THE OTTAWA SENATORS' LOBBY FOR COMPREHENSIVE TAX RELIEF: A SOMEWHAT (but only somewhat) PRINCIPLED APPEAL TO THE NOTION OF TAX FAIRNESS

Ryan Keon McGill University, Montreal Faculty of Law July 2001

A thesis submitted to the Faculty of Graduate Studies and Research in partial fulfilment of the requirements of the degree of Master of Laws (LL.M.)·

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------~---~ Acknowledgements

1wish to acknowledge the great patience and dedication which the following people showed in helping me to complete this paper: my wife Cindy, Professor Richard Janda, Professor Stephen Smith, The McGill University Faculty of Graduate Studies and Research, and my employers LaBarge Weinstein. Table of Contents

Abstract 1Abstrait iii

1. INTRODUCTION 1

II. A BRIEF HISTORY OF PROFESSIONAL HOCKEY IN CANADA 5

A. Introduction 5

B. Elite Professional Hockey in Canada Prior to NHL Hegemony 6

C. The "Original Six" Era of NHL Hockey in Canada 22

D. The WHA: 1972-1979 25

E. The NHL in Canada Since 1980: The Best of Times or the Worst of Times? 30

F. Conclusion 37

III. TAXATION APPLICABLE TO THE OTTAWA SENATORS AND OTHER CANADIAN ENTERTAINMENT BUSINESSES IN ONTARIO 40

A. Introduction 40

B. Taxation of Business in Ontario - The General Rules 41

i. Municipal Taxation in Ontario 42

H. Provincial Taxation of Corporations Doing Business in Ontario 49

Hi. Federal Taxation of Corporations Doing Business in Canada 54

C. Special Tax Treatment of Canadian Live Entertainment Businesses in Ontario 57

D. Special Tax Treatment of Canadian Film and Video Production Businesses in Ontario 63

-1- E. Unfavourable Tax Treatment of NHL Hockey in Ontario 72

F. Conclusion 77

IV. THE INCOMPLETE RATIONALE FOR COMPREHENSIVE TAX RELIEF IN FAVOUR OF CANADIAN NHL HOCKEY TEAMS 80

A. Introduction 80

B. The Meaning of "Fairness" in Comparing the Taxation to Which Different Canadian Businesses are Subject 82

C. The Federal Government's Solicitude for NHL Hockey in Canada 85

D. A Preliminary but Inconclusive Fairness Rationale: Fostering and Protecting NHL Hockey as an Element of Canadian Heritage 88

E. Prospects for Mitigating the Capture of Proposed Federal Assistance by Star Players on Canadian NHL Teams 93

F. Rationalizing Municipal Tax Regimes Applicable to NHL Hockey in Ontario with United States Norms 100

G. Conclusion 102

V. THE IRONY OF THE SOLUTION TO THE OTTAWA SENATORS' FINANCIAL NEEDS 104

A. Introduction 104

B. High Technology Businesses in Ottawa 104

C. The Tax Treatment of Research and Development Businesses in Canada 110

D. Conclusion 118

VI. CONCLUSION 120

-11- Abstract

The Ottawa Senators' lobby for comprehensive tax relief in favour of Canadian NHL teams towards the end of the 1990's is commendable. The argument that the Ottawa Senators hockey team is unfairly taxed in comparison to other Canadian businesses rejects reliance upon familiar economic impact studies of dubious validity, and is almost undeniably true in respect of property taxes. The argument is also colourable with respect to tax incentives which are given to businesses with links to Canadian culture and heritage, but are denied to professional hockey. Ultimately, however, the absence of any need to encourage Canadian participation in hockey, the obvious capture of any benefits by star players unwilling to participate in the structuring of an assistance programme, and the extraordinary public appetite for the NHL in Canada, distinguish hockey from those comparable businesses.

Abstrait

Durant les derniers années du vingtième siècle, les Sénateurs d'Ottawa ont essayé de persuader les gouvernments que les impots payer par les équipes Canadiens de LNH sont injuste. Cet argument rejet des études de l'impact économique qui sont bien connut, mais incertain, dans le contexte des sports professionels. Certainment, les impots payer par les Sénateurs en respect de leurs immeubles ont été injuste. L'argument des Sénateurs mérite considération aussi dans le contexte de la traitement des entreprises liés à la culture et l'héritage Canadien, avec l'exception du hockey professione!. Mais vraiment, ces autre entreprises peut être distinguer du hockey par l'absence d'une necessité pour encourager la participation en hockey au Canada, les salaires payer aux joueurs pré-éminent qui ont refusé de participer dans un solution partager avec LNH et les gouvernments, et la demande extraordinare pour l'hockey professionel a Canada.

-111- THE OTTAWA 5ENATOR5' LOBBY FOR COMPREHEN51VE TAX RELIEF: A 50MEWHAT (but only somewhat) PRINCIPLED APPEAL TO THE NOTION OF TAX FAIRNE55

"Look, we play the Star Spang/ed Banner before every game, you want us ta pay income taxes tao?"

Bill Veeck1

"/ a/ways turn ta the sports pages first, which record peop/e's accomp/ishments. The front page has nothing but man's fai/ures."

u. S. Chief Justice, Ear/ Warren2

1. INTRODUCTION

There can be no doubt that the professional sports business is at times bizarre.

The unbelievable salaries paid to players, the abandonment of apparently sound arenas and stadiums in favour of ever more lavish new construction, the public worship of local teams and star players, and owners' and players' apparently paradoxical shifts between obsession and indifference to the public's esteem are ail a IiUle perverse. On the other hand, few people can deny some fascination at the exhibitions of strategy, discipline, and individual excellence for

1 Bill Veeck became a professional sports team owner at age 28 when he bought the Milwaukee Brewers in 1941. Between 1946 and 1949 he headed a syndicate that owned the Cleveland Indians. In 1951 he became the owner ofthe St.Louis Browns baseball team. Between 1958 and 1961, and again between 1975 and 1981, he owned the Chicago White Sox. He published two books on the economics ofbaseball, namely, Veeck as In Wreck, and The Hustler 's Handbook. The quotation is taken from the latter, as discussed in J. Quirk and R.D. Fort, Pay Dirt - the Business ofProfessional Team Sports (Princeton, N.l: Princeton University Press, 1992) at 88-91.

2 M. Maggio, ed., Sex, Money & Sports: Quotations on the Only Things Men Talk About (Toronto: Prentice Hall Press, 1998) at 118.

1 which professional sports are sometimes a forum.

ln the last year or so of the twentieth century, the Ottawa Senators were another one in a seemingly infinite line of professional sports teams that have pleaded for tax breaks. Making matters appear worse, their campaign happened to come at the end of a five year period in which NHL teams in Quebec City and

Winnipeg departed for greener U.S. pastures, and Canadian NHL teams had failed to produce a single Stanley Cup finalist. In that context, the Ottawa

Senators attempted to elevate their campaign to a matter of national public policy. The NHL supported that effort, and a number of federal politicians expressed their solicitude for the businesses engaged in Canada's favourite game. Nevertheless, the Ottawa Senators ultimately failed to inspire any new nationallaw or policy. This paper will attempt to objectively evaluate the merit and results of the Ottawa Senators' recent campaign to obtain comprehensive tax relief from municipal, provincial, and federal governments.

ln their lobbying effort, the Ottawa Senators' eventually focused on the argument that the team's operations are unfairly taxed in comparison to other businesses.

A comparison of the treatment received by NHL hockey and other entertainment businesses in Ontario certainly permits the argument that NHL hockey is unfairly taxed relative to other types of business. On account of differences in the economic fragility, the salary structure, and the public profile of hockey and other

2 businesses that bear similar relations to Canadian culture and heritage, however, the relatively poor location of NHL hockey on the spectrum of preferential, average, and prejudicial tax treatment that ultimately prevails within the Canadian tax system does not appear to merit comprehensive relief.

Property taxes are a clear exception to that general observation and relief provided to the Ottawa Senators in that respect is quite rightly justified as a matter of fairness.

Before turning to the actual question of taxation, the history of the hockey business in Canada is worth considering. Only time will tell for sure whether the business of professional hockey in Canada is in dire straits, but the current state of affairs appears much less alarming if considered in the context of over a hundred years of professional hockey in Canada. With the possible exception of the 1980's, there has never been such an abundant and stable supply of elite professional hockey in Canada. It is also worth noting that the attraction of failing Canadian leagues and teams to relocate and/or expand in the United

States is not so new, dating from at least the 1920's, not the 1970's, 1980's or

1990's. Similarly, history suggests that the current crisis in NHL player salaries is attributable at least as much to teams and fans in cities like Winnipeg, which made Bobby Hull hockey's first player-millionaire, as it is with deep­ pocketed U.S. teams. Those facts are not only interesting, but ultimately relevant to the comparison of hockey with other businesses that derive tax

3 advantages from their apparent connection to Canadian culture.

ln addition to the conclusions summarized above, a review of the taxation to which the Ottawa Senators are subject is worthwhile in explaining why a team which claims to have rarely if ever been profitablè would spend a year or more lobbying for relief from a heavy and unfair tax burden rather than just asking for direct subsidies or grants of financial assistance. The Senators' complaints are in fact consistent with an observed increase in the tax burden imposed on

Canadian businesses without regard to their actual profitability. The Ottawa

Senators eventually obtained much of the relief they required privately, from their fans and business customers in Ottawa's high-technology based economy.

As a postscript to the tax fairness debate engaged in by the Ottawa Senators, it is weil worth noting the irony that the team's financial troubles were ultimately addressed by an industry fed in part by generous tax incentive programmes for the benefit of research and development businesses in Canada.

4 Il. A BRIEF HISTORY OF PROFESSIONAL HOCKEY IN CANADA

A. Introduction

Only time will tell for sure whether the business of professional hockey in

Canada is in jeopardy, but the current state of affairs appears much less alarming if considered in the context of over a hundred years of professional hockey in Canada. History suggests that the supply of professional hockey in

Canada has probably never been healthier than it is today. That observation is an indisputable fact in terms of the current combination of numbers and stability of NHL teams in Canada. It is true that the six current Canadian NHL teams have been unable to match the on-ice excellence seen more often and in more

Canadian cities than ever before during the 1980's. But the excellence achieved in almost every Canadian NHL city during the 1980's appears to go beyond what anybody should ever reasonably expect to see again, regardless of the economic strength of Canadian NHL teams relative to their U.S. counterparts.

The popular complaint that the NHL has in recent decades compromised the interests of Canadian teams and fans by a shift in focus to U.S. teams and large

U.S. cities also appears to find little support in the history of leagues, teams, and player salaries throughout the twentieth century. The attraction of failing

Canadian leagues and teams to relocate and/or expand in the United States can be observed from at least the 1920's, not the 1970's, 1980's or 1990's.

5 Although the current level of NHL player salaries is absolutely unprecedented, it is still noteworthy that the run-up in player salaries since the 1970's finds a historie parallel in the run-up of player salaries that led to the failure of innumerable teams and leagues during the early twentieth century. An ambitious team in the small town of Renfrew, Ontario actually made a hockey player the highest paid professional athlete in North America during an early twentieth century period of chaotic competition among rival leagues and teams in Canada. Eventually, the NHL's Original Six teams, which include five of the six largest markets in North America, succeeded in harshly suppressing player salaries for the better part of the twentieth century. Following changes in U.S. antitrust laws which made it impossible to continue suppressing player salaries indefinitely, the smaller Canadian markets were able to re-establish their own elite professional teams in the 1970'5, pulling the trigger on the modern run-up in player salaries. Accordingly, the blame for the current salary crisis in NHL player salaries is attributable at least as much to teams and fans in cities like

Winnipeg, which made Bobby Hull hockey's first player-millionaire, as it is with deep-pocketed U.S. teams.

B. Elite Professional Hockey in Canada Prior to NHL Hegemony

There is apparently no exact answer as to when hockey emerged as a popular sport in Canada, but it was certainly weil established by the end of the

6 nineteenth century with leagues springing up throughout the country. Claims to the origin of the game have been made mostly on behalf of Kingston (Ontario),

Halifax, and Montreal as of 1847, 1855, and 1837, respectively.3 The birth of hockey in Canada, or elsewhere, is probably an impossibly fine point to draw since the ice-skating and field hockey games from which the game evolved during the 1800's are ancient pastimes. 4 Suffice it to say that the game has been played in Canada for virtually the entire history of the country itself. A book published in 1876 under the title The Emigrant and Sportsman in Canada, stated that:

Canada is par excellence the country for the skater. Every Canadian can skate more or less. The rink is the great winter amusement and is to be found in every city.... The boy of the country however is addicted to hockey and is, 1am compelled to say, a nuisance to the non-hockey playing public. Happily he is excluded from the rink. His chief victim in the open is a timid elderly skater or a beginner; and such a one on glare ice, surrounded by his tormentors, is indeed a pitiable object. 5

The taming of the game into organized leagues was weil underway by the

3 See H. Roxborough, The Stanley Cup Story, (Toronto: McGraw Hill Ryerson Limited, 1971) at 4-5. See also G. Vaugh, "Ice Hockey in Nova Scotia - From Hurley to Hockey on Frozen Ponds" in Dan Diamond et al., eds., Total Hockey (Kansas City: Andrews McMeel Publishing, 1998) at 3-4.

4 Roxborough, supra note 3 at 4.

5 Ibid at 6 (citing 1.1. Rowan, The Emigrant and Sportsman in Canada (1876)).

7 1880'S.6

While the sport's popularity in Canada remained constant, the inevitable efforts to organize elite leagues showcasing the very best teams and players seldom achieved lasting success. In the space available, it is impossible to list ail of the elite hockey leagues that were established, renamed, reorganized, and abandoned since hockey became a spectator sport on offer to Canadian consumers. It is similarly impractical to attempt to list the creation, relocation and failure of the various teams that participated in one or more of the leagues that have existed. Nevertheless, even the brief history set out below indicates what an uncertain business proposition professional hockey has been in most

Canadian towns and cities for most of the twentieth century.

The ambition of organizers based in Montreal often led to the establishment of associations which were national in name, though not in actual scope, and the frequent establishment of new associations on the ruins of their rivais.. The

Amateur Hockey Association of Canada was established in 1886-87 ("AHAC") among three teams in Montreal and a fourth team in Ottawa. A team in Quebec

City joined the other four founders almost immediately afterwards. 7 ln aspiring to

6 Ibid at 6.

7 B. MacFarlane, "Our ElectrifYing Game - Hockey in the era ofGaslight", in Diamond et al., eds., supra note 3 at 22.

8 govern hockey throughout the Maritimes, Quebec and Ontario, the AHAC's reach exceeded its grasp, leaving it the first of many elite hockey leagues stretching from Quebec City, through Montreal, and into Ottawa.

During hockey's first two decades, most action centered in and around the metropolis on the St. Lawrence, and although the league name would vary - Canadian Amateur Hockey League, Eastern Canada Amateur Hockey Association and others ­ most seasons it featured three or four teams from Montreal, as weil as single entries from Quebec and Ottawa.lia

The Canadian Amateur Hockey League ("CAHL") was created for the 1898-99 by two teams in Montreal, an Ottawa team and a Quebec City team that had quit the AHAC in objection to the admission of a second Ottawa team to the AHAC. 9 ln 1903, the CAHL's refusai to admit new teams in turned led to the creation of another rival association, the Federal Amateur Hockey League ("FAHL"), by three teams in Montreal as weil as teams from Ottawa and Cornwal1. 10

The game's popularity also led to the establishment of many elite teams weil beyond the reach of the Montreal based associations. The first hockey league of any kind in the city of Toronto was not organized until 1888, but the city was soon a strong enough hockey market to centre the formation of its own nationally

8 C. Goyens and F. Orr, Blades on /ce: A Century ofProfessional Hockey (Markham, Ontario: TPE Publishing, 2000) at 15.

9 MacFarlane, supra note 7 at 22.

10 Ibid., at 23.

9 prominent association. 11 Only two years later, Toronto hosted a meeting of thirteen teams from throughout Ontario that formed the Ontario Hockey

Association ("OHA").12 The game also spread further west to Manitoba where the first two hockey clubs in the province were established during the winter of

1890/91.13 By 1892 A Manitoba Hockey association was established and by

1895 a Manitoba club challenged for the Stanley Cup. A year later another

Manitoba team captured the national trophy.14

The donation of the Dominion Challenge Cup on March 18, 1892 by Lord

Frederick Arthur Stanley, Governor General of Canada at the time, resulted in an annual competition which was quickly accepted by ail leagues as determinative of national hockey championship in Canada. 15 The Cup was initially held by the Montreal Hockey Club of the AHAC, and was first contested for between a Montreal and an Ottawa team on March 22, 1894.16 The trustees appointed for the purpose of administering competition for the cup established rules allowing the champion of any of the various hockey associations in the

11 Ibid, at 22.

12 Roxborough, supra note 3 at 8, 12.

13 Ibid, at 16.

14 Goyens and Orr, supra note 8 at 16.

15 Roxborough, supra note 3 at 12.

16 Ibid, at 14.

10 country to challenge for it, the intent being to make the cup as representative as

possible of national championship.17 ln time, the trustees would allow

professionals and U.S. based teams to compete for what quickly became and

remains the most prized hockey trophy in North America. 18

Inevitably, professional players became a fixture of the game as various elite

Canadian hockey leagues continued to form, evolve and/or fold over the next

decade or so. Beginning in January 1898, when it expelled an entire Berlin

(Kitchener) Ontario team and banned every one of its players and coaches for

accepting one ten dollar coin each from the local mayor atter winning their very first game, the OHA would lead a losing fight to preserve the notion of

amateurism in elite Canadian hockey.19 By the time of the 1906-07 season the

Manitoba Hockey League ("MHL") was an entirely professional circuit and its

champion, the Kenora Thistles, won both the Stanley Cup and the lasting

distinction of being the team from the smallest town ever to do so.2° Despite the

success of its Kenora team, the MHL ceased to operate as a professional league

17 Ibid., at 13.

18 P. Wilton, "Pioneer Executive W.A. Hewitt - Hockey's Rapid Growth in the Early 1900's Challenged the Game's Organizers", in Diamond et al., eds., supra note 3 at 29.

