appeals that provisions of a Canada-U.S. tax treaty that establish a 15 per cent tax rate for an “inducement to sign an agreement” for an athlete applies to their signing bonuses. At the time, they were both U.S. residents.

But they said the CRA disagreed and reassessed them for millions in unpaid taxes, arguing that their bonuses were part of their employment income and should be taxed at roughly 53 per cent.

In his appeal, Marleau — a Canadian who played for the Leafs from 2017 to 2019 — said CRA is claiming over $3.8 million in combined federal and provincial taxes on his signing bonuses paid in the 2017 and 2018 tax years, as well as $180,000 in interest.

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Muzzin — a former defenceman who joined the Leafs’ front office after a career-ending injury in 2022 — said in his appeal that CRA is claiming over $3.7 million in federal taxes and $131,000 in interest for his 2020 tax year.

Marleau’s appeal notes that when Marleau entered free agency in the summer of 2017, he was entertaining bids from no less than 10 teams, including the Leafs.

Thus, to make their bid more appealing, the Leafs designed their offer to include both a salary and a more significant signing bonus. Marleau’s appeal notes that the bonus was “integral” to his decision to sign with the Leafs that summer.

While Marleau’s contract was worth US$4.25 million over three seasons, it included a US$14.5 million signing bonus that was paid out gradually twice a year over the duration of the contract.

His appeal said the Leafs withheld and paid 15 per cent of the annual signing bonus payments to the CRA in 2017 and 2018. It also says he declared the signing bonus on his U.S. tax returns and paid tax there as well.

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“The signing bonus was consideration for this sought after unrestricted free agent, Marleau — a veteran NHL player who had garnered widespread respect for his skill, versatility, dedication, and leadership — committing to the three-year Contract with the Toronto Maple Leafs,” reads his appeal.

“Marleau’s signing bonus is not salary, wages or other remuneration in respect of an employment.”

But in 2019, CRA wrote to Marleau saying it didn’t believe the bonuses qualified for the reduced 15 per cent rate. In 2023, it officially re-assessed the NHL star, saying he owed the agency over $1.5 million in federal tax and $2.2 million in provincial tax.

In a reply in court, CRA wrote that it disagreed that the yearly signing bonuses were “an inducement to sign.” Instead, it concluded they were “remuneration” for their work in Canada, mainly because his contract stipulated he would have to pay it back if he did not fulfill his entire contract.

The signing bonuses “were for, and dependent on, the performance of (Marneau’s) employment services under the Contract, which included giving his services and playing hockey in all games to the best of his ability, reporting to training camp, keeping in good physical condition, and playing hockey only for the Toronto Maple Leafs,” read the CRA’s reply.

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One of Marleau’s lawyers at KPMG Law, Mark Feigenbaum, said in a brief statement that the Tax Court’s decision in the Tavares case will likely bring much needed questions to the live issue of signing bonus taxation.

“The CRA is assessing similar signing bonus taxation claims as in the Tavares case and hopefully the court will resolve this controversy,” he said in an email.

Muzzin’s appeal lays out similar events. After being traded from Los Angeles to Toronto in 2019, Muzzin negotiated a four-season contract beginning in 2020-2021 with the Leafs that included a US$16.8 million signing bonus.

For 2020, Muzzin was paid $12.7 million, nearly $10 million of which was signing bonuses he argued should be taxed at 15 per cent, read his appeal.

But in 2023, the CRA reassessed his income and increased his federal tax debt by $3.7 million, once again saying his signing bonus should be taxed like employment income. It also charged him over $131,000 in interest on the additional tax.

“The CRA was unable to explain the increase in the Appellant’s net federal tax in the Reassessment,” Muzzin said in his appeal.

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“The Inducement Payment is clearly an ‘inducement’ by (Maple Leafs’s ownership) to entice the (Muzzin) ‘to sign an agreement relating to the performance of’ his services as an ‘athlete’. To argue otherwise is to distort the legal and economic reality” of Muzzin’s contract, read his appeal.

CRA’s reply to Muzzin’s appeal has not yet been made public.

Muzzin’s counsel, Marie-Claude Dompierre of Davies, declined to comment. A CRA spokesperson also declined to comment while the case is in front of the courts.

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