Player's claim was offside

National Post

2012-07-14



Tax rules can sometimes seem illogical and unfair and it's normal to want to challenge them in court, although a change in the tax law may be what's ultimately needed to correct a perceived flaw in the rules.

Take the recent case of Canadian-born minor league hockey player Michael Caruso. He was drafted by the Florida Panthers in 2006 after playing with the Guelph Storm of the Ontario Hockey League and was assigned to the Panthers' American Hockey League affiliate, the Rochester Americans. He currently plays for the San Antonio Rampage.

In May 2008, he signed a threeyear contract with the Panthers and paid an agency fee to AKT Sports Management Consultants Inc. of about $2,900. The issue in the tax case was whether he was entitled to deduct these fees from his employment income.

Under the terms of the contract, the agency was retained to "represent, advise, counsel, and assist [Mr. Caruso] in conducting individual compensation negotiations for the Player's services with the Player's NHL club and in maintaining and enforcing the Player's rights following execution of a contract with the Player's NHL club."

The Income Tax Act severely restricts the types of expenses employees can deduct. In fact, generally employees can't deduct any expenses unless there is a specific provision permitting that type of expense to be deducted.

Mr. Caruso argued that his agency fee should be deductible under the rule that permits an employee to deduct "legal expenses incurred by the taxpayer to collect or establish a right to salary or wages owed to the taxpayer by the employer." He maintained that, as a result of his agent's negotiations, he was able to receive an additional $60,000 in signing bonus.

The contract for agency services between Mr. Caruso and AKT Sports was signed by a guarantor who was a lawyer; however, the judge said there was no indication whether AKT Sports was authorized to practise law.

The judge also said even if it was arguable that the services provided by AKT could somehow be regarded as "legal services," they were not to collect salary or wages owed to Mr. Caruso since the agency services were provided before any contract was signed. Similarly, the fees could not have been paid to establish a right to salary or wages since there was no legal right to any salary or wages until after the contract with the Panthers was signed, which was after the services were already provided by the agent.

As Mr. Caruso couldn't identify any other rule in the act to justify his claim for the agency fees, he was denied the $2,900 deduction on his 2008 tax return.

This seems, indeed, like a harsh result since, clearly, the amounts were paid to earn taxable employment income. Unfortunately, however, the Tax Court can't change the law just because it may seem unfair. That's a matter for parliament.