19 Ibid, at 30.

20 Goyens and Orr, supra note 8 at 24. See also D. Spaner, "The Rival Big Leagues­ Competing Leagues and Their Attempts to Ice the Best Players in the World", in Diamond et al., eds., supra note 3 at 642,643.

11 after the 1908-09 season. Another openly professional league called the

Ontario Professional Hockey League ("OPHL") was also in operation by the

1907-08 season and, before folding in 1911, would produce Stanley Cup contenders. 21 The teams of the Eastern Canada Amateur Hockey Association were also well-known to be paying professionals by at least as 1906.22 By the start of the 1908-09 season, two Montreal teams that had refused to employ professionals left the ECAHA and it was somewhat more accurately renamed the

Eastern Canada Hockey Association ("ECHA,,).23 Although it would only operate for the one season, the ECHA was widely recognized as the best hockey league in Canada that year, and its champion Ottawa Senators captured the Stanley

CUp.24

The organization of hockey leagues in the United States at the very least showed a parallel tendency toward the professionalism emerging in Canadian hockey, and presumably heightened the competition for players which made professionalism an irreversible part of Canadian hockey. The American Amateur

Hockey League ("AAHL") was formed in 1889 and operated unti11917.25 AAHL

21 Spaner, supra note 20 at 643. See also MacFarlane, supra note 7 at 26.

22 Goyens and Orr, supra note 8 at 24.

23 Spaner, supra note 20 at 643.

24 Ibid.

25 MacFarlane, supra note 7 at 23.

12 and other U.S. teams were known to recruit top Canadian players, paying them cash and/or offering jobs outside of hockey.26 ln 1904, a five team league of four

U.S. based teams and one Canadian based team claimed the distinction'of being the first fully professional league in the history of the game. 27 The central figure in the organization of the International (Pro) Hockey League ("IPHL") had been banned from the OHA as a player with the Berlin, Ontario team mentioned above and had actually established the first fully professional team a year earlier in Houghton, Michigan.28 Although the IPHL champions never competed for the

Stanley Cup, the league was of such high quality relative to other leagues operating at the same time that, of only 97 players who played in the league before it ceased to operate in 1907, 15 have since been inducted into the

Hockey Hall of Fame.29

ln 1909, a dramatic re-organization of professional leagues in Eastern Ontario and Quebec began the final phase of pre-NHL hockey history in Canada. The ambition of a particular hockey team in Renfrew, Ontario drew attention, indeed

26 Ibid.

27 The five teams ofthe IPHL were located in Pittsburgh, Sault Saint Marie (Michigan), Sault Saint Marie (Ontario), Calumet (Michigan) and Houghton (Michigan). Goyens and Orr, supra note 8, at 19.

28 McFarlane, supra note 7 at 23; Wilton, supra note 18 at 30; Spaner, supra note 20 at 642-43.

29 Ibid. See also Goyens and Orr, supra note 8, at 18.

13 ridicule, in 1907 and 1909 when the team was good enough to win its league championship, and bold enough to apply for the right to challenge for the

Stanley CUp.3O The teams of the Ottawa Valley Hockey League in which

Renfrew played were ail known to bid for the best players as early as 1908.31

Nevertheless, the Stanley Cup trustees denied Renfrew the right to challenge for the Cup both years. 32 The Renfrew team therefore left the Ottawa Valley League and applied to enter the ECHA in the fall of 1909.33 ln November of 1909, however, the teams of the ECHA voted the league out of existence, and the five

ECHA members that started up a new Canadian Hockey Association ("CHA") denied Renfrew's attempts to join. 34 Renfrew and a former ECHA team from

Montreal which had also been left out of the CHA banded together with other ambitious teams from Cobalt, Haileybury, and Montreal to form the National

Hockey Association ("NHA"), the most direct ancestor of today's NHL. 35

The Renfrew team moved quickly to sign star players away fram the new CHA

30 E. Zweig, "The National hockey Association - The Swashbuckling Roots ofthe NHL's Immediate Predecessor", in Diamond et al., eds., supra note 3, at 32.

31 MacFarlane, supra note 7 at 23.

32 Zweig, supra note 30 at 32.

33 Ibid.

34 Goyens and Orr, supra note 8 at 29.

35 Zweig, supra note 30 at 33.

14 teams, as weil as from the Edmonton team that had unsuccesfully challenged the ECHA champion Ottawa Senators in Stanley Cup competition the year

before. Dubbed the Renfrew Millionaires, the team gave the NHA such

immediate credibility that the Ottawa Senators and a Montreal team quit the CHA to join the NHA before the end of the 1909-10 season.36 The CHA was soon out

of business with Renfrew acknowledged as the team to beat in eastern Canada's

leading new professionalleague.37 Unfortunately for the town of Renfrew, the

ali-star roster of players was unable to deliver a league championship. By the

start of the 1912-13 season the Renfrew team, swamped in financial losses, was

sold and relocated to Toronto. 38

ln its drive for hockey supremacy, the Renfrew team had paid unprecedented

player salaries, the most generous going to one of the greatest hockey players

of the early twentieth century, Frederick Wellington Taylor (a.k.a. "Cyclone"

Taylor).39 At sixteen years of age, Taylor had declined an offer to play for the

Toronto Marlboros during the 1904-05 Ontario Hockey Association ("OHA") and

36 Ibid. See also Goyens and arr, supra note 8 at 30.

37 Ibid.

38 Ibid.

39 Although he never played in the NHL, Taylor is considered the early twentieth century counterpart ofBobby arr. Eric Zweig, "Statistical Twins - Top Players Compared Across Eras Using Adjusted Scoring Statistics" in Diamond et al., eds., supra note 3 at 627.

15 was refused the opportunity to join any other OHA team. 40 The next year he played briefly year in a Manitoba league before joining the Portage Lakes of

Houghton, Michigan, as a fully paid professional. 41 ln 1908 he joined the Ottawa

Senators, with whom he was the biggest star on the 1909 Stanley Cup championship team. When he joined Renfrew for the start of the 1909-1910 season he was reported to be the highest paid player on any North American sports team, earing $5,250 ($105,000 in 1999 dollars) over 12 games, ahead of baseball legend Ty Cobb. 42 By 1912 Taylor moved on to become a member of the Vancouver Millionaires of the Pacifie Coast Hockey Association ("PCHA"), where he finally remained settled until he retired after the 1921 Stanley Cup finals. 43

40 Wilton, supra note 18 at 30; Goyens and Orr, supra note 7 at 32.

41 Ibid.

42 Zweig, supra note 30 at 33. Ty Cobb was actually reported to be paid $6500 as against Taylors' $5250, but Cobb had to play 142 more games (154 game season) than Taylor in order to earn his money. According to Robert C. Sahr, Inflation Conversion Factorsfor 1700 to estimated 2010 (Political Science Department, Oregon State University) [available at http://www.ùrst.edu/dept/polsci/fac!sahrlsahr.htm]. $5,250 in 1909 US. dollars is equal to approximately $105,000 in 1999 US. dollars, while $6,500 in 1909 U.S. dollars is equal to approximately $130,000 in 1999 US. dollars. The treatment ofboth salaries as U.S. dollar figures is indulged in because even such a loose approximation serves the purpose ofrough comparison only, and because an inflation calculator available on the Bank ofCanada website for Canadian dollar figures (http://\vvvw.bankofcanada.ca/enlinflationcalc.htm) will only calculate values from as far back as 1914.

43 Zweig, supra note 30 at 33, 39.

16 For a short time, a professionalleague on Canada's east coast managed to compete with the NHA for Canadian hockey supremacy. In 1910-11, the

Interprovincial Professional Hockey League was established among teams in

New Brunswick and Nova Scotia.44 The following season the league was renamed the Maritime Professional Hockey League ("MPHL").45 The Moncton team which won the first MPHL championship was selected to challenge for the

Stanley Cup, but was defeated by the NHA champs.46 A year later, the MPHL championship was awarded to a Sydney team which also went on to lose the

Stanley Cup to the NHA champion in the spring of 1913.47 Of ail the professional leagues, the MPHL was most adversely affected by World War l, and the league ceased to operate after the 1913-1914 season. 48

From 1914 on, the only leagues that seriously competed with the NHA, and later the NHL, in producing elite hockey in Canada were based in western Canada and the north-western United Sates. A league called the Pacific Coast Hockey

Association ("PCHA") was founded by three teams in Vancouver, Victoria and

New Westminster, British Columbia in December 1911 and aggressively

44 Spaner, supra note 20 at 643.

45 Ibid.

46 Ibid.

47 Ibid.

48 Ibid.

17 recruited talent away from the NHA,49 After winning the Stanley Cup in the

Spring of 1913, the NHA's Quebec City team accepted an offer to play an exhibition series against the PCHA champions from Victoria. 50 Victoria defeated the Stanley Cup champion NHA team in that series and, beginning in the following spring of 1914, the PCHA champions participated in each of the next ten Stanley Cup championship series. 51

ln 1914 and 1915, the PCHA led the way to integrating the United States into

Canada's elite professional hockey leagues. Prior to the beginning of the 1914-

1915 season, the PCHA's New Westminster team was relocated to Portland,

Oregon, and the following season a new PCHA team was established in Seattle,

Washington.52 The addition of U.S. teams to one of the two leagues which had become perennial contenders for the Stanley Cup compelled a response from the Stanley Cup trustees. Even though the cup had originally been donated as an award for the top amateur team in Canada, the cup's trustees decided that because the Stanley Cup had become emblematic of hockey world championship, it should no longer be a challenge trophy "open to bids from

49 T.D. Picard, "The Pacifie Coast Hockey Association", in Diamond et al., eds., supra note 3 at 35.

50 Zweig, supra note 30 at 34.

51 Spaner, supra note 20 at 643.

52 Picard, supra note 49 at 36-37.

18 organizations or individuals with stars in their eyes."53 Accordingly, the trophy would go to the winner of an annual series between the NHA and PCHA champions, whether or not the team was based in Canada. 54 ln the spring of

1917, the PCHA's Seattle Metropolitans became the first non-Canadian team to win the Stanley CUp.55

The NHL was established by four teams that survived the NHA's 1916-17 season. The outbreak of World War 1prior to the 1914-15 season created some difficulties for the NHA as players left the league for military service and attendance dropped.56 The league was also frustrated by one Toronto team's purchase and elimination of the other Toronto based NHA team for the start of

1915-16 season. 57 The NHA managed to replace the second Toronto team, and bring a number of weil known players back into the league, by adding a military team prior to the 1916-17 season. 58 The military team was shipped to Europe before the end of the season, however, and the NHA arranged to complete the

53 M. Dunnell, "The Stanley Cup Mystique", in Diamond et al., eds., supra note 3 at 47

54 Picard, supra note 49 at 37. The Portland Rosebuds were the first U.S. based team to challenge for the Cup at the end ofthe 1915-16 season.

55 Goyens and Orr, supra note 7 at 24.

56 Zweig, supra note 30 at 34.

57 Ibid.

58 Ibid.

19 season with four teams, spreading the remaining Toronto team's players out to other teams for the remainder of the season. 59 ln order to rid themselves of their unpopular NHA counterpart in Toronto, the Ottawa, Ouebec, and two Montreal teams that completed the 1916-1917 NHA season then abandoned the NHA, and established the NHL instead. 60 The NHL admitted an entirely new Toronto team to its membership prior to the start of its first season in 1917-18 but a fire in one Montreal team's arena, and a one year sabbatical of the Ouebec team for financial reasons, resulted in only three teams actually completing the first NHL season.61

By 1921-22, another professional league in western Canada emerged to compete with the NHL and PCHA. A league called the Big Four League had been operating in Alberta and Saskatchewan and the quality of players and teams in that league began to rival the NHL and PCHA by the 1920-21 season.62

The Western Canada Hockey League was established upon the remnants of the

Big Four League for the 1921-22 season with teams in Edmonton, Calgary,

Regina and Saskatoon. 63 Acknowledged in its first season as a truly elite

S9 Ibid.

60 Ibid.

61 Ibid.

62 Spaner, supra note 20 at 644.

63 Ibid.

20 league, the WCHL champions played the PCHA champions in the spring of 1922 for the right to meet the NHL champion for the Stanley CUp.54 At the end of the

1922-23, and 1923-24 seasons, the NHL champion actually played off against both the PCHA and WCHL champions before being awarded the Stanley CUp.65

By the start of the 1926-27 season, the NHL had gained its position as the premier brand of professional hockey in North America, indeed the world, as a result of the eventual failure of the PCHA and WCHL. By the start of the 1924-25 season the PCHA was no longer viable and the league's two surviving teams in

Vancouver and Victoria joined the WCHL. 66 At the start of the 1925-26 season, the WCHL was renamed the WHL to reflect the relocation of the league's

Regina team to Portland, Oregon. 67 Following the 1925-26 season, the WHL teams decided to cease operating and offered their player contracts for sale to the highest bidders from among ten NHL teams scheduled to play the next season. 68 ln the end, the NHL essentially purchased the entire WHL in order to avert a bidding war and instead distribute players in an orderly way

64 Picard, supra note 49 at 39.

65 Ibid.; Spaner, supra note 20 at 644.

66 Picard, supra note 49 at 40.

67 Spaner, supra note 20 at 644.

68 Roxborough, supra note 3, at 68.

21 among new NHL teams in Detroit, Chicago, and New York. s9 After losing the

Stanley Cup to the WCHL champions in the spring of 1925, and capturing it from the WHL champions in 1926, the NHL champions would never again have to compete with teams from any other league in order to be awarded the Stanley

Cup at the end of each season. 70

C. The "Original Six" Era of NHL Hockey in Canada

Of the five Canadian hockey teams that established the NHL in 1917, and one new Canadian team admitted to the league in 1924, only two would remain active by 1939. The five founding teams were the Montreal Canadiens, the

Montreal Wanderers, the Ottawa Senators, and the Quebec Bulldogs, who had ail played in the NHA prior to 1917, and a new team in Toronto called the

Arenas. 71 Only two of those teams continue to operate today. The Montreal

Canadiens had been in operation since 1909, and have continued as such throughout the history of the NHL. 72 The Toronto team was founded at the same

time as the NHL and has continued to operate throughout the history of the

league, changing names twice to become the Toronto St. Patricks in 1919, and

69 Ibid., at 68-69.

70 Ibid., at 70.

71 Ibid., at 60.

72 Quirk and Fort, supra note 1 at 468.

22 to become the Toronto Maple Leafs in 1926.73 The Montreal Wanderers permanently ceased to operate in 1918.74 The Ottawa Senators managed to operate until 1931 before suspending operations for one year, and then resuming operations for part of the following year before moving to become the

St. Louis Eagles, and finally going out of business in 1935.75 The Quebec

Bulldogs did not actually play in the NHL's first season, but did play in 1919 before moving to become the Hamilton Tigers in 1920, and leaving Canada in

1925 to become the New York Americans. 76 Of six new teams that joined the

NHL between 1924 and 1927, only the Montreal Maroons were based in

Canada. 77 That team began playing in 1924 and operated until 1938, when it voluntarily suspended its operations for one year and unsuccessfully attempted to negotiate a relocation of the team to St. Louis. In 1939 the NHL canceled the

Montreal Maroons franchise. 78

From 1939 until 1970, therefore, NHL Hockey in Canada consisted solely of the

Montreal Canadiens and the Toronto Maple Leafs competing with each other

73 Ibid., at 473.

74 Ibid., at 469.

75 Ibid., at 472.

76 Ibid., at 463-64.

77 Ibid., at 327-28.

78 Ibid., at 469.

23 and a variety of U.S. based teams. As noted above, those NHL teams that failed in Canada between 1917 and 1939 had often looked to U.S. markets for new homes, while the NHL also sold league memberships to five entirely new teams in the United States teams between 1924 and 1927. By 1942, after various NHL teams had been created, relocated and gone out of business in those various

Canadian and U.S. cities, the league's membership finally settled at six teams which have become known in NHL folklore as the "Original Six". For the next twenty-five seasons not a single NHL team would be created, relocated or go out of business and, to this day, ail of the "Original Six" teams remain in operation in the same cities and under the same names as in 1942.79

Having never included more than four Canadian teams since 1925, the number of NHL teams in Canada would reach a total of six during the 1970's as a result of the league's successful expansion throughout North America. NHL calibre hockey was lost to Western Canada in 1926, and with the departure of the

Ottawa team in 1933 would again not be played in a Canadian City other than

Montreal or Toronto unti11970. In 1967, however, the NHL's Original Six finally embarked on a period of expansion, reaching Vancouver in 1970, and continuing to add new NHL teams in additional North American cities. In 1979 the number of Canadian NHL teams grew to six when the Edmonton Oîlers, the

79 Apparently the NHL did entertain the possibility ofcreating an NHL team in Cleveland in 1952. In any event, no such deal was ever made and the NHL remained a six team competition unti11967. Ibid., at 465.

24 Winnipeg Jets, and the Quebec Nordiques entered the NHL upon the demise of the rival World Hockey Association ("WHA"), which they had helped to found seven seasons earlier.

D. The WHA: 1972·1979

A professional hockey league known as the World Hockey Association ("WHA") did actually attempt to compete with the NHL during the 1970'5, but succeeded only in imitating the erratic additions, relocations, and failures of teams that previous leagues had experienced during the first three decades of the twentieth century. The WHA was established in Canada and the United States in 1972 by a group of twelve new professional hockey teams. 80 Even though the WHA was able to attract another four teams, which joined the league over the next four years, ten out of those sixteen WHA teams would not survive long enough to finish 1978-79 season. 81 Four of the six remaining teams, located in Edmonton,

80 S. Fischler, "The World Hockey Association - Assessing the Impact ofthe 'Rival League"', in Diamond et al., eds., supra note 3 at 374.

