What can advisors learn from John Tavares’ battle with the CRA?

The Leafs captain's appeal against the CRA raises issues that advisors and planners need to be aware of when they work with ultra high net worth clients

What can advisors learn from John Tavares’ battle with the CRA?

Last week Toronto Maple Leafs captain John Tavares filed an appeal against the Canada Revenue Agency over an $8 million tax bill. The CRA had reviewed Tavares’ 2018 tax return and found his income to be $17.8 million higher than reported, ordering him to pay $6.8 million in taxes plus $1.2 million in interest.

The trouble is, that additional income was paid to him as a signing bonus from the Leafs, while he was still resident in the state of New York. Tavares’ lawyers argue, therefore, that the bonus was eligible for the reduced rate of 15 per cent under a Canada-US Tax Treaty provision designed specifically for athletes, actors, and musicians.

Tavares’ appeal is now filed, and we haven’t yet seen a response from the CRA in a court proceeding that could take months to years. Nevertheless, the case holds a range of lessons for financial advisors working with high net worth and ultra high net worth clients. Individuals who may have cross-border residence status and can often receive compensation in the form of large bonuses could face their own challenges emerging from this case. One advisor and former pro athlete believes that Tavares’ story is a reminder to advisors to know as much as possible about the situation your clients are in now.

“Advisors need to be aware that they don’t know what they don’t know,” says Brad Coutts, a wealth advisor at Nicola Wealth and former CFL player. “Ultimately you need to be working with high end subject matter experts, tax professionals, employment professionals, and lawyers to sort out all the details and facts.”

Coutts says that process has to begin with detailed note taking on the part of the advisor. Onboarding clients and working with them needs to involve probing questions that work out where they are, where they’ve come from, and what they plan to do with their wealth. That can help inform both the advisor and their network of professionals about any possible liabilities or tax issues that can occur.

The Tavares case, Coutts says, is additionally complex because it involves four separate jurisdictions: the US, the State of New York, the Province of Ontario, and Canada. While that level of complexity would be a headache for any advisor, Coutts says that regular communication with that clients’ tax lawyers and accountants can help an advisor manage that complexity.

When working with tax planners for particularly complex clients, Coutts says he’ll often have a fulsome conversation where all of the professionals serving the client lay out where they think the clients’ tax liabilities are. Because these cases are so complex, it can be difficult to arrive at a concrete answer, but a clear outlining of exposure can help manage client expectations and prepare for any risks.

At Nicola, Coutts says, the approach is to plan first and build out that robust network of professionals for clients before they encounter any of these issues. That includes future goals, like whether they want to help their kids or grandkids with housing, or if they have tax bills accumulating in specific accounts. Their work includes charitable planning as well, which can help offset some tax exposure, or using flow through shares to create tax efficiencies. On a fundamental level, the unique situation a client finds themselves in will dictate the strategy their advisor can take. Nevertheless the best practices in any situation begin with a strong understanding of your client.

That mantra holds especially true in the case of athletes like Tavares. High earners at a young age come with their own set of challenges. They might not be as well-versed in tax issues or investing, and they may not fully realize that their relatively short careers will probably be their highest earning periods. Working with these clients, Coutts says, requires those same fundamentals of understanding, network-building, and communication.

“I always come back to understanding your client as soon as possible, understanding their situation, and double checking everything with the accountant to make sure you got your numbers right,” Coutts says. “Then tactfully communicating things with the client, positioning these tools that they can use to minimize their tax burden. Sometimes it takes multiple meetings and multiple conversations. Rome wasn’t built in a day.”