Maple Leafs use tax cap on bonuses to 'entice' players to Toronto, ex-NHL star Patrick Marleau tells court

In the multi-million-dollar tax trial about the word “inducement” and how it relates to income tax on professional hockey contracts, former NHL superstar Patrick Marleau’s use of the word “entice” made ears prick up Wednesday morning in the downtown Toronto courtroom.

“Enticing” someone sounds like “inducing” them to do something, on the face of it. So when Marleau testified about negotiating a three-year contract with the Toronto Maple Leafs in 2017 that would see him leave the San Jose Sharks after two decades, and how then Leafs coach Mike Babcock said one of the ways they “entice” elite players like him to sign deals was a cross-border tax break spelled out in a treaty, his legal team were suddenly metaphorically on the power play.

A few minutes later, Marleau drove the point home. He testified that after he signed this deal with Toronto, and was having dinner with team leadership, Babcock again told him that this tax cap on signing bonuses for athletes is well known as “a lever that teams are able to use to get people to come play in Toronto.”

Marleau, according to his testimony, was a prime example of how this worked. Signing with the Leafs as a free agent was “a chance to cash in on all the hard work you’ve done throughout your career,” Marleau testified. It also paid most of its value as a signing bonus, including two payments of $3.5 million in the first year, as a rare perk to make sure he gets the most money as soon as possible. A signing bonus is also protected against lockout and buyout in a way salary is not.

“I wouldn’t have come to Toronto without the signing bonus, and knowing that it would only be taxed at 15 per cent made it even that much more enticing to come to Toronto,” Marleau testified. “I had to move my whole family to a different country, get them all set up. Getting that money up front is huge.”

Until he heard about this tax cap from Babcock, Toronto was not even on his radar. He was talking to other big American teams. Once he consulted with his financial advisors, though, this tax break on the signing bonus suddenly made Toronto the leading candidate in his mind. “Having found out that that was true, it made Toronto a viable option,” he said.

The same enticing lever would be used the following year, 2018, when Leafs centre John Tavares made a similar blockbuster move from the New York Islanders to Toronto, with the deal sweetened by having most of the money paid as a signing bonus, eligible for the tax break in 2018 when Tavares was a resident of New York State.

And now they are at trial in the Tax Court of Canada, each with millions of dollars at stake, and it all comes down to the meaning of a single word. Canada argues that Marleau’s and Tavares’s signing bonuses were not “inducements” to sign their contracts, but rather employment income promised by those contracts. The difference is crucial, and it caused Canada to reassess their tax bill for the relevant years and claim they each owe millions, based on an employment income tax rate of 53 per cent.

Marleau is now a player development coach and advisor to hockey operations for the San Jose Sharks, where he played most of his career except for a few years at the end in Toronto and Pittsburgh.

His career was exceptionally long, and he holds the record for most regular season games played in the NHL, with 1,779 over 23 years. He won two Olympic golds for Canada in 2010 and 2014.

“What is an inducement? That is the question before you,” Crown counsel Devon Peavoy told Justice J. Scott Bodie in opening remarks. “You would think that the answer to that question would be straightforward, or should be straightforward.”

The Canadian Oxford Dictionary defines “inducement” as “an attraction that leads one on,” or “a thing that induces,” which is to say “prevail on; persuade.”

It is from the Latin for “lead into,” and the same word that appears in the traditional version of the Lord’s Prayer in Christianity, as “ne nos inducas in tentationem,” or “lead us not into temptation.”

So an inducement is literally a thing that leads you to do something, and not by force but by persuasion, compulsion, even “attraction,” or as Babcock told Marleau, by “enticement.”

This word “inducement” appears in Article XVI(4) of the Canada-United States Convention with Respect to Taxes on Income and on Capital,” which places a 15 per cent cap on taxes on any money paid cross-border “as an inducement to sign an agreement relating to the performance of the services of an athlete.”

This clause refers to “an” inducement, not “the” inducement. On a purely literal reading, it need not be the only factor.

Marleau’s cross-examination by Peavoy for the Crown focused on this notion, that the signing bonus was not Marleau’s only “inducement” to sign the contract, that in fact there was much else that attracted him to the Leafs, including three years instead of two, and a higher annual average value than other offers.

“Family, money and hockey” were this three main considerations, Marleau said. On the ice, he wanted to be a “difference maker,” playing on the power play, penalty kill, last minute, clutch situations.

He also was not set on leaving the Sharks. “It’s always a hard decision to leave your brothers,” he said.

The hearing continues Thursday with testimony from Robert DeGregory, counsel for the National Hockey League Player’s Association, about the league’s collective bargaining agreement.

Our website is the place for the latest breaking news, exclusive scoops, longreads and provocative commentary. Please bookmark nationalpost.com and sign up for our daily newsletter, Posted, here.