81 See franchise history tables in Fischler, supra note 80 at 375; and Quirk and Fort, supra note 1 at 474-78. The location and total number ofWHA teams varied at the rates set out in the following table:

Hockey Season 1972 1973 1974 1975 1976 1977 1978 -73 -74 -75 -76 -77 -78 -79

Number ofteams at start of season 12 12 14 14 12 9 7

Number ofteams joining league before start of 2 2 season 25 Winnipeg, Quebec and Hartford, Connecticut, gained admission to the NHL in

1979 as part of a deal which put an end to the WHA once and for al1. 82

ln contrast to the survival of the WHA's Edmonton Oilers, Winnipeg Jets and

Quebec Nordiques until joining the NHL, three other WHA franchises accounted for two moves of teams into Canada, two moves of teams within Canada, one move of a team out of Canada, and 2 team failures within Canada. 83 Along with the teams in Edmonton, Winnipeg, and Quebec City, a fourth Canadian team located in Ottawa was among the WHA's twelve founding teams in 1972. The

Ottawa team relocated to Toronto by the start of the 1973-74 season. At the same time, another WHA team had relocated from Philadelphia to Vancouver.

By the start of the 1975-76 season the Vancouver team relocated again to

Hockey Season 1972 1973 1974 1975 1976 1977 1978 - 73 -74 - 75 -76 -77 -78 -79

Number ofteams relocating before start ofseason 2 2 2 1

Number ofteams relocating during season 1 1

Number ofteams failing to complete season but 1 resuming play the following season

Number ofteams out ofbusiness before end of 1 1 season

Number ofteams out ofbusiness before start ofnext 2 2 2 2 2 season

Number ofteams joining NHL before start ofnext 4 season

82 Quirk and Fort, supra note 1 at 332.

83 See supra note 81.

26 Calgary, and halfway through the same season Canadian membership in the

WHA peaked at six when a Denver team moved to Ottawa. By the beginning of the following season, Ottawa's second WHA team was out of business and

Toronto's WHA team had left Canada for Birmingham, Alabama. By the start of the 1977 season the Calgary team was also out of business, leaving the

Edmonton Oilers, the Winnipeg Jets, and the Quebec Nordiques as the only

Canadian WHA teams. 84

ln the half century prior to the creation of the WHA, the NHL had constructed an iron-c1ad system of severely restricting player salaries and mobility. In 1972, the standard NHL player contract contained a well-known reserve clause which provided that once a player was under contract to a team, that team could unilaterally renew the contract in perpetuity and prevent the player from ever playing for any other team or league.85 Through the NHL draft system, the NHL network of contract affiliations with most junior leagues and minor professional leagues throughout North America with similar standard player contractual reserve rights, most if not ail North American hockey players of professional or near professional calibre were bound to one of the NHL parent clubs either

84 Quirk and Fort, supra note 1 at 329.

85 Weistart and Lowell, The Law ofSports (D. S.A.: The Bobbs-Merrill Company, Ine., 1979) at 502, n. 162.

27 directly or through its affiliated leagues or teams. 86

ln bidding for contracts with players purportedly bound to NHL teams, the WHA deliberately repeated the same leading role that ambitious new leagues of the early twentieth century had played in escalating player salaries for stars and other players alike. Of the NHL players with whom the WHA contracted, Bobby

Hull was the foremost star and was induced to breach the contractual reserve rights of his NHL employers with a one million dollar signing bonus and a ten year contract worth 2.75 million dollars.87 By comparison, the WHA only had to better average NHL salaries of $24,000 and minor league salaries of $11 ,000 to

$12,000 in convincing other players to breach their NHL employers' contractual

88 reserve rights . By the start of the WHA's first season, an average WHA salary of $53,000 was sufficient to persuade over 200 players to breach NHL reserve clauses, and to help effect an increase of the average NHL salary to $31,000.89

Besides some modest salary increases, NHL teams responded by notifying

86 Philadelphia World Hockey Club, Inc. v. Philadelphia Hockey Club, Inc., et al., 351 F. Supp. 462 (B.D. Pa., 1972) at 472-479 [hereinafter WHA Case (1972)].

87 Ibid., at 492.

88 Ibid., at 472. See aIso, infra note 95 and accompanying text; G. Stein, Power Plays: An Inside Look at the Big Business ofthe National Hockey League (Secaucus, N.J.: Carol Publishing Group, 1997) at 20.

89 Quirk and Fort, supra note 1 at 330.

28 players that they intended to enforce their reserve rights through litigation if necessary, and actually sued at least 11 star players who signed in with WHA teams. 90 ln the case of Bobby Hull and three or four other players, NHL teams even obtained preliminary injunctions to prevent them from playing in the WHA when the 1972 hockey season opened. 91

Later ln the fall of 1972, the NHL's system of player salary and mobility restraints was declared illegal in a preliminary but conclusive decision of the antitrust litigation that arose from the conflict between the ambition of the WHA and the aggressive response of the NHL. A few weeks after the WHA had opened its first season, a preliminary injunction was issued to prohibit NHL teams from enforcing their perpetuai rights to bind players to renewals of their otherwise expired NHL contracts. 92 The decision was made in the course of a consolidated proceeding the had brought together the several antitrust lawsuits that were pending between NHL and WHA teams and players at the time. 93 The ruling made c1ear that, in principle, the "materially identical"contract provisions used by miner professionalleagues affiliated with the NHL were also illegal.94

90 WHA Case (1972), supra note 86 at 493-95,488 to 489.

91 Ibid, at 494-495.

92 Ibid, at 467-468.

93 Ibid., at 468.

94 Ibid, at 511.

29 The competitive bidding for player talent initiated by the WHA in 1972 has continued to date. Average NHL player salaries have increased in absolute terms from $25,000 (US$) in 1970 to $1,167,713 (US$) in 1998.95 When adjusted for inflation, that still represents an increase of more than ten times. 96

The NHL was unable, both in law and practice, to regain control over player salaries with the demise of the WHA in 1979. As a matter of law, the NHL is simply prohibited from reconstructing the system of player salary and mobility restraints it previously enjoyed without obtaining the collectively negotiated agreement of the players themselves to the system. In any event, the expansion in the number of NHL teams to the present thirty has probably made the kind of owner discipline necessary to maintain control over bidding for player talent a practical impossibility.

E. The NHL in Canada Since 1980: The Best of Times or the Worst of Times?

From the fall of 1980 when the number of Canadian NHL teams increased to seven, Canadian hockey fans enjoyed an unprecedented amount and quality of local NHL hockey, with the number of Canadian teams peaking briefly at eight

9S Source: National Hockey League Players' Association.

% According to Sahr, supra note 42, $25,000 in 1970 US. dollars is equal to approximately $108,000 in 1999 US. dollars, while $1,167,713 in 1998 US. dollars is equal to approximately $1,196,000 in 1999 US. dollars.

30 from the fall of 1992 until the spring of 1995. In 1980 the number of Canadian

NHL teams grew to seven as a result of the relocation of the Atlanta Flames to

Calgary.97 A decade later, in 1992, NHL teams in Canada numbered eight with the admission of the Ottawa Senators to the league.96 A Canadian team ultimately won the Stanley Cup in eight of the fifteen hockey seasons between the fall of 1980 and the spring of 1995.99 Canadian teams also qualified for almost one third (seventy-nine out of two hundred and forty) of the available slots in the NHL playoffs during that period, and thirteen of the thirty eventual

Stanley Cup finalists were Canadian teams. 1OO

The loss of two Canadian NHL teams, first in the fall of 1995 and again in the fall of 1996, may seem disastrous to Canadian hockey fans who enjoyed an unprecedented number and quality of NHL teams operating in Canada during the nineteen-eighties and early nineteen-nineties. With the start of the 1995-96 season, the total number of Canadian NHL teams dropped back to seven when the Quebec Nordiques relocated to become the Colorado Avalanche. 101 A year

97 Quirk and Foct, supra note 1 at 464.

98 Ibid., at 470.

99 Diamond et al., eds., supra note 3, at 50.

100 Ibid. at 50; See also "Franchise Histories - Profiles ofCurrent and Former NHL Clubs", in Ibid. at 160-259, for regular season and playoffresults for each NHL team.

101 Ibid., at 183.

31 later, the Winnipeg Jets became the Phoenix Coyotes, leaving Canada with six

NHL teams. 102 ln addition, not a single Canadian team has advanced to the

Stanley Cup final since the Vancouver Canucks lost in the 1994 championship, and in the six seasons completed since the end of the 1994-95 season,

Canadian teams have combined to qualify for just under one quarter (twenty-one out of ninety-six) of available NHL playoff slots and have failed to produce a

Stanley Cup finalist. 103

When taking a more balanced view of the entire history of professional hockey in

Canada, however, the current state of affairs appears more positive. In the first place, it is probably somewhat early to conclude that one of the six Canadian teams will never again win the Stanley Cup. It is equally unrealistic to expect six

Canadian teams that make up only one quarter of the league's current slate of thirty teams to qualify for play-off spots in any greater proportion. Canadian consumers have rarely enjoyed a more abundant supply of professional hockey at home, and have never enjoyed it without the accompanying chaos of repeated formations, relocations and failures of local teams.

Of the nine Canadian cities that have had NHL teams at some time during the twentieth century, only Winnipeg, Quebec and Hamilton are not home to active

102 Ibid. at 234.

103 Supra note 100.

32 teams today.104 Twelve different NHL teams have operated at one time or another in Canada between 1917 and 2000, and if the WHA teams which failed to eventually join the NHL are counted then there have been fifteen teams.

Those respective totals increase to 13 and 18 if NHLIWHA teams which relocated from one Canadian city to another Canadian City are counted twice instead of once. 10S Of those eighteen NHLIWHA teams, however, only ten were ever viable enough to operate for more than five years before either closing down or leaving Canada. 106 Two of those ten teams, namely the Ottawa

Senators and the Montreal Maroons, both ceased to operate in the 1930's leaving eight to operate in recent memory. Of those eight, six remain active in

Canada today. While the departures of the Quebec Nordiques and the Winnipeg

Jets were disappointing to their fans, the two teams still succeeded, respectively,

104 Even ifthe PCHAlWCHLIWHL teams ofthe 1910's and 20'a are also considered, the history ofprofessional hockey in Canada still fails to show any record ofeconomic viability comparable to today's teams. At least 7 more Canadian professional hockey teams competed with the NHL under various names in the PCRA, WCHL, and WHL from 1909 to 1926. Only the Vancouver Millionaires, later renamed the Maroons operated throughout that entire period. Teams in Victoria, New Westminster, Regina, Saskatoon, Calgary and Edmonton also participated in one or more ofthose western North American professional hockey leagues at sorne point in time. See Diamond et al, eds., supra note 3 at 35-41, 642-644. See aiso, franchise histories in Quirk and Fort, supra note 1 at 463-64,474-75; and "Franchise Histories - Profiles ofCurrent and Former NHL Clubs", supra note 100 at 160-259.

105 In the 1920, the NHL's Quebec Bulldogs were moved and renamed the Hamilton Tigers. In the 1970's, the WHA's Ottawa Nationals were relocated as the Toronto Toros, and the WHA's Vancouver Blazers were relocated as the Calgary Cowboys. Quirk and Fort, supra note 1 at 463-64,474-75.

106 See franchise histories in Ibid., at 463-78; See also "Franchise Histories - Profiles of Current and Former NHL Clubs", supra note 100 at 160-259.

33 in operating for sixteen and seventeen NHL seasons (twenty-three and twenty­ four seasons if WHA years are included).

Simply comparing the number of NHL games played in Canada in any given year also indicates that the years between 1980/81 and 1994/95 are the only time that the supply of elite professional hockey in Canada was greater than at present. 107 Between the 1938-39 and 1969-70 seasons, the two Canadian NHL teams played a combined total of between 48 and 80 regular season home games each year. Because schedules were shorter, the three to five Canadian

NHL teams active at various times during the NHL's first twenty seasons from

1917-18 through 1937-38, produced a similar range of between 36 and 96 regular season home games in any given year. The numbers increased only slightly in the years between the 1970-71 and 1978-79 seasons, when there were three Canadian NHL teams playing between 76 and 80 regular season games, producing a combined total of between 114 and 120 regular season home games. The total number of NHL regular season home games played in

Canada approached the current level for the first time only in the 1979-80 season, with six Canadian teams playing an 80 game schedule and producing

240 home games in Canada. Between the 1980-81 and 1994-95 NHL seasons,

107 See Ibid for the number ofgames played by each team in each year.

34 teams played schedules of between 80 and 84 regular season games per year108 producing all-time high combined yearly totals of between 280 and 336 regular season NHL home games in Canada. Currently, each of the six active Canadian

NHL teams plays 82 regular season games producing a combined total of 246 regular season home games. It is also worth noting that the availability of elite professional hockey in Canada today is enhanced more than ever by arenas with larger attendance capacities and the increasing potential for teams' entire schedules to be made available on radio and television broadcasts.

With respect to the health of the league as a whole, and not just in Canada, the most noteworthy accomplishment of the NHL in the phase of expansion and team relocations that began in 1967 has been the relative infrequency of team failures, relocations, and other chaos that characterized early twentieth century professional hockey businesses. Of twenty-four teams added to the NHL since

1967 the teams originally known in 1967 as the Oakland Seals, and in 1974 as the Kansas City Scouts, have been the most transient. The Oakland team moved briefly to Cleveland before merging with the Minnesota North Stars in

108 NB., The 1994-95 season was actually shortened by a player strike and therefore the regular season schedule that year was made up ofonly 48 games per team. Ibid. 35 1977, becoming the only modern NHL team to actually go out of business. 109

The Kansas City team was relocated after two seasons to become the Colorado

Rockies, and moved again in 1981 to New Jersey where the team remains today.110 Only one other NHL team relocated during the 1980's, leaving Atlanta to become today's Calgary Flames. 111 Another bout of relocations occurred in the 1990's with teams in Minnesota, Quebec City, Winnipeg, and Hartford relocating, respectively, to Dallas as of the 1993-94 season, Denver as of the

1995-96 season, Phoenix as of the 1996-97 season, and North Carolina as of the 1997-98 season. 112 The extent to which those moves might indicate any instability in the league must be considered, however, in light of the fact that they occurred only after each team had operated for over two decades in its previous home. 113

Finally, it is surprising to find that average NHL ticket prices only slightly more than doubled between 1971 and 1999. The average NHL ticket price in 1971 was $5.22 in U.S. dollars. 114 ln 1999, the average NHL ticket price reached

109 Diamond et al, eds., supra note 3 at 172-73; Quirk and Fort, supra note 1 at 465.

110 Diamond et al, eds., supra note 3 at 212-215; Quirk and Fort, supra note 1 at 469-70. ll1 Diamond et al, eds., supra note 3 at 169-72; Quirk and Fort, supra note 1 at 464.

112 Diamond etai, eds., supra note 3 at 184-87,180-83,231-34,174-76.

113 Ibid.

114 WHA Case (1972), supra note 86 at 471.

36 $45.70 in U.S. dollars. 115 When adjusted for inflation, however, the 1971 ticket price amounts to appraximately $21.48 in 1999 U.S. dollars. 116 That increase also has to be considered in Iight of the fact that, until 1970, the cost of attending an NHL hockey game for fans in two thirds of today's NHL cities would also have included the price of a trip to Montreal or Toronto.

f. Conclusion

Positive observations about the current state of NHL hockey in Canada would have been no consolation to NHL hockey fans in Ottawa at the start of the year

2000. On January Tuesday January 18, 2000 federal Industry Minister John

Manley announced that NHL hockey teams would be eligible for financial assistance under a federal government plan yet to be formulated. 117 As a preliminary matter, however, federal government committed itself to make a contribution to any Canadian NHL hockey team of up to 25% of the total of any other assistance the team received fram the NHL, municipal government, and

us M. Buteau, "NHL Average Ticket Prices Rise, Overtake NFL", The Detroit News (Friday October 15, 1999), available at http://detnews.com/1999/sports/9910/15/10150156.htm.

116 Sahr, supra note 42.

117 Industry Canada, News Release "Financial Challenges Facing Canadian NHL Teams" (January 18,2001).

37

~------provincial governments.118 The federal aid was not intended to be available to any team unable to obtain assistance from each and every one of those other parties. 119 As a result of their previous lobbying efforts, the Ottawa Senators had already met the requirement of obtaining the underlying league assistance, and municipal and provincial tax relief. Across Canada, the immediate public and governmental reaction to the proposai was overwhelmingly negative,120 and by

Friday, January 21, 2000, Industry Minister John Manley announced that "This proposai is dead, and we will not be pursuing the issue any further.,,121 On

February 1, 2000 the team held a press conference, followed by the publication of an open letter in The Ottawa Citizen on February 2,2000, announcing that existing season ticket holders and corporate partners/sponsors, respectively, had approximately one week to decide whether to accept a 7% increase in ticket priees and a 10% increase in contracted priees for advertising and other services. 122 ln addition, another 1500 season ticket holders wauld have ta

118 Ibid.

119 Ibid.

120 See e.g. T. BIackwell and C. Cobb, "Harris won't give Bryden tax break - NHL 'not a charity' he says ofSenators' bid to avoid paying amusement Ievy", The Ottawa Citizen (January 19,2000).

121 (AP), "'This proposaI is dead' - Canadian government ices NHL subsidy program", CNNSports Illustrated - cnnsi.com (January 21,2000) avaiIabIe at http://,,,ww.cnnsi.com.

122 R. Bryden, "An Open Letter to Hockey Fans and Concemed Citizens ofour Community", The Ottawa Citizen (February 2,2000) at A9.

38 5 123 subscribe at the higher ticket priees by February 21 \ 2000. According to the

Ottawa Senators' published letter to their fans, the team would be offered for sale to U.S. buyers if those conditions were not met. 124

There does not, however, appear to be a historical basis for the fear that the future of Canadian hockey itself hung in the balance when the federal government tried and failed to assume a role in providing direct financial assistance to Canadian NHL teams. In comparison to other Canadian businesses that compete with U.S. counterparts, Canadian NHL teams cer:tainly appear to bear a disproportionate burden in coping with a comparatively high tax burden and a Canadian dollar languishing at a historically low value.

Nevertheless, the history of professional hockey in Canada suggests that the industry has almost never been as healthy as it is today. In light of hockey's special place in many Canadians' lives, there is surely sorne widespread support for trying to preserve the current NHL presence in Canada. However, the ultimate ability of the private and business citizens of Ottawa to provide the

Ottawa Senators with the relief they required, without federal assistance, strengthens the view that there is not actually any imminent national cultural emergency to be averted.

123 Ibid

124 Ibid

39 III. TAXATION APPLICABLE TO THE OTTAWA SENATORS AND OTHER CANADIAN ENTERTAINMENT BUSINESSES IN ONTARIO

A. Introduction

It must seem peculiar to many people that the Ottawa Senators, a team which claims to have rarely if ever been profitable, spent a year or more lobbying for relief from a heavy and unfair tax burden rather than just asking for direct subsidies or grants of financial assistance. Most people are of course aware that some taxes, such as property taxes, are imposed regardless of profitability.

Nevertheless, one would tend to presume that a disproportionately heavy tax burden would usually fall on taxpayers with considerable net income.

A comprehensive review of the entire system of Canadian business taxation recently revealed that, to a surprising extent, unprofitable Canadian businesses may bear a relatively heavier tax burden today than ever before. On March 6,

1996, a Technical Committee on Business Taxation, composed of experts in the field, was appointed by the federal Minister of Finance to study the overall system of business taxation in Canada. In December of 1997, that committee published its report (the "1997 Technical Committee Report"). According to the

1997 Technical Committee Report, Canadian corporate profits steadily declined relative to GDP from the late 1970s into the 1990s. 125 The increasing reliance

125 Report ofthe Technical Committee on Business Taxation (submitted to the Honorable Paul Martin, P.C., M.P., Minister ofFinance) by lM. Mintz et al. (Ottawa: Department of Finance, Distribution Centre, 1997) at section 2.12 [hereinafter Report on Business Taxation].

40 on profit insensitive taxes during the same period wouId, by 1995, yield 85 billion dollars in tax revenue from Canadian businesses, of which only 22% ($19 billion) was made up of taxes on corporate income (i.e. profits).126

Besides the fact that the taxation to which the Ottawa Senators are subject is burdensome without regard to the financial results of the team's operations, a comparison of the treatment received by NHL hockey and other entertainment businesses in Ontario does permit an argument that NHL hockey is unfairly taxed relative to other types of business. General rules of municipal, provincial, and federal taxation combine to produce the basic landscape of taxation applicable to Canadian businesses in Ontario. Live entertainment, films, and television productions ail compete with professional sports for audiences.

Accordingly, some insight into the relatively poor location of NHL hockey on the spectrum of preferential, average, and prejudicial tax treatment that ultimately prevails within the generallandscape can be gained by comparing the tax treatment applied to those various business activities in Ontario.

B. Taxation of Business in Ontario - The General Rules

As observed by the 1997 Technical Committee Report, it is difficult to observe clear distinctions between personal taxes and taxes to which businesses are

126 Ibid, at section 1.4.

41 subject,127 For example, although provincial sales taxes and federal goods and services taxes are theoretically charged to the consuming public, it is the businesses selling taxable items that are responsible for the collection and remittance of the taxes. These taxes therefore deny businesses a share of the market price which they could otherwise obtain in exchange for their goods or services. By comparison, annual corporate income and capital taxes which are imposed by both provincial and federal governments relate only to businesses.

Nevertheless, the 1997 Technical Committee Report emphasized that these taxes may ultimately bear upon consumers and/or employees. Accordingly, the taxes which are discussed below may not in ail cases be a tax on business itself, and may not represent every single tax to which business activity is subject, but they have been set out because they arise in the course of business activity and affect the flow of money in or out of Canadian businesses as a practical matter.

i. Municipal Taxation in Ontario

Real estate properties in the province of Ontario are taxed according to the financial requirements of up to two levels of municipal government and between one and four district school boards. Ontario municipalities can be organized with either one or two levels of municipal government. Until January 1, 2001, when the municipalities around Ottawa were amalgamated and re-organized into

127 Ibid, at section 2.1.

42 a single city, the two tier model applied, and the most locallevels of government were incorporated under various designations, such as city, town, township, or village, to perform some but not ail municipal functions. 128 A second level of government, designated as the Regional Municipality of Ottawa-Carleton

("RMOC"), existed on a larger regional basis and performed the remaining municipal functions across the various cities, towns, and villages within the geographic Iimits of the RMOC. 129 From 2001 forward , ail of the municipal functions previously performed by the various municipalities and the RMOC were consolidated within the responsibility of the new, single City of Ottawa.

Ontario school boards are organized in districts which are legally distinct from, and may not exactly correspond to local and/or regional municipality boundaries. ln any given district, there can be up to four separate school boards organized to administer publicly funded english language public schools, french-language public schools, english language Roman-Catholic separate schools and french- language Roman Catholic separate schools. 130

Except for very limited types of property which are specifically exempted from taxation, every real estate property in Ontario is taxed on the basis of its

128 SeeCityofOttawaAct, 1999, S.O. 1999, c. 14, Sched. E, S.2.

129 See Ibid., s. 1 (definition of "oid municipality"); Municipal Act, RS.O. 1990, c.M-45, Part II.

130 Education Act, R.S.O. 1990, c. E-2, s. 58.1.

43 property classification and current assessed value. 131 Throughout Ontario, the assessed value of each piece of real property for purposes of taxation is determined by a provincial agency, incorporated as the Ontario Property

Assessment Corporation. 132 The assessment corporation is mandated by

Ontario's Assessment Act (the "Assessment Act") to prepare and deliver a separate assessment roll for every municipality in the province. 133 The assessment corporation also classifies every property into one of the property classes provided for under the Assessment Act. 134 The Act itself establishes seven classes of real estate, but permits additional classes to be established by provincial regulations under the Assessment Act. 135

The only limited discretion given to municipalities to discriminate in the rates of

131 Assessment Act, R.S.O. 1990, c. E-2, s. 19. Current value is defined to mean "the amount ofmoney the fee simple, ifunencumbered, would realize ifsold at arm's length by a willing seller to a willing buyer." Ibid., ss. 1, 3; Municipal Act, supra note 129, s. 362(1).

132 See Ontario Property Assessment Corporation Act, S.O. 1997, c. 43, Sched. G. Land in Ontario will eventually be assessed annually, but for the time being, 1998, 1999, and 2000 taxes will be based upon the value ofthe property assessed as ofJune 30, 1996; 2001 and 2002 taxes will be based upon the value ofthe property assessed as ofJune 30, 1999; 2003 taxes will be based up on the value ofthe property assessed as ofJune 30, 2001. Taxes in 2004 and subsequent years will be based upon the value ofthe property assessed as ofJune 30 ofthe preceding year. Assessment Act, supra note 131, s. 19.2.

133 Ibid, ss. 14,36.

134 Ibid, s. 14.

135 Ibid, s. 7.

44 taxation applied to various properties is the power discriminate, within a prescribed range of difference, between the various classes and subclasses.

The point of classification and sub-classification is, of course, to facilitate some discrimination in the rates of taxation paid by different types of property.136 Ali municipalities are required to pass an annual by-Iaw establishing tax ratios that control the municipal tax rate charged to each property class relative to the municipal tax rate charged to the residential/farm property class. 137 Provincial regulations under the Act restrict the municipalities' discretion to discriminate even between classes, however, by setting minimum and maximum ratios within which the municipally adopted tax ratios must fall. 138 ln Ottawa's former two-tier municipality it was the upper tier RMOC which was responsible for establishing the annual tax ratios. 139 The tax ratios adopted by an upper tier municipal government, are binding on ail of the lower tier cities, villages, townships and towns. 140

ln addition to the municipalities' limited discretion over tax ratios, regulations

136 See Ibid, s. 8 (requiring the Minister to prescribe subc1asses for land awaiting development, vacant land, vacant units and excess land within various property classes).

137 Municipal Act, supra note 129, s. 363. Perhaps redundantly, subsection 363(2) provides that: "The tax ratio for the residential/farm property c1ass is 1."

138 Ibid, s. 363(6).

139 Ibid, s. 363(4).

140 Ibid

45 passed under the Assessment Act have given municipalities some additional limited discretion to discriminate in the tax rates applied to different types of property. Besides the seven property classes provided for in the Assessment

Act, regulations adopted under the Act have established six more property classes that only apply in cases where a municipal by-Iaw opting to have the additional property c1ass apply has been adopted. 141 If no such by-Iaw is enacted, property that is classified in one of the six additional classes will fall back into one of the seven statutory property classes. Seven out of the resulting total of thirteen classes of real estate are further divided into between one and four subclasses. 142

Finally, ail property taxes are levied and collected by the local municipal government, even in a two-tier municipality where properties in the same class may ultimately end up paying different rates. In addition to adopting tax ratios, every city, town, township and village in the Province of Ontario is annually required to adopt budgets,143 pass by-Iaws levying the taxes required for municipal purposes,144 and pass by-Iaws levying the taxes required for school

141 O. Reg. 174/00, s. 1; O. Reg. 218/98, ss. 2., 19-21.

142 Ibid.; As discussed below, O. Reg. 174/00, added a professional sports facility c1ass to the twelve classes ofproperty previously prescribed by regulations under the Act.

143 Municipal Act, supra note 129, s. 367.

144 Ibid., s. 368.

46 purposes. 145 The tax ratios dictate that municipal tax rates will be equal for ail

properties within the same class in a given city, town, township or village. In a

two-tier municipality, however, the upper-tier municipality also adopts an annual

budget,146 and an annual by-Iaw directing the various lower tier-municipalities to

levy the taxes required under the upper-tier municipality's budget. 147 The tax

rates applicable for upper-tier municipal purposes are therefore the same for ail

properties in a given class or sub-class throughout the upper tier-municipality,

although the portion of taxes levied for lower-tier municipal purposes may vary

between the various cities, towns, townships or villages. 148

ln addition to local and/or regional-municipality tax rates, real estate taxes

include local school tax rates which are prescribed by the provincial government

and levied by municipal governments in order to fund local school board budgets

under the Education ACt. 149 School boards are required to prepare annual

budgets which are filed with the Ministry of Training and Education, but the

145 Education Act, supra note 130, ss. 257.7(1), 257.12.1(1)-(6).

146 Municipal Act, supra note 129, s. 365.

147 Ibid, s. 366. Ibid., s. 366(5) requires local municipalities to levy taxes in accordance with upper-tier municipality's requirements, ibid., s. 366(12) provides that amounts levied by lower-tier municipality in accordance with upper-tier by-Iaw are deemed to be taxes and are a debt payable by the lower-tier municipality 10 the upper-tier municipality.

148 Ibid., s. 366(4)3.

149 Education Act, supra note 130, ss. 257.6, 257.7, 257.12. School boards levy taxes directly in cases where no municipality exists in the relevant territory.

47 Ontario Minister of Finance ultimately dictates the tax rates for school purposes. 150 School tax rates applicable to the various residential classes are prescribed by regulations and are required to relate to each other in ratios fixed by the Education ACt. 151 The Minister of Finance has greater discretion in determining the school tax rates on the various business property classes. The school tax rates on the business property classes are fixed by either provincial regulation, or a municipal by-Iaw passed in accordance with a written requisition from the Minister of Finance. 152 ln a two-tier municipality the requisition is addressed to the upper-tier government, which is then required to pass a by-Iaw directing the lower-tier municipality to levy the taxes. 153

150 Ibid, ss. 231(1), 231(1l)(c), 257.7, 257.12.

151 Ibid., s. 257.12 Ontario has English language Roman Catholic school boards, French language separate (Roman Catholic) school boards, English language public school boards ,and French language public school boards. In the various residential property classes, therefore, otherwise identical properties in the same municipality and property class may actually be taxed to the support ofdifferent boards and pay different school tax rates. Residential property classes are taxed for English language public board purposes unless the owner has filed a notice requiring that the land be taxed for another board's purposes. Ibid, s. 237(5). School taxes on business property classes are apportioned to the support ofall the boards in a municipality, in proportion to the enrolment in each board. Ibid, s. 237(2).

152 Ibid., ss. 257. 12(1)(b), 257.12.1(1)-(6) The differentiation oftax rates between the various business property classes is not restricted by any ratios as are residential school tax rates and municipal taxes. If, however, the commercial or industrial classes set out in the Assessment Act have been supplemented in the regulations by additional commercial or industrial classes, the rate applied within the commercial classes must be in the same proportion as the applicable municipal ratios for each ofthe commercial classes. The same mIe applies where there are more than one industrial classes. Ibid, s. 257.12.1(7).

153 Education Act, supra note 130, s. 257.12.1(1)-(6).

48 H. Provincial Taxation ofCorporations Doing Business in Ontario

ln Ontario, a generally applicable sales tax of eight per cent (8%) is imposed under the Retail Sales Tax Act. Subject to certain exceptions in the Retail Sales

Tax Act, a purchaser of any tangible personal property sold in Ontario is required to pay sales tax of eight percent on the fair value of the goodS. 154 The eight percent tax is also payable on a limited number of taxable services Iisted in the Act. 155 The act appoints every person who sells taxable goods or services in the ordinary course of their business as an agent of the Minister of Finance, and legally obligates the agents so appointed to collect the taxes imposed by the

Retail Sales Tax Act. 156 The Act also provides that it is illegal to go into business selling taxable goods or services without first obtaining a permit to transact business in the province. The minimum penalty for doing business without the required permit is a fine of $100 per day on which the offence occurs or continues. 157

ln addition to having to collect sales tax on applicable transactions, businesses

154 Retail Sales Tax Act, RS.O. 1990, c. R-31, s. 2(1).

155 Ibid., SS. 1, 2(3), 2.1.

156 Ibid., S. 10.

157 Ibid., s. 5.

49 operating in Ontario and organized as corporations are subject to income tax under the Corporations Income Tax Act. Any corporation that has a permanent establishment in Ontario is liable to taxation under the Act. 158 Taxable income earned by corporations in Ontario is subject to tax, at the rate of 15.5 percent if earned prior to May 2,2000, at the rate of 14.5 percent if earned prior to January

1, 2001, and at the rate of 14 percent if fram January 1, 2001 forward. 159 ln order to effectively exempt corporate income earned outside of Ontario from the

Ontario tax, corporations receive a credit equal to the 15.5 percent, 14.5 percent, or 14 percent, as applicable, of the portion of their taxable income which is earned outside of Ontario. 160

A "corporate minimum tax" is also provided for in the Corporations Tax Act and becomes payable in Ontario if a corporation, or group of associated corporations,161 is required to pay IiUle or no corporate income tax in a given year but has sorne net income and either total assets exceeding $5,000,000 or

158 Corporations Tax Act, RS.O. 1990, c. C-40, ss. 2(1)-(2), 57.2, 57.11.

159 Ibid., s. 38.

160 Ibid., s. 39.

161 Ibid., s. l(a) provides that interpretations set out in Part XVII ofthe Income Tax Act, RS.C. 1985, c.1 (5 th Supp.) are applicable for purposes ofthe Corporations Tax Act unless explicitly excluded. Section 256(1) ofthe Income Tax Act gives the broadest possible meaning to associated corporations defining them to include, among other things, a corporation controlled, directly or indirectly, in any manner whatever, by another corporation, or more than one corporations controlled, directly or indirectly, in any manner whatever, by the same person or persons who are related to one another.

50 total annual revenue exceeding $10,000,000. 162 It is, of course, possible, that a corporation subject to taxation under the Act may have its liability for the basic corporate income tax rate of 15.5, 14.5, or 14 percent effectively reduced or eliminated by credits or past losses which can be used to reduce taxes payable under the Act. In such a case, the minimum tax rate of 4% is applied to the portion of a corporation's adjusted "net income" which is allocated to Ontario under the Act. 163 A corporation's net income is somewhat different than the

"taxable income" figure to which the corporate income tax rate applies under the

Act because it is determined according to Generally Accepted Accounting

Principles, with a few adjustments. 164 If an Ontario corporation's income tax

162 Corporations Tax Act, supra note 158, s. 57.2(1).

163 Ifa corporation has taxable incorne for purposes ofthe corporate incorne tax applied under the Act, then the sarne fraction ofits adjusted net incorne is allocated to Ontario as the fraction obtained by dividing the portion ofits taxable incorne which is earned in Ontario by its total taxable incorne. Ifa corporation has no taxable incorne for purposes ofthe corporate incorne tax applied under the Act, then its entire adjusted net incorne will be taxed at the rate of4%. Ibid., ss. 57.3,57.6.

164 Net incorne (or net loss), for purposes ofthe corporate minimum tax, is defined as net incorne, before any incorne taxes, as determined in accordance with Generally Accepted Accounting Principles. Ibid., s. 571.(2). To arrive at the "adjusted net incorne" figure which is taxed under the Act, the net incorne figure that a corporation has obtained under GAAP must be adjusted as follows: a) to preserve the exclusion frorn taxable incorne which is applied in the incorne tax provisions ofthe Corporations Tax Act and Incorne Tax Act with respect to capital property owned by a non-resident and protected against taxation under a tax treaty or convention (see ibid, ss. 37(2), 57.4(1)(a)(ii), 57.4(1)(b)(v)(C), Incorne Tax Act, RS.C. 1985, c.l (5th Supp.), s. 115(1)(b»; b) to deny a corporation, such as a cooperative corporation, the incorne reducing effects ofpaYments made to shareholders/rnernbers on more favourable terms than payments made to non-shareholders/non-mernbers for identical consideration by capping the deduction from income for any such paYments with reference to the

51 payable in a given year is less than the amount of minimum tax for that same year, then a credit equal to the amount of the income tax is given to reduce the minimum tax payable to the difference between the minimum tax amount and the

incorne attributable to dealings with such shareholders/rnernbers (see Corporations Tax Act, supra note 158, ss. 57.4(I)(a)(iii), 57.4(I)(b)(iv); Income Tax Act, RS.C. 1985, c.l (5 th Supp.), s. 135; See also D.M. Sherman (ed.), Income Tax Act­ Department ofFinance - Technical Notes (1lth ed.), (Toronto: Carswell, 1999) at 1237-40); c) to preserve the effective deferral oftaxation which taxpayers can elect to have apply under the incorne tax provisions ofthe Corporations Tax Act and Income Tax Act in circurnstances where property is transferred between a shareholder and a corporation, or within a partnership (see Corporations Tax Act, supra note 158, ss. 57.4(1)(a)(iv), 57.4(1)(b)(vi), 57.9; Income Tax Act, RS.C. 1985, c.l (5 th Supp.), ss. 85, 97); d) to preserve the tax treatrnent applied to corporations under the incorne tax provisions ofthe Corporations Tax Act and Income Tax Act in the case of amalgamation (see Corporations Tax Act, supra note 158, ss.57.4(I)(a)(v), 57.4(1)(b)(ii»; e) to preserve the effective tax deferral which applies under the incorne tax provisions ofthe Corporations Tax Act and Income Tax Act where property is ditributed to a taxpayer on the winding up ofa corporation (see Corporations Tax Act, supra note 158, ss. 57.4(1)(a)(vi), 57.4(I)(b)(iii); Income Tax Act, RS.C. 1985, c.l (5 th Supp.), s. 88(1»; f) to preserve the effective tax deferral which a taxpayer can elect to have apply in cases where depreciation or capitallosses c1airned to reduce taxable incorne in prior years have bee recaptures upon a disposition ofthe property, but the taxpayer has reinvested the previously unanticipated/c1airned gain in the same type ofproperty within a certain period oftirne. (see Corporations Tax Act, supra note 158, ss. 57.4(I)(a)(vii), 57.10; Income Tax Act, RS.C. 1985, c.l (5 th Supp.), ss. 13(4),44; David M. Sherman (ed.), Income Tax Act - Department ofFinance­ Technical Notes (l1th ed.), (Toronto: Carswell, 1999) at 68,292-93.); and g) to preserve the exclusion frorn incorne ofcapital dividends and the preferential treatrnent ofinter-corporate dividends to the sarne extent as they are exc1uded or preferentially treated under the incorne tax provisions ofthe Corporations Tax Act and Income Tax Act (see Corporations Tax Act, supra note 158, ss. 57.4(I)(b)(v)(A), 57.4(1)(b)(v)(B); Income Tax Act, RS.C. 1985, c.l (5 th Supp.), ss. 83(2), 112, 113, 138(6».

52 income tax already payable. 165 Accordingly, the minimum tax does not apply at ail if income tax payable under the Act equals or exceeds the minimum tax amount in a given year. Net losses can be carried forward for up to ten years to reduce net income for corporate minimum tax purposes. 166

Finally, the Ontario Corporations Tax Act imposes a capital tax, regardless of income or other measures of profitability. With only a few exceptions, corporations that maintain business in Ontario are subject to the capital tax provisions of the Act,167 which impose a tax of 0.3 percent upon the portion of a corporation's taxable paid up capital that is employed in Ontario, as determined under the Act. 168 Banks actually paya higher capital tax of 1.12 percent under the Ontario statute. 169 Of the few exemptions from Ontario's corporate capital tax, the most important applies to "small business" corporations who have, either

total assets and gross revenue for a taxation year of 1.5 million dollars or less,

or taxable paid up capital of 2 million dollars or less throughout the taxation

165 Corporations Tax Act, supra note 158, s. 57.3(2).

166 Ibid., s. 57.5(5). A corporation's net losses for corporate minimum tax purposes are also calculated according to GAAP, with the same adjustments as are applied to net income. Ibid., s. 57.4.

167 Ibid., ss. 2, 58.

168 Ibid., ss. 66(1), s. 67.

169 Ibid., s. 66(2).

53 year. 170

iii. Federal Taxation of Corporations Doing Business in Canada

Under Part IX of the federal Excise Tax Act, virtually ail goods and services sold by businesses to consumers in Canada are subject to tax in an amount equal to seven percent of the value of the consideration paid for the goods or services

("GST").171 Businesses, except those of the very smallest scale,172 are obligated to register under the act, and then collect and remit any GST applicable when they sell goods or services. The recognition of "input tax credits" makes the

170 Ibid., s. 68(1)(b). Under ibid., s. 68(1)(a) the total assets/gross revenue threshold for the small business capital tax exemption is actually 1 million dollars for years ending on or before December 31,2000, increasing to 1.5 million dollars trom January 1,2001 forward. The other capital tax exemptions are as follows: Family fishing and/or farm corporations are liable to a fixed tax oforuy $100 under the Act's capital tax provisions. Ibid., s. 71(2). Charities, non-profit corporations, and any corporations with neither $1,000,000 in gross revenues or $1,000,000 in total assets are exempt trom the capital tax. Ibid., ss. 68, 71(1). Non-resident corporations without any permanent establishment in Ontario, and subject to taxation under the Act as a result oruy ofthe disposition ofCanadian property, are also exempt trom the capital tax provisions under the Act. Ibid., s. 70.

171 Excise TaxAct, R.S.C. 1985, c.E-15, s. 165(1). "Taxable supplies" ofgoods and services to which GST applies are defined broadly in section 123(1) ofthe Excise Tax Act as "supplies made in the course ofa commercial activity." "Commercial activity" is essentially defined as any business, adventure or concern in the nature oftrade, or dealing in real property. Ibid., s. 123.

172 See Ibid, s. 166, providing that GST does not apply to sales made by "small suppliers" who have not registered under the Excise Tax Act. "Small suppliers" are essentially businesses that have had less than $30,000 annual revenue trom the sale oftaxable supplies under the Act. The threshold for businesses dealing in games ofchance is increased by the value ofthe prizes payable to its customers. Ibid, ss. 123(1), 148(1).

54 GST inapplicable when a registered business purchases goods or services to be used or resold as part of their own business. 173 Businesses which are registered under the act immediately realize the benefit of the input tax credits to which they are entitled by not paying GST when they purchase goods or services, and then accounting for the unpaid GST amounts as input tax credits on returns filed under the act. Unless they choose to voluntarily register under the Act,174 small businesses which are not obligated to register under the Act cannot claim input tax credits and have to pay GST on virtually ail transactions in the same way as the consuming public. 175

Under the federal/ncome Tax Act ("ITA"), corporations other than small

businesses are also subject to an effective corporate income tax rate of 28

percent, not including surtaxes. The basic federal income tax rate applicable to

corporations under the act is 38 percent. 176 ln order to partially offset provincial

corporate income taxes, however, 10% of the taxable income earned by the

corporation in any Canadian province in deducted from the income tax payable

173 Ibid., s. 169 establishes the general mIe that input tax credits apply to the extent that any person purchases goods or services "for consumption, use or supply in the course of commercial activities ofthe person." .

174 Ibid, s. 166.

175 Ibid, s. 169(1).

th 176 Incorne Tax Act, RS.C. 1985, c.1 (5 Supp.), s. 123.

55 by the corporation under the ITA. 177 The rate applied to corporate incorne earned in Canada is effectively reduced to 28% by this deduction. Any foreign incorne which a corporation rnay have is essentially exernpt frorn taxation to the extent that it is subject to taxation in foreign jurisdictions.178 The ITA taxes the incorne of srnall Canadian business corporations at a rnore favourable rate of

22%, which is effectively reduced to 12% by the 10% deduction to offset provincial incorne taxes. 179

Ali corporations which are subject to the foregoing incorne tax under the ITA, are also required to pay the greater of an annual incorne surtax (Le. surtax), and any applicable capital tax. The ITA provides for a second tax on corporate incorne, calculated as 4 percent of the tax for which a corporation is already liable under the ITA, except that no allowance is rnade for the srnall business or foreign tax

177 Ibid., s. 124(1).

178 Ibid, s. 126 provides for a deduction from the tax payable under the act in order to offset taxes paid in foreign jurisdictions.

179 Ibid., s. 125(1) allows a Canadian controlled private corporation ("CCPC") to deduct from the income tax it would otherwise have to pay under the Income Tax Act, 16% of either its income or its "business limit", whichever is less. Section 125(7) defines when a corporation qualifies as a CCPC. Ibid., s. 125(2) initially sets the "business limit" at $200,000. Ibid., s. 125(5.1) then reduces the business limit to the product ofthe initial amount of$200,000 multiplied by a specified fraction ofthe tax for which a corporation was liable in the preceding year under Part 1.3 ofthe Income Tax Act. Part 1.3 provides for a capital tax applicable to corporations with value capital exceeding $10,000,000 in value. Ibid., ss. 181.1 (1), s. 181.5(1). As a general mIe, by the time the value ofa corporation's assets exceed $15,000,000, the formula set out in section 125(5.1) will reduce the available small business deduction to zero.

56 deductions that may be taken in calculating the tax payable. 180 Besides this surtax, the ITA also provides for a capital tax. For purposes of calculating the corporate capital tax provided for in the ITA, the value of a corporation's capital is notionally reduced by ten million dollars, and then taxed at an annual rate of

0.225 percent of the remaining value. 181 The federal capital tax is called a large corporations tax on account of this ten million dollar threshold. The amount of large corporation tax payable in a given year is reduced by the amount of any surtax payable that same year, and can be further reduced by any other surtax paid, but not deducted from the large corporation tax payable, in any of the preceding seven or subsequent three years. 182 The effect of this deduction is to turn the large corporations tax to being a minimum tax, the amount which ceases to apply once the total minimum amount has been paid as surtax.

C. Special Tax Treatment of Canadian Live Entertainment Businesses in Ontario

As a general rule, sales of admission to entertainment venues in Ontario are subject to a higher provincial sales tax than that applicable to most sales of goods in Ontario. Sales of goods in Ontario are subject to a sales tax of eight

180 Ibid, s. 123.2.

181 Ibid, SS. 181.1(1), 18.5(1).

182 Ibid, s. 181.1(4).

57 percent (8%), which is collected as part of the price paid by consumers. 183 But as with sales of beer, liquor, and wine, sales of admission to "a place of amusement" are subject to an increased sales tax of ten percent (10%).184 A

"place of amusement" isdefined to include most conceivable forms of entertainment, including any place that stages an athletic contest. 185

ln the case of most live entertainment other than professional sports, however,

Ontario has provided broad sales tax exemptions. Most notably, the increased provincial sales tax is not applicable to "theatrical or musical performances where 90 percent of the performers who regularly participate in the cast of a theatrical or musical performance held in a place of amusement" are

Canadian. 186 The provincial sales tax is also not applicable to the ticket price for any live entertainment where the performers are not paid or where the event is

183 See notes 154 to 157, supra, and accompanying text.

184 Retail Sales Tax Act, supra note 154, s. 2(5). N.B. that the tax is only applicable where the price ofadmission is in excess offour dollars.

185 Ibid., s. l(1)(a) defines a place ofamusement as follows: an amusement park or a premises or place, whether enclosed or not, where a projector or similar equipment is operated, or where a theatrical performance, carnival, circus, side show, menagerie, concert, rodeo, exhibition, horse race, athletic contest or other performance or entertainment is staged or held or where facilities for dancing are provided to the public with the service ofliquor, beer or wine and to which admission is granted upon payment ofa price ofadmission through the sale oftickets or otherwise.

186 Ibid., s. 9(2). A "performer" is defined in the regulations under the act as "a person who takes part in a performance, but does not include a manager director, producer, stagehand, designer, hairdresser or applier ofmakeup." R.R.O. 1990, Reg. 1013, s. 1.

58 staged under the auspices of a Canadian amateur athletic association, or various other types of charitable, educational, or publicly funded organizations. 187

The Ontario legislature has also taken measures to significantly reduce the property taxes that would otherwise apply to large live theatre businesses in the

City of Toronto, and to completely eliminate these taxes for the benefit of smaller or non-profit theatre businesses throughout Ontario. The Assessment Act exempts ail non-profit live theatres of greater than a thousand seats throughout the province of Ontario from taxes that are levied on the assessed value of properties. 188 Live commercial theatres of less than a thousand seats throughout the province of Ontario are similarly exempt from property taxes. 189

Though not entitled to the blanket exemption that the large non-profit theatres enjoy, large privately-owned commercial theatres in the City of Toronto are

187 Retail Sales Tax Act, supra note 154, s. 9(2).

188 Assessment Act, supra note 131, s. 3(1)27 exempts from taxation "Land used as theatre that contains l,000 seats or more and that is used to present, on a total ofat least 183 days in the taxation year, live performances ofdrama, comedy, music or dance, including opera or ballet, that are not presented with the intention ofgenerating profit. This paragraph applies only ifthe theatre is owned and operated by a non-profit corporation without share capital."

189 Ibid., s. 3(1)26 exempts from taxation: "Land used as a theatre that contains fewer than a thousand seats and that, when it is used in the taxation year, is used to present live performances ofdrama, comedy, music or dance."

59 exempt from school taxes. 190 School taxes, being one of only two components that are normally included in property taxes, represent about half of property taxes paid by Ontario businesses. 191

For the time being, some of the large live theatre businesses in Toronto are completely exempt from property tax because their operations occur in municipally owned buildings. As with small theatres and large non-profit theatres, municipally owned properties throughout the province of Ontario are completely exempt from property taxes. 192 The Assessment Act does provide that the City of Toronto may pass a by-Iaw requiring any large commercial theatres which are exempt from taxation to pay the city an amount equal to the property taxes that would otherwise be applicable, less an allowance calculated

190 Education Act, supra note 130, s. 257.6(4) provides that "An eligible theatre in the City ofToronto ... is exempt from taxes for school purposes." By regulation under the Act, and "eligible theatre" is defined as "land used as a theatre that contains 1,000 seats or more and that, when it is used in the taxation year, is used predominantly to present live performance ofdrama, comedy, music or dance." O. Reg. 393/98.

191 See notes 131 to 153, supra, and accompanying text with respect to how property taxes are levied for municipal and school purposes. In addition to the municipal and school tax levies which are normally the only two components ofproperty taxes in Ontario, certain other types oflevies can sometimes be included on property tax bills. Under section 58 ofthe Local Improvement Act, RS.O. 1990 c. L.26, for example, the costs ofcertain types ofroad work, sewer work, watermain work, and other work can be charged back to the properties abutting the work as a special assessment forming part of their property tax bill. By way offurther example, section 32 ofthe Development Charges Act, 1997, S.O. 1997 c. 27, provides that charges to offset the increased cost of municipal services that will be required by properties where development is planned can be collected as an additional component ofthe tax bills respecting those properties.

192 Assessment Act, supra note 131, s. 3(1)9.

60 on the basis of any time that the theatre is made available for non-profit activities. 193 This peculiar provision is designed to level the playing field between the large privately-owned Torontotheatres, and the large theatres buildings that are owned by the City of Toronto but operated by privately owned theatre businesses. To date, however, no such by-Iaw has been passed and any large theatre businesses that happen to operate out of municipally owned theatres in the City of Toronto remain completely exempt from property taxes.

The names of the many premier live entertainment venues that are entitled to the benefit of these property tax exemptions are weil known. The Hummingbird

Performing Arts Centre (formerly the O'Keefe Centre), The Toronto Centre for the Performing Arts (formerly the Ford theatre), the St. Lawrence Centre for the

Arts and the Elgin and Winter Garden Theatres are completely exempt from taxation under the Assessment Act. 194 Although already owned by the City of

193 Ibid., s. 27.1.

194 The Hummingbird complex is owned by the City ofToronto pursuant to a deed registered on September 2, 1977 as instrument no. CT252264, in the Land Registry Office for Toronto, Registry division (No. 63). The multi-theatre complex at the Toronto Centre for the Performing Arts was originally owned by the City ofNorth York, and is now owned by the City ofToronto pursuant to a lease of99 years with an option to renew for a further 99 years registered on February 10, 1992 as instrument no. C759238, in the Land Registry Office for Toronto, Land Titles division (No. 66). The St. Lawrence Centre for the Arts is owned by the City ofToronto pursuant to deeds registered on May 14, 1970 as instrument no. 67369ES in the Land Registry Office for Toronto, Registry division. The Elgin and Winter Garde Theatres are exempt from taxation by virtue ofsection 15 ofthe Ontario Heritage Act, R.S.O. 1990, c. 0.18, which provides that "the [Ontario Heritage] Foundation, its real and personal property and business and income are exempt from all assessment and taxation made, imposed or levied by or under the authority ofany Act of

61 Toronto, the Hummingbird Performing Arts Centre is also exempt from taxation on account of being deemed a large non-profit theatre pursuant to statute. 195

Other well-known large Toronto theatres which are privately owned, namely

Massey Hall, Roy Thomson Hall, the Pantages Theatre, the Princess of Wales

Theatre, and the Royal Alexandria Theatre, are exempt only from the school tax component of property taxes.

The names of the live theatre productions that benefit from the Retail Sales Tax exemptions are similarly weil known. In 2001, for example, tickets to performances of live productions such as Madame Butterfly, the Lion King,

Cabaret, and Mamma Mia will be sold in the Toronto theatres where they are based, and in the cases of the Lion King, Madame Butterfly, and Beauty and the

Beast, in the Ottawa venues to which they travel on tour, at priees comparable to those paid for NHL hockey tickets. 196 The theatre tickets will, however, be sold completely free of the ten (10%) provincial sales tax to which professional the [Ontario] Legislature...." Title to the Elgin and Winter Garde Theatres was certified in the name ofthe Ontario Heritage Foundation pursuant to a first application registered under the Land Tifles Act, RS.O. 1990, c.L.5, as instrument no. D1057-66-198 in the Land Registry Office for Toronto, Land Titles division (No.66).

195 Hummingbird Performing Arts Centre Corporation Act, 1998, S.O. 1998, c.37, section 7. See also the City ofToronto Act, 1997 (No. 2), S.O. 1997, c. 26, section 66.

196 "Madame Butterfly" will be performed in 2001 by the National Ballet ofCanada both on tour, and at the Hummingbird Centre in Toronto where the ballet is based. AIso during 2001, "The Lion King" will be performed both on tour and at its permanent base in Toronto's Princess ofWales Theatre, while "Cabaret" and "Mamma Mia" will be staged in Toronto at the Pantages Theatre and the Royal AIexandria Theatre, respective1y.

62 hockey tickets are subject.

D. Special Tax Treatment of Canadian Film and Video Production Businesses in Ontario

ln the case of the motion picture and television industries, the federal income

Tax Act provides preferential tax treatment to the film and video production businesses that compete, for television audiences in particular, with professional hockey and other sports. Under the Income Tax Act, a film or video production business operating in Canada can obtain either a Canadian Film or Video

Production Tax Credit ("PTC"), or a Film or Video Production Services Tax

Credit ("PSTC").197 The tax liability of a business entitled to either a PTe or a

197 Income Tax Act, supra note 176, ss. 125.4, 125.5. The most important regulations governing the PTC and PSTC are, Draft Regulation 1106, Canadian Film Tax Credit ­ Draft Regulations (December 12, 1995 (revised June 20, 1996 and October 27, 1998)), and Draft Regulation 9300, Film or Video Production Services Tax Credit (October 29, 1997). Although they have not yet formally come into force, they are being applied by the Canada Customs and Revenue Agency ("CCRA") as indicated, for example, in Canadian Film or Video Production Tax Credit - Co-Production, Technical Interpretation, Resources, Partnerships and Trusts Division; Film or Video Production Service Tax Credit - AccreditedProduction, Technical Interpretation, Resources, Partnerships and Trusts Division, July 23, 1999; Letter dated May 14, 1998 and bearing Document No. 9810995, from the Manager, Partnerships Section, Resources, Partnerships and Trusts Division, Income Tax Rulings and Interpretations Directorate, Policy and Legislation Branch (CCRA); Letter dated July 23, 1999 and bearing Document No. 99010015, from Acting Manager, Partnerships Section, Resources, Partnerships and Trusts Division, Income Tax Rulings and Interpretations Directorate (CCRA); Letter dated June 30,2000 and bearing Document No. 2000-0002745, from the Paul Lynch, Manager, Partnerships Section, Resources, Partnerships and Trusts Division, Income Tax Rulings and Interpretations Directorate, Policy and Legislation Branch (CCRA), c.c. the Honourable Paul Martin, P.C., M.P., Minister ofFinance.

63 PSTC is reduced by an amount equal to the PTC or the PSTC, as applicable. 19B

ln order to be applicable, the PTC must be c1aimed by a "qualified corporation" in respect of a "Canadian film or video production", as those terms are defined in the Income Tax Act and Regulations. 199 A qualified corporation is simply a taxable Canadian corporation200, with office or operating facilities located in

Canada,201 and engaged primarily in a Canadian film or video production business. 202 A film or video production is "Canadian" for purposes of the PTC if it is produced as contemplated under a co-production treaty.203 If no such treaty

198 Incorne Tax Act, supra note 176, ss.125.4(3) and 125.5(3).

199 Ibid, s. 125.4(3) provides that a qualified corporation can obtain a PTC equal to 25% ofits qualified labour expenditure. By definition under the Incorne Tax Act, a qualified labour expenditure can only be incurred with respect to a Canadian film or video production. Ibid, s. 125.4(1)

200 By definition under the Incorne Tax Act, a qualified corporation must be a prescribed taxable Canadian corporation. Ibid, s. 125.4(1). Under Draft Regulation 1106, supra note 197, s.(2) a prescribed taxable Canadian corporation is merely a Canadian corporation that is not controlled by either a person exempt from tax or by a labour­ sponsored venture capital fund. A "Canadian corporation" is a corporation that was incorporated in Canada and that is resident in Canada. Incorne Tax Act, supra note 176, ss. 248(1), 89(1).

201 By definition, a qualified corporation must carry on its Canadian film and video production business through a "permanent establishment" in Canada. Ibid., s. 125.4(1) See Regulation 8201 under the Incorne Tax Act for the full definition ofa "permanent establishment".

202 See Incorne Tax Act, supra note 176, s.125.4(1) for the definition of"qualified corporation".

203 Dralt Regulation 1106, supra note 197, s.(3)(a).

64 is applicable, then a film or video production will be considered Canadian if a

Canadian individual is the named producer,204 the production obtains six points under a prescribed scoring system designed to measure the extent to which the key persons involved in the production are Canadian,205 and if services provided by Canadian individuals account for 75% of certain production costs206 and 75% of certain post-production costS. 207

If applicable, the PTC reduces the cost of making a motion picture or television show by up to 12% a year of the total net cost of such a production. The PTC is equal to 25% of a "qualified labour expenditure" .208 Although neither the Act or

Regulations define when one production ends and another begins, the amount of the qualified labour expenditure is based on the total labour expenditure in

respect of a discrete production (i.e. salaries and wages paid to employees, and the remuneration paid to independent personal service contractors).20S ln calculating the qualified labour expenditure for a given year, it is first necessary

204 Ibid, s. (3)(b)(i). See s.(I) for the definition of"producer".

205 Ibid., s.(3)(b)(ii).

206 Ibid, s.(3)(b)(iii).

207 Ibid, s.(3)(b)(iv).

208 Incorne Tax Act, supra note 176, s. 125.4(3).

209 See ibid., s. 125.4(1) for the definitions of"labour expenditure" and "qualified labour expenditure".

65 to determine the total labour expenditure in current and previous years, not including the portion allowed as the qualified labour expenditure in prior years. 210

It is then necessary to determine the total cost of the production, net of any qualified labour expenditures allowed in previous years and any government or other financial assistance used to fund the production costS. 211 The portion of labour expenditure that will be allowed as a "qualified labour expenditure" in any given year is equal to the lesser of the first figure, and forty-eight percent (48%) of the second figure. 212 ln any year, therefore, the PTC can equal up to 12%

(25% multiplied by 48%) of the total net cost of a particular production.

If the PTC is not available, a corporation may still qualify for the PSTC if it is an

"eligible production corporation" that has incurred expenditures to produce an

"accredited production."213 An eligible corporation is simply a taxable corporation214 which has an office or operating facilities located in Canada,215 is

210 See ibid., s. 125.4(1)(a) under the definition of"qualified labour expenditure".

211 See ibid., s. 125.4(1)(b) under the definition of"qualified labour expenditure".

212 See ibid., s. 125.4(1) for the definition of"qualified labour expenditure".

213 Ibid., s. 125.5(3).

214 By definition, a corporation is not an eligible production corporation ifall or part ofits income is exempt from taxation under the Act, or ifit is controlled by either a person exempt ftom tax or by a labour-sponsored venture capital fund. Ibid., s. 125.5(1),

215 By definition, an eligible production corporation must carry on its Canadian film and video production business through a "permanent establishment" in Canada. See Regulation 8201 for the full definition ofa "permanent establishment". Ibid., s. 125.5(1),

66 engaged primarily in a Canadian film or video production business,216 and is the

owner or has contracted directly with the owner of the copyright to the accredited

production. 217 As a general rule, a single film or video production costing in

excess of $1,000,000 during a filming or taping period of up to two years is an

accredited production.218 A television series, or a pilot for a television series, will

generally constitute an accredited production if the production costs exceed

$100,000 for each episode of less than thirty minutes, or $200,000 for longer

episodes.219

Depending upon the circumstances, the PSTC may be only marginally less

generous than the PTC. The PSTC is equal to 11 % of an eligible production

corporation's qualified Canadian labour expenditure with respect to an

accredited production.220 The Canadian labour expenditure is basically the total

labour expenditure paid to Canadians in respect of an accredited production (Le.

salaries and wages paid to resident Canadian employees, and the remuneration

paid to independent contractors providing personal services of resident

216 See ibid., s. 125.5(1) for the definition of"eligible production corporation".

217 See ibid., s. 125.5(1) for the definition of"eligible production corporation".

218 Draft Regulation 9300, supra note 197, s.(a).

219 Ibid, s.(a).

220 Incame Tax Act, supra note 176, s. 125.5(3).

67 Canadians).221 To arrive at the qualified Canadian labour expenditure, the

Canadian labour expenditure is simply reduced by the amount of any portion already allowed as a qualified Canadian labour expenditure in prior years, and the amount of any government or other assistance used to fund the Canadian

labour expenditure.222 The PSTC is therefore capped at 11 % of the total net

Canadian labour costs of production, while the PTC is capped at 12% of the total

net production costs, which may or may not be a significantly greater amount.

Under the Ontario Corporations Tax Act, however, a corporation that qualifies for

the PTC may also qualify for additional tax credits that are not available to

federal PSTC claimants. The Ontario film and television tax credit ("OFTC") is

available to qualified production corporations, which are defined by reference to

the PTC provisions of the federal Income Tax Act,223 Subject to caps described

below, and except for very small productions or first time productions, the

amount of the OFTC is generally 15% of the qualifying labour expenditure in

respect of an eligible Ontario production, up to a maximum lifetime OFTC

amount established with respect to the production in question by a certificate

which the Corporations Tax Act requires claimants to obtain from the Ontario

221 See ibid., s. 125.5(1) for the definition of"Canadian labour expenditure".

222 See ibid., s. 125.5(1) for the definition of"qualified Canadian labour expenditure"

223 O. Reg. 322/97, s. 2(1).

68 Media Development Corporation.224 The qualifying labour expenditure for OFTC

purposes is arrived at by a calculation similar to the calculation of a qualifying

labour expenditure for PTC purposes. 225 The OFTC is applied to reduce the tax

Iiability of a qualified production corporation under both the income tax or capital

tax provisions of the Corporations Tax Act. 226

While the availability of OFTCs tracks the provisions of the PTC provisions of

the federallncome Tax Act, the procedure for permitting and capping OFTCs is

slightly different. A qualified production corporation can claim the OFTC only if

the Ontario Media Development Corporation certifies the production to which the

OFTC relates as an "eligible Ontario production.,,227 As a general rule, a film or

video production will qualify for the Ontario film and television tax credit

("OFTC") if (1) it either falls under a co-production treaty, or its named producer

is a resident Canadian, and (2) it obtains six points under the same scoring

system used to determine if the PTC is applicable and if 75% of the production

costs relate to services provided by Ontario-based corporations or individuals. 228

224 Corporations Tax Act, supra note 158, s. 43.5(6)(a).

225 O. Reg. 322/97, s. 7(1).

226 Corporations Tax Act, supra note 158, ss. 43.5(1)-(2).

227 Ibid., s. 43.5(7). The Ontario Media Corporation is established under section 5 ofthe Development Corporations Act, R.S.O. 1990, c. D.lO, and O. Reg. 672/00 pursuant to that Act.

228 Corporations Tax Act, supra note 158, s. 43.5(3); O. Reg. 322/97, s. 3(1)6.

69 The certificate issued with respect to an eligible Ontario Corporation will cap the total amount of OFTCs that are available with respect to that production over the various years in which OFTCs may be claimed. 229 The maximum OFTC with respect to any Ontario production is never allowed to exceed $1.5 million for a television series or $500,000 for any other type of production. 230 If a single qualifying corporation claims OFTCs with respect to more than one eligible

Ontario productions in a single year, the total OFTCs c1aimed will not be allowed to exceed $2 million.231

ln the context of this paper, the film and video income tax provisions are particularly notable in that they deliberately exclude sports from the credits to which other television productions are entitled, and just as deliberately exclude the most highly paid film and video industry workers from calculations where their nationality and high salaries might jeopardize the credits. The draft regulation which establishes the test for application of the PTC specifically excludes sporting events from the film or video productions with respect to which the PTC is available?32 The regulations under the Ontario Corporations TaxAct

229 Corporations Tax Act, supra note 158, s. 43.5(9).

230 Ibid, s. 43.5(13).

231 Ibid, s. 43.5(11).

232 Draft Regulation 1106, supra note 197, s.(1).

70 33 do the same.2 As mentioned above l the federal regulatory test for the availability of the PTC requires that services provided by Canadian individuals account for 75 % of certain production costs234 and 75% of certain post- production costS. 235 ln non-animated productions, the regulation excludes remuneration paid to persons in the following eight positions from such production costs: director, principal screenwriter, lead performer receiving the highest remuneration, lead performer receiving the second highest remuneration, art director, director of photography, music composer, and picture editor. 236 Accordingly, the individuals most Iikely to be highly paid and non-

Canadian are not even considered in determining whether sufficient expenditures have been paid to Canadian individuals to qualify for the PTC in the context of productions ROBOCOP, The Bride of Chucky, and KUNG-FU The

Legend Continues (produced in the Ontario film and television industry between

1992 and 1999).237

The manner in which the PTC provisions accommodate star salaries without

233 O. Reg. 322/97, ss. 3(1)1, 4(1)(a).

234 Draft Regulation 1106, supra note 197, s.(3)(b)(iii).

235 Ibid, s.(3)(b)(iv).

236 Ibid, s.(3)(b)(iv).

237 Ontario Film Development Corporation, Who Shot Where?: Ontario Locations by Area Usedfor Fi/ming 1992-1999, available online at http://www.to- ontfilm.comldocs/ofdcmainlwho.shot.where.html.

71 jeopardizing the tax credits which the ITA makes available to encourage the film and video production business in Canada demonstrates a curious difference in the public attitude toward entertainer salaries, as opposed to professional athletes' salaries. As has been observed elsewhere:

It is interesting that the public perception of the importance of rising salaries for entertainers is so different between movie stars and pro athletes.... If the level of discussion about salaries in movies and popular music is a murmur, then it is a high-pitched scream in pro sports. Roger Clemens is c1early not in the same salary league with fellow entertainment stars Sylvester Stallone, Jack Nicholson, or Janet Jackson, but the behaviour of baseball salaries generate statements [like the following]: "The current system is a prescription for disaster. But whether the disaster is just around the corner or will take place ten years from now, 1don't know" (Sporting News, December 31, 1990) To fans, the answer to why pro sports are different from other entertainment endeavours is obvious. Other mass entertainment media do not bring philosophers to their defense, lead presidents of the United States to throw out first pitches, or give poets pause to reflect. Whatever the reason, pro team sports are viewed differently from the other mass entertainment industries by almost everyone ­ fans, sportswriters, players, and owners. 238

E. Unfavourable Tax Treatment of NHL Hockey in Ontario

As already noted , certain tax provisions actually discriminate against, rather than in favour of professional hockey. The Retail Sales tax Act imposes an

238 Quirk and Fort, supra note 1 at 215-16.

72 increased provincial sales tax of 10%, as opposed to 8%, on sales of some items, including sales of tickets to "places of amusement." The applicability of this increased sales tax to professional sports tickets is especially notable when contrasted to the complete exemptions from provincial sales tax in favour of entertainment events such as amateur sports and live theatrical or musical performances where 90% of the performers are Canadian. The specifie regulatory exclusion of sports from the income tax credits available to film and video production businesses under federal and Ontario legislation is similarly notable.

The most familiar tax rule thought to benefit professional sports teams in Canada

is, of course, the Income Tax Act provision for the partial deduction of

entertainment expenditures from the income of businesses. Although the

common business practice of entertaining persons with whom the business

deals is, in principle, recognized as an expense "incurred for the purpose of

gaining or producing income,,,239 the Income Tax Act only permits fifty percent of

any such expense to be accounted for as a deduction in computing income.240

The apparently obvious benefit which this provision shows toward professional

sports teams was discussed when both the Montreal Expos and the Toronto

Blue Jays baseball teams appeared before the parliamentary Sub-Committee on

239 Income Tax Act, supra note 176, s. 18(1)(a).

240 Ibid., s. 67.1(1).

73 the Study of Sport in Canada in May of 1998.241

The supposed benefit derived by professional sports teams from other businesses' deduction of some entertainment expenses is somewhat dubious.

First of ail, as pointed out by Mr. Sam Pollock of the Toronto Blues Jays when he appeared before the parliamentary sub-committee, many sports fans attend professional sporting events at their own expense and for their own personal enjoyment, without the benefit of any tax incentive whatsoever. 242 And, as Mr.

Pollock also observed, the limitation of the deduction to fifty percent of money expended on professional sports tickets for business entertainment purposes would hardly divert other businesses' expenditures into professional hockey revenues when other expenditures, such as advertising, are entirely deductible. 243 As ML Pollock also pointed out, whatever indirect benefit the deduction of entertainment expenses may have for professional sports

241 House ofCommons, Standing Committee on Canadian Heritage, Sub-Committee on the Study ofSport in Canada, Transcript ofproceedings [hereinafter Sub-Committee on Sport proceedings] (May 25, 1998,4:00-4:05 PM) (testimony ofMr. Sam Pollock, Chairman and ChiefExecutive Officer, Toronto Blue Jays); Ibid (May 5, 1998, 10:00­ 10:05 AM) (testimony ofMr. Claude Brochu, President, Montreal Expos).

242 Ibid (May 25, 1998,4:00-4:05 PM) (testimony ofMr. Sam Pollock, Chairman and ChiefExecutive Officer, Toronto Blue Jays)

243 Ibid. The only limitation on the deductibility ofadvertising, for example, is with respect to advertising purchased in non-Canadian media. See Income Tax Act, supra note 176, ss. 19, 19.1.

74 businesses should be enjoyed equally by ail forms of entertainment. 244

ln response to the Ottawa Senators lobbying efforts, the Ontario property tax regime was amended to provide one tax measure of clear benefit to professional hockey in Ontario. As noted above, it is normally difficult for Ontario municipalities to discriminate in favour of individual praperties because the determination of property assessments and classifications occurs outside of municipal government, and the Municipal Act prohibits a municipal government fram directly exempting any property fram taxation, deviating from assessments made under the Assessment Act, or differentiating in the rates of taxation to be paid by praperties within the same c1ass or subclass. 245 Nevertheless, the point of classification and sub-classification is, of course, to facilitate discrimination in the rates of taxation paid by different types of property.246 The provincial regulations under the Municipal Act have delegated some discretion to the municipalities by creating some additional property classes that will apply in any municipality that adopts a by-Iaw to that effect. 247 ln March of 2000, the Ontario

244 Sub-Committee on Sport proceedings, supra note 241 (May 25, 1998,4:00-4:05 PM) (testimony ofMr. Sam Pollock, Chairman and ChiefExecutive Officer, Toronto Blue Jays)

245 Municipal Act, supra note 129, ss. 2. 362.

246 See Assessment Act, supra note 131, s. 8 (requiring the Minister to prescribe subclasses for land awaiting development, vacant land, vacant units and excess land within various property classes).

247 O. Reg. 282/98.

75 government amended the applicable regulation to add another optional property c1ass which includes only Toronto's Air Canada Centre, Maple Leaf Gardens and SkyDome, as weil as Ottawa's Corel Centre where the Ottawa Senators play their home games. 248 The practical power to discriminate in favour of these four stadium facilities is enhanced not only by the exclusion of any other properties from the c1ass, but also by the regulatory establishment of a tax ratio for this property that allows municipalities to apply a tax rate to these stadium facilities which falls anywhere between 0.1 % and 110% of the rate applied to the residential/farm property class.249

The Premier of Ontario made very clear, however, that the Province would prevent the Ottawa Senators from realizing any further tax relief at the provincial level when the team briefly toyed with the idea of trying to avoid the 10% provincial sales tax by holding games under the auspices of a charitable foundation administered under the Senators' name. In the Premier's own words,

"The NHL is not a charity and they will not have charitable status within the province of Ontario.... 1don't know how much clearer 1have to make it. If (Mr.

Bryden) has a battery of lawyers to get through our existing legislation, then l'II

248 O. Reg. 174/00, amending O. Reg. 282/98.

249 O. Reg. 176/00, amending O. Reg. 386/98, under the Municipal Act, supra note 129, s. 363(6).

76 pass new ones, "250

F. Conclusion

For most people, the question of whether the property tax relief obtained by the

Ottawa Senators was too much or too little probably depends only upon their feelings about professional sports in general and the Ottawa Senators in particular. Many fans of the Ottawa Senators would surely favour any means necessary to keep the team in place. By comparison, one would expect and have to understand that many fans of the departed Winnipeg Jets or Quebec

Nordiques could probably not care less what happens to NHL hockey in Ottawa, or Canada for that matter. For sorne critics of the current Canadian tax regime, of course, the relief enacted for the Ottawa Senators is a disappointment in that a potentially high profile proponent for general tax reductions has been placated with a narrow discriminatory concession in its favour. 251

250 T. Blackwell and C. Cobb, "Harris won't give Bryden tax break - NJll., 'not a charity' he says ofSenators' bid to avoid paying amusement levy", The Ottawa Citizen (January 19,2000).

251 See e.g. Sub-Committee on Sport proceedings, supra note 241 (April 28, 1998, 10: 10­ 10:15 AM) where Mr. Preston Manning (Calgary Southwest, Ref) commented as follows: "You will find a large number ofmembers ofParliament who think the tax levels in this country are too high. They're killing jobs, and not just jobs in your industry; they're killing business in other areas as weIl. But the great thing about hockey is that large numbers of Canadians who won't pay attention to this argument when it's made in relation to other

77 ln order to evaluate the tax relief sought as a matter of fairness, however, it is not enough to merely point out that the Ottawa Senators were, and may still be, found at the losing end of the spectrum of tax treatment applicable to other

Canadian entertainment businesses in Ontario. It may weil be true, as observed by the 1997 Technical Committee Report, that in our layered and exception riddled system, fairness is an important and desirable objective that is not being

industries will pay attention to it when it's made in relation to hockey. So you ought to put that chart on Hockey Night in Canada. See also, Sub-Committee on Sport proceedings, supra note 241 (April 28, 1998, Il :20-11 :25 AM) (testimony ofMr. Rod Bryden, Chairman and Governor, Ottawa Senators, National Hockey League) where Monty Solberg (Medicine Hat, Ref.) Put the fol1owing question to Mr. Bryden: It seems to me that the fact that Canadian taxes are about 50% higher than those in the U.S. has to be one ofthe major issues. Wouldn't it make more sense to bring in broad, sweeping tax reliefto bring our tax levels in line with those ofthe U.S.? ln doing that, we could decrease the difference in exchange rates. Ofcourse, one of the primary reasons that our exchange rate is so out ofwhack with that ofthe V.S. is because our taxes are much higher, which affects productivity and things like that. Wouldn't it make a lot more sense, instead oftrying to target tax reliefat National Hockey League teams, to bring in this broad tax reliefthat would benefit everybody? This would leave more money in the pockets offans so they could come out to more games and that kind ofthing. Wouldn't that be a better approach? And Mr Bryden responded by saying: 1 think one ofthe keys to surviving in many businesses, induding the National Hockey League, is that you never make a big problem out ofa smal1 one. While many Canadians, l'm sure, would like to have lower taxes, 1 don't know that the overall fiscal position ofCanada could be affected in order to accommodate the National Hockey League. So while it rnight be more desirable, 1 suspect that this problem will become much more acute long before that matter would be resolved. 1 would prefer to focus on a specific action dealing with this industry in relation to other industries.

78 satisfactorily achieved at the present time. 252 But in such a system disparate treatment is anything but unusual. The question of whether fairness dictates the adoption of relief from property tax and/or any other taxes requires some examination of the rationales for discrimination in favour of the Ottawa Senators or other businesses.

252 See Report on Business Taxation, supra note 125, ss. 1.2, 1.4, 1.6, 1.7, 1.14 which indicate that faimess is a desirable objective which is not being attained in the taxation of Canadian businesses at the present time.

79 IV. THE INCOMPLETE RATIONALE FOR COMPREHENSIVE TAX RELIEF IN FAVOUR OF CANADIAN NHL HOCKEY TEAMS

A. Introduction

For a period of perhaps two years, and in earnest from the winterlspring of 1999, the Ottawa Senators lobbied ail levels of government for a combined reduction of the taxes to which the team is subject. 253 Until relief was obtained, the team's property taxes, which could only be reduced through joint provincial and municipal action, were approximately 3.5 million dollars annually.254 ln 1998, capital taxes accounted for about one million dollars more, while GST, PST, and a two dollar per ticket provincial surcharge levied to pay for highway ramps accessing the arena combined to account for another six million dollars in taxes. 255 It would have been impossible for the Ottawa Senators to obtain the roughly $10 million dollars worth of tax relief they sought without a combined reduction in the total mix of municipal, provincial, and federal taxes to which the team's activities are subject. 256

253 R. Bryden, "An Open Letter to Hockey Fans and Concemed Citizens ofOur Community" The Ottawa Citizen (February 2,2000) A9 ("Eleven months aga the Ottawa Senators and the National hockey League embarked on a program that would see allievels ofgovemment recognize the unreasonable levels oftax burden and policies that were seriously threatening the viability ofNHL teams in Canada.").

254 Sub-Committee on Sport proceedings, supra note 241 (April 28, 1998, 9:50-10: 10 AM) (testimony ofMr. Rod Bryden, Chairman and Govemor, Ottawa Senators, National Hockey League).

255 Ibid

256 1. MacLeod, "Why Senators issue goes beyond simple arithematic" The Ottawa Citizen

80 ln a refreshing rejection of the suspect economic impact rationales adopted by most sports teams seeking government assistance, the Ottawa Senators ultimately organized their lobbying message around the principle of "tax fairness". Around the time of the Parliamentary sub-committee's examination of sport in Canadian heritage, the Ottawa Senators and the NHL had publicly floated some of the familiar rhetoric about the beneficial economic impact that a professional sports team brings to a host city.257 The Sub-committee's report and the later report of the Public Policy Forum of Canada commissioned by John

Manley, however, the suspect nature of those arguments was highlighted.258 But even before those rejections of the economic impact arguments, the debate had become characterized by the Ottawa Senators' overriding message that hockey should be given more favourable tax treatment as a matter of simple "fairness".

(Deeember 4, 1999) Al.

257 See e.g., R. Bettman, "Can Canadian NIn..- teams Survive? - Yes, says the league eommissioner, ifcities are willing to subsidize their teams" The Ottawa Citizen (April 19, 1998) A6.

258 House ofCommons, Standing Committee on Canadian Heritage, Sub-Committee on the Study ofSport in Canada, Sport in Canada: Leadership, Partnership and Accountability - Everybody 's Business (Ottawa: Public Works and Government Services Canada, Publishing, 1998) at 94-96 [hereinafter Sub-Committee Report on Sport in Canada](referring to testimony ofProfessor Jean Harvey and Professor Marc Lavoie, Sub-Committee on Sportproceedings, supra note 241 (February 5, 1998))~ Public Poliey Forum, The National Hockey League In Canada (Public Poliey Forum, Oetober 1999) at 25.

81 The Canadian businesses to which hockey is most obviously comparable are, of course, media entertainment and live entertainment businesses. Unfortunately for the Ottawa Senators, tax advantages in the magnitude of those available to

Canadian live theatre businesses and Canadian film and television production businesses were not adopted in favour of NHL hockey. Although NHL hockey is of at least equal cultural significance to those other industries, and despite the

Ottawa Senators' and the federal government's efforts to rationalize the adoption of financial assistance for Canadian NHL hockey teams on the basis of tax fairness, there are distinctions which can be drawn as a matter of principle to exclude fairness as a grounds for extending most of those benefits to hockey. It is worth noting, however, that the property tax relief obtained by the Ottawa

Senators does appear to be firmly justifiable in terms of a fairness rationale.

B. The Meaning of "Fairness" in Comparing the Taxation to Which Different Canadian Businesses are Subject

One question which was never explicitly asked or answered in the entire episode was what exactly the Ottawa Senators meant by the term fairness. Tax fairness of course dictates that similar taxpayers be treated in a similar manner. But the question of which two taxpayers are similar is not necessarily clear. As with the question of economic impact, the Ottawa Senators and the NHL briefly flirted with the argument that fairness might dictate Canadian governments match the generous packages offered by U.S. cities and states to lure professional sports

82 teams. 259

Canada may wish that other countries did not subsidize commercial investment in product research and development, but that is part of the international reality. If Canada. If Canada is to retain and expand its technology based industries, it must keep the playing field levaI. We may wish that other countries did not support the export of capital equipment, but the practice is widespread. If Canada is to meet that competition, it must meet it if companies like Bombardier are to thrive and to deliver their dynamism to Quebec and the rest of Canada.

The forestry industry requires appropriate stumpage fees. Oil and gas require appropriate royalties and tax treatment. Every industrial category in Canada is assessed by the Government of Canada and the provinces. Its value to the country is established. Its international competitive position is reviewed, and the government typically follows two programs. One is to work with other countries to reduce international subsidies to get the tax cost down to taxpayers. Secondly. if ifs an industry we wish to hold on to, we take the appropriate actions to level the playing field.

Ali of us wish that U.S. cities did not bid with their taxpayers' money against each other and against Canadian cities for NHL hockey in their city. But they do. The result is that the Ottawa Senators and other Canadian clubs are denied revenues that flow annually to our US. competitors. They are not going to stop because we don't like it. 260

That explanation of the argument for referencing the broadest possible range of

259 See e.g., "Can Canadian NIn.. teams Survive?", supra note 257 at A6. See also 1. Mercer & C. Freeze '''We are artists, too - Hall ofFamer, Senators owner back :MPs' crusade" The Ottawa Citizen (November 1, 1997) A1-A2.

260 Sub-Committee on Sport proceedings, supra note 241 (April 28, 1998, 10:00-10:05 AM) (testimony ofMr. Rod Bryden, Chairman and Governor, Ottawa Senators, National Hockey League).

83 taxpayers was made by the Ottawa Senators before the Parliamentary sub- committee. It appears, however, that neither the Ottawa Senators nor any level of government ever seriously considered the possibility that Canadian NHL teams might receive assistance of the same magnitude given to professional sports teams in the U.S..

At the very least, therefore, the NHL teams were asking to be treated in substantially the same manner as similar businesses within Canada. At the same time that Mr. Bryden made the foregoing argument, he volunteered that the Ottawa Senators "can besound and successful without matching U.S. support because hockey is Ottawa's sport. Fan and business support is much more concentrated and much more loyal than that in the U.S. cities.,,261 ln a similar vein, Mr. Ronald Corey speaking for the Montreal Canadiens told the subcommittee that ''l'd like to be properly understood on this point. The Montreal

Canadiens don't want to get out of their fair share of taxes....We don't expect any favours or special status. We just want to be treated fairly and equitably.,,262

The NHL commissioner also told the subcommittee that: "1 don't believe we're looking to have the government in Canada, at any level, equal what's going on in

261 Ibid.

262 Ibid. (April 28, 1998, 10:15 AM) (testimony ofMr. Ronald Corey, President and Govemor, Montreal Canadiens, National Hockey League). But see also, "Can Canadian NHL teams Survive? - Yes, says the league commissioner, ifcities are willing to subsidize their teams" supra note 257.

84 the United States, not just for hockey but for ail sportS.,,263

C. The Federal Government's Solicitude for NHL Hockey in Canada

The federal government's desire to find a way to justify assistance for Canadian

NHL teams had been publicly and consistently expressed for almost a year and a half before the Senators' intensive public lobbying began, and more than two years before Industry Minister John Manley announced the federal proposaI. In the late fall of 1997, the federal Parliamentary heritage committee announced that a parliamentary sub-committee would be formed to study the economics of sport, and particularly NHL hockey, in Canada. 264 ln Iight of that news, the

Ottawa Senators publicly announced that they would desist from lobbying for

government help until the sub-committee completed its work. 265 ln the spring of

1998, the Ottawa Senators were joined by other Canadian NHL clubs and the

263 Ibid. (April 28, 1998, 9:50-9:55 AM) (testimony ofMr. Gary Bettman, Commissioner, National Hockey League).

264 R. MacGregor, "Save Canada's game, MP's plead - Fear ofhockey heading south inspires formation ofsport subcommittee" The Ottawa Citizen (October 31,1997) Al;"'We are artists, too' - Hall ofFamer, Senators Owner back MPs' crusade", supra note 259.

265 A. Panzeri, "A time to listen, learn - Senators owner will sit back, let Heritage Canada committee fully explain to Canadians problems their NHL clubs face" The Ottawa Citizen (November 6, 1997) El.

85 NHL head office in testifying before the parliamentary sub-committee. 266 The sub-committee published its report in November of 1998, and recommended that the financial problems of Canada's NHL teams' problems should be addressed in a "sport pact" which would include a "Canadian professional sport stabilization program," for which teams could qualify by meeting various criteria including

matched assistance from other stakeholders.267 Before the proposai could be

implemented however, the sub-committee recommended that "evaluation should

be conducted by the Department of Finance to determine the costs of

implementing the sport pact." 268

By June of 1999, Industry Minister John Manley responded to complete inaction

on the sub-committee's recommendations. The Industry Minister retained a

consulting organization to conduct further consultations and study among teams,

players, and governments to determine the prospects for arriving at a shared

solution.269 ln October of 1999 the Public Policy Forum reported to the minister

that "...the elements required for a shared solution consisting of contributions

from ail the major stakeholders that would ensure the future economic viability of

ail six existing Canadian teams cannot be forged from the current

266 Sub-Committee on Sport proceedings, supra note 241 (April 28, 1998).

267 Sub-Committee Report on Sport in Canada, supra note 258, at 101-05.

268 Ibid.

269 The National Hockey League In Canada, supra note 258, at 1.

86 contributions.'mo

Nevertheless, by January 18, 2000, John Manley was apparently convinced that an assistance programme could succeed. In a press conference and written release on January 18, 2000, John Manley said "that there had been some positive developments since the release last October of the report by the Public

Policy Forum". 271 Accordingly, the Minister had been authorized by cabinet "to negotiate federal assistance of up to 25 percent of a shared solution, with the remainder to be contributed by other stakeholders, namely, the National Hockey

League, and the provinces and municipalities within which the teams reside.',272

The programme was to remain in place until 2004. 273 It was believed the programme could have yielded a direct benefit of between 2.5 and 3 million dollars for each team that qualified.274 John Manley was, however, obviously

270 Ibid. at 3.

271 News Release, "Financial Challenges Confronting Canadian NHL Teams" (January 18, 2000) (available at http://WVI..W.ic.gc.ca).

272 Ibid.; With respect to financial assistance offered by the NHL, see The National Hockey League In Canada, supra note 258, at Appendix III (Sept 14, 1999, "Professional Hockey in Canada: NHL Self-help Initiatives and Proposed Stakeholder Contributions" (National Hockey League), summarizing the NHL's programme ofassistance to compensate Canadian NHL teams for the difficulties ofbidding to keep their players in the face ofoffers from V.S. teams that would otherwise have the advantage ofthe disparity in Canadian and U.S. dollars.)

273 "Financial Challenges Confronting Canadian NHL Teams", supra note 271.

274 T. Blackwell & C. Cobb, "Harris Won't Give Bryden Tax Break" The Ottawa Citizen (January 20, 2000).

87 mistaken about the public's willingness to support such a proposaI. Only three days later, widespread and overwhelming public outrage at the proposai led

Manley to hoId a second pres conference in which it was announced that the proposai was revoked and the issue would not be pursued any further. 275

O. A Preliminary but Inconclusive Fairness Rationale: Fostering and Protecting NHL Hockey as an Element of Canadian Heritage

It should not be surprising to anybody in Canada that the federal Parliament's

Heritage Committee took an interest in the financial problems of Canada's NHL teams long before the federal Industry Minister ever attempted to coordinate a

"shared solution" to those problems. For anyone sympathetic to the plight of

Canada's NHL teams, the mere observation that other businesses falling within the sphere of "culture" and "heritage" are the beneficiaries of considerable government assistance seems to justify the extension of similar treatment to hockey. Denis Potvin, former NHL defenseman and member of the hockey hall of fame, had this to say when asked about the formation of the parliamentary sub-committee in 1997.

The government is only too happy to step in and help the pertorming arts. What do you think hockey is?

275 Associated Press, "'This Proposai is Dead' - Canadian governrnent ices NHL subsidy program" CNN/Sports Illustrated (January 21,2000) available through W\Nw.cnnsi.com at hup:/ISP0l1sillustrated.cnn. com/hockev/nhl/news/2000/01/211canada subsidy ap/index.ht ml).

88 Ifs an art. Absolutely 1support this [committee]. Ifs about time the government went out of its way to help the sport. We should be treating the preservation of that business the same way as we do a company like Bombardier - as something that is in our national interest.276

While the logic of Mr. Potvin's comparison to performing arts makes for compelling rhetoric, the reference to the treatment which a company like

Bombardier receives may indicate some incomplete analysis.

It is a popular and familiar presumption of Canadian public policy that Canadian cultural industries are economically "fragile". In Canada, "cultural" industries like

live theatre, television broadcasting, and film-making, are presumed to be fragile for the simple reason that similar forms of entertainment are made available to

Canadian consumers in overwhelming amounts by U.S. businesses.

Accordingly, the availability of discriminatory tax measures in favour of live

theatre, and film and television production are virtually always conditioned on

minimum participation by Canadian performers and/or production staff. The

property tax exemptions in favour of live theatre in Ontario are an exception to

that rule.

By comparison, hockey in Canada is surely not entitled to the benefit of any

presumption that its continuation is in jeopardy. As noted by Ken Dryden when

276 "'We are artists, too' - Hall ofFamer, Senators Owner back MPs' crusade", supra note 259, at Al, A2.

89 speaking to the parliamentary subcommittee, hockey has always been a uniquely Canadian game.

Until recently Canadian teams won most of the time because of what 1cali the Canadian advantage - that unorchestrated conspiracy of hopes and expectation, demands and rewards that fill the air in those places where agame matters, that makes players play harder and battle longer and win more often. Now Canadian teams lose most of the time because of the Canadian disadvantage - that unorchestrated conspiracy of currency values, tax structures, and public and governmental understandings that, given the fragility of competing at the top, is too much to overcome. 277

The argument that Canada's NHL teams are having difficulty remaining competitive to U.S. based teams is less persuasive if, besides counting the number of Stanley Cup appearances by Canadian teams during the 1990's, you also count the number of playoff appearances during the same period, and set aside comparisons to the statistically aberrant success of Canadian teams during the 1980's. Warnings like Mr. Dryden's may also be somewhat overstated in light of the seemingly irrepressible nature of hockey as a Canadian

institution and the number of businesses that have tried to establish top professional teams in Canada over the entire history of the sport.

An obvious but incomplete response to the distinction between hockey and more

277 Sub-Commiftee on Sport proceedings, supra note 241 (April 28, 1998,9:40-9:45 AM) (testimony ofMr. Ken Dryden, President and General Manager, Toronto Maple Leafs, National Hockey League)

90 "fragile" Canadian entertainment businesses is to point out that tax incentives are being captured by nominally Canadian producers of "non-Canadian" entertainment while the truly Canadian institution of hockey is denied assistance. Certainly some, if not most, of the tax benefits intended for supposedly fragile Canadian live theatre and television or film production businesses are being captured in the production of such non-Canadian entertainment as the Lion King and Robocop. The capture of tax benefits by such productions may constitute an excellent rationale for re-examining the use of tax incentives to promote the production of entertainment in Canada, with a view to reforming and perhaps even repealing those measures. On the other hand, the production of that entertainment may still be contributing to the development of at least some skills and/or artistry that might not otherwise exist in Canada. Either way, there is no logical basis for justifying the adoption of measures in favour of the NHL by comparison. Problems arising in the implementation of existing policies do not amount to a reason for tax relief in favour of NHL hockey.

Even if none of the underlying objectives of other culturally motivated tax measures are being obtained, it is impossible to consider tax relief for NHL

hockey in Canada without asking whether there is any prospect of any team ever

recapturing sorne of the assistance that would be presently consumed in one or two star players' salaries. Giving legislators the benefit of the doubt, it is

91 possible to imagine that they could not have known how quickly, by whom, or to what extent tax incentives offered to theatrical businesses and film and video production businesses might be captured for unintended purposes. There was no such doubt when the parliamentary sub-committee considered the NHL case.

To get back to the question of salaries, people can't take it seriously when the Ottawa Senators give a contract like the one they signed with Alexandre Daigle, who at age 18 had never played. It's not surprising that the franchises have trouble. 1watch the young player from Rimouski who at 18 plays extremely weil for $50 a week. Maybe that's much too liUle, but if he were signed up for $15,000,000 next year, that would be just as exaggerated.

That's why it is hard for ordinary people to understand why we'd even think about helping you. Notwithstanding the fact that you say it's a big industry, nobody buys it. What people remember is that we're thinking about helping millionaires, while . there are people who go hungry, children at school who go hungry. If the government has money, it should be using it to help these people. It shouldn't be giving it to people who already have too much. We have the impression that, since your players are already weil paid, we wouldn't really be helping you, because if we helped you and you didn't cap your salaries, you'd have to give them even more. You'd come back to see us and tell us we didn't give you enough.... Something else has got to happen before we give you any money.278

That sentiment has been echoed by Gordie Howe, one of the most eminent

278 Sub-Committee on Sport Proceedings, supra note 241 (April 28, 1998, 10:40 AM) (comments ofMs. Suzanne Tremblay, MP (Rimouski-Mitis, BQ)).

92 Canadian hockey players of ail time. 279

E. Prospects for Mitigating the Capture of Proposed Federal Assistance by Star Players on Canadian NHL Teams

Unfortunately, enormous player salaries will remain beyond resolution in the foreseeable future, continuing to raise serious problems when considering tax relief forCanadian NHL teams. As the U.S. antitrust laws stand today, NHL owners will never again be allowed to set restrictions on how they might bid up player salaries in competing amongst each other,280 and the legality of any league wide system of player salary and mobility controls will depend on the players having approved it in the context of meaningful collective bargaining. 281

U.S. courts certainly recognize that sports leagues have a "strong and unique interest" in maintaining the competitive balance among teams. 282 Nevertheless, measures such as concerted refusais to deal with a player who has been drafted

279 R. Boswell, ''''No role for government in saving hockey, Howe says - Six-decade veteran blames greed for game's woes" The Ottawa Citizen (November 2, 1997) at Al.

280 See generally, Weistart and Lowell, supra note 85.

281 Clayton Act, 15 U.S.C. ss. 6,20 (1988).

th 282 Mackey v. National Football League, 534 F. 2d 606,621 (8 Ciro 1976). See aIso, section VI ofthe V.S. Supreme Court's decision in National Collegiate Athletic Association v. Board ofRegents, 468 U.S. 85 (1984) where the court recognized the Iegitimacy ofIeague's interest in "maintaining a competitive balance among amateur athletic teams."

93 by another team,283 and salary caps imposed by a league without the consent of its players,284 have been held illegal in other sports unless collectively bargained for.

Until twenty or thirty years ago, of course, the loyalty and salaries of players were non-issues in the operation of NHL teams. As with other professional sports leagues in North America, the entry of players into the NHL, has been historically governed by a draft or other system of allocating exclusive rights to a

single team. 285 The NHL system was supplemented bya network of affiliations to minor leagues and amateur associations that brought just about every decent

hockey player in North America under contract, directly or indirectly, to the

283 See e.g Kapp v. National Football League, 390 F. Supp. 73 , 82 (N.D. Cal. 1974) where the court stated with respect to teams' exclusive rights to a player acquired through the league draft system, among other things: "in the present case, league enforcement of most ofthe challenged rules is so patently unreasonable that there is no genuine issue for tria!." See also Smith v. Pro-Football Inc., 420 F. Supp. 738 at 744-45 (D.D.C. 1976), where the court found that the NFL's draft system violated the antitrust laws, and described the system as "a group boycott in its classic and most pernicious form ...with no purpose other than the stifling ofcompetition." See also Robertson v. National Basketball Association, 389 F. Supp. 867, 893 (S.D.N.Y. 1975) where the judge, in deciding various pre-trial matters, foreshadowed how he might view the substance ofthe claims at trial by stating that "the player draft and perpetuaI reserve system are readily susceptible to condemnation as group boycotts based on the NBA's concerted refusal to deal with the players save through these unfair restrictive practices."

284 See e.g., Mackey v. National Football League, 407 F. Supp. 1000, 1010 (D. Minn. 1975) where the trial court conc1uded that league rules which violated antitrust principles could not be successfully defended by the league, in part because they "had never been the subject ofserious, intensive, arm's length collective bargaining" between the players and the league.

285 Weistart and Lowell, supra note 85 at 504.

94 NHL. 286 Under the system, a player who showed enough promise to attract

professional attention was only allowed to enter the league by playing for the team that held the exclusive right to negotiate with that player. The bond

between NHL team and player was then perpetuated by the reserve clause in

the standard form contract, which gave the team the perpetuai right to

unilaterally and repeatedly renew the contract upon expiration of the original

term. 287 Desirable NHL players could therefore change teams only by way of

trades between teams pursuant to contractual assignment clauses which bound

the player to the assignee team, regardless of the player's wishes. 288

It was largely because the NHL's initial rise to hockey hegemony coincided with

the exemption of professional sports businesses from the application of U.S.

antitrust laws that the NHL became the only professional hockey league in

history capable of completely controlling players' salaries and mobility between

teams throughout their careers. The NHL was formed in 1917, and emerged as

the sole elite professional hockey league in North America by 1926. In 1922, the

U.S. Supreme Court decision in Federal Baseball Club ofBaltimore, Ine. v.

National League of Professional Baseball Clubs ("Federal Baseball") appeared

to establish once and for ail that the business of professional baseball, and by

286 Quirk and Fort, supra note 1 at 330.

287 Weistart and Lowell, supra note 85 at 283-84, note 477 and accompanying text.

288 Ibid, at 291-92.

95 analogy ail professional sports, did not constitute "interstate commerce" to which the U.S. antitrust laws apply.289 ln addition to the U.S. antitrust law's decisive recoil from the sports business, it is also worth noting the absence of meaningful competition laws in Canada during the NHL's formative years. 290

8etween 1957 and the 1970's, the rule that ail professional team sports in the

U.S. were completely exempt from the federal antitrust laws was eventually cast aside. In a 1949 case that was later settled out of court,291 a federal appellate

289 259 US. 200 (1922) affirming 269 F. 681 (D.C. Cir. 1920), noted in 34 HARv. L. REv. 554 (1921). The federal antitrust laws in the United Sates are based upon a few short statutory provisions, which have been elaborated through an enormous body of case1aw since the adoption ofthe Sherman Act in 1890. The general substantive rules of US. antitrust laws are contained in sections 1 and 2 ofthe Sherman Act which state as follows: Section 1. Every contract, combination in the form oftrust or otherwise, or conspiracy in restrain oftrade or commerce among the several States, or with foreign nations, is hereby declared to be illegal. ... Section 2. Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other persons to monopolize any part of the trade or commerce among the several states shall be guilty of a felony. 15 US.C. ss. 1,2 (1988). In addition to the those substantive rules, the remedies that are available include injunctive reliefand, under section 4A ofthe Clayton Act, money awards equal to three times the actual damages suffered as a result ofan illegal restraint oftrade. 15 US.c. ss. 4, 15a (1988). Despite the forcefulness ofthese basic rules, the caselaw has ofcourse recognized that "reasonable" restraints oftrade are necessary and legal, and a monopolist may not be subject to the unfair application ofantitrust remedies where they are "the survivor out ofa group ofactive competitors, merely by virtue of[their] superior skill foresight and industry." See e.g. U.S. v. Aluminum Co. ofAmerica, 148 F.2d 416 (2d Cir. 1945)

290 R.J. Roberts, Roberts on Competition/Antitrust: Canada and the United States, 2d ed. (Toronto: Butterworths) at 88-91. See also B. Dunlop., D. McQueen & M. Trebilcock, Canadian Competition Policy - a Legal andEconomie Analysis (Toronto: Canada Law Book, 1987) at 20 - 21.

291 Weistart and Lowell, supra note 85 at 484, citing Martin, "The Aftermath ofFlood v. Kuhn: Professional Baseball's Exemption from Antitrust Regulation", 3 WES. ST. U L.

96 court decided for the first time that the rule in Federal Baseba/l should be re- examined in Iight of increasing interstate sports business activity, broadcasting being the most notable.292 ln 1953, the U.S. Supreme Court responded by attempting to limit the precedential force of Federal Baseball to the extent "that

Congress had no intention of including the business of baseball within the scope of the antitrust laws.,,293 Within two years the U.S. Supreme Court felt compelled to follow up its 1953 decision by stating that the antitrust laws apply to the business of promoting professional boxing matches. 294 By 1957, the Supreme

Court would explicitly apply antitrust laws to a professional team sport, football, for the first time. 295 ln the fall of 1972, the NHL's system of player salary and mobility restraints was declared illegal in a preliminary but conclusive decision of the Iitigation that arose when the WHA persuaded players to accept more generous WHA contract instead of honouring their supposed obligations to remain bound to the NHL teams or minor league affiliate teams for as long as the

REV. 262, 265 n.15 (1976).

292 Gardella v. Chandler, 172 F. 2d 917 (2d Cir. 1949), rev'g 79 F. Supp. 260 (S.D.N.Y. 1948)

293 Toolson v. New York Yankees, 346 US. 356 at 357 (1953)

294 United States v. International Boxing Club, Inc., 348 US. 236 at 242 (1955). In a companion case, the antitrust laws were also applied to the non-atWetic exhibitions business ofa theatrical booking and production company. United States v. Schubert, 348 US. 222, at 225-29 (1955).

295 Radovich v. National Football League, 407 US. 445 (1957).

97 NHL team saw fit. 296 Today's strikingly less effective system of salary and mobility contrais exists only because the players have been persuaded to accept it in collectively bargained agreements.

ln announcing its proposai to assist Canadian NHL teams, the federal government unsuccessfully attempted to sidestep the question of player salaries. ln the report addressed to John Manley which concluded that there was no basis for arriving at a shared solution to the NHL's problem's in Canada, the Public

Policy Forum in~icated that the NHL Players Association "recognizes the prablem, but believes the solution is in the hands of other stakeholders.,,297 ln a letter attached as an appendix to that report, Minister Manley had expressed his agreement with others that the players needed to be involved if a solution was to

296 A few weeks after the WHA had opened its first season, a preliminary injunction was issued to prohibit NHL teams from enforcing their perpetuaI rights to bind any players to renewals oftheir otherwise expired NHL contracts. The decision was made in the course ofa consolidated proceeding the had brought together the several antitrust lawsuits that were pending between NHL and WHA teams and players at the time. WHA Case (1972), supra note 86 at, 467-468. The ruling made clear that, in principle, the "materially identical"contract provisions used by minor professionalleagues affiliated with the NHL were also illegal. Ibid., at 511. The Court ruled that the NHL enjoyed its unrivaled position as the sole supplier ofelite professional hockey in North America as a result ofits monopolization over the supply ofvirtually all North American hockey players with sufficient skill to play professionally. Ibid., at 509. Although the V.S. antitrust laws do not necessarily prohibit the mere existence ofsuch a monopoly, the Court also found that the NHL had exhibited by its conduct and its clearly stated intent that it planned to illegally maintain against all opposition its power to control player salaries and to exclude competition for those players' services. Ibid., at 510; see also Ibid., at 509 for the definition ofa monopoly as "the power to control prices or exclude competition" (citing United States v. duPont, 351 V.S. 377 at 391 (1956».

297 The National Hockey League in Canada, supra note 258 at 2.

98 be found. But when he decided to go ahead with assistance, Manley attempted to put the salary issue aside by leaving the players off the list of groups required to participate in a shared solution. The timeline for the programme did, however, recognize that the salary issue was central to the question of relief in that the proposed assistance would be available only until2004, when the league's collective bargaining agreement with its players is due to expire. 298

It must be said that Canadian NHL hockey players could probably have overcome the weaknesses in any analogy to other cultural businesses that receive tax relief in Canada by simply offering to participate in the creation of a shared solution. Despite the popularity of the game among the much larger populations of Europe and the United States, Canada remains the country of origin for over one half of the players in the NHL,299 When John Manley proposed to develop a shared solution, he only tried to open the door to the

negotiation of a multi-party scheme. The players had expressly stated that they would not be involved in any such process. Had Canada's NHL players

expressed concerns about the game's future in Canada in common with their

employers, there may have been sorne additional basis for the public to believe

that a central element of Canadian culture was truly in jeopardy. More

298 "Financial Challenges Confronting Canadian NHL Teams", supra note 271.

299 D. Wallace, "Powerful Province - Ontario is NHL's main supplier oftalent" CNN/ Sports Illustrated (November 29,2000) available through www.cnnsi.com at http://sportsillustrated.cnn.convstatitudes/news/2000/11/2911indros leafs/index.html).

99 importantly, the lightning rod that player salaries constitute for public resentment might have been neutralized. But for the time being it appears that NHL players, perhaps even more so than NHL owners, are focused on U.S. rather than

Canadian dollars.

F. Rationalizing Municipal Tax Regimes Applicable to NHL Hockey in Ontario with United States Norms

Unlike the relief proposed by the federal government, principles of fairness clearly support the property tax relief that the Ottawa Senators actually did

obtain for the benefit of ail the major professional sports teams in Ontario.

Ontario's property tax exemptions for the benefit of live theatre are an exception

to the general requirement that Canadian pertormers or producers participate in

the favoured business activity. Accordingly, there does not appear to be any

legislatively sanctioned reason for the discriminatory taxation that used to apply

against professional sports teams as opposed to the live theatre entertainment

businesses with which they compete.

Property tax relief also constitutes a clear and discrete case for application of

Rod Bryden's principle that fairness sometimes requires a Canadian government

match favouritism shown abroad to a Canadian business' competitors. As Rod

Bryden stated:

100 Every industrial category in Canada is assessed by the Government of Canada and the provinces. Its value to the country is established. Its international competitive position is reviewed, and the government typically follows two programs. One is to work with other countries to reduce international subsidies to get the tax cost down to taxpayers. Secondly, if it's an industry we wish to hold on to, we take the appropriate actions to level the playing field. 300

As often pointed out by Mr. Bryden, in a year when the Ottawa Senators paid property and capital taxes of approximately 4.4 million Canadian dollars in relation to their arena, ail 20 of the U.S~ based NHL teams combined paid similar taxes in a total amount of approximately 4.1 million Canadian dollars. 301 During the same period, the Montreal Canadians paid 11.3 million dollars in property and capital taxes in relation to their arena.302 ln the absence of some overriding cultural policy to promote other forms of entertainment to the detriment of hockey, there is simply no reason that the Ontario government should not have done exactly as it did. As a result, Ontario municipalities are now permitted to decide for themselves whether the value they attach to the presence of a professional sports team is sufficient to justify foregoing property taxes to the same extent as U.S. cities have done.

300 Sub-Committee on Sport proceedings, supra note 241 (April 28, 1998, 10:00-10:05 AM) (testimony ofMr. Rod Bryden, Chairman and Governor, Ottawa Senators, National Hockey League).

301 Ibid.

302 Ibid. (April 28, 1998, 10:15 AM) (testimony ofMr. Ronald Corey, President and Governor, Montreal Canadiens, National Hockey League).

101 G. Conclusion

ln the absence of participation from the NHL players, the Canadian government would have exposed the Canadian tax system to the worst kind of cynicism had they succeeded in adopting comprehensive tax relief for Canadian NHL teams.

Some people may accept the notion that NHL teams might just as weil be given tax relief similar to that offered to other businesses because problems in our tax system, such as misplaced cultural incentives, are not going to be reformed in the foreseeable future anyway. But, as has been observed, "If government tried to subsidize NHL teams, it would have a multitude of interest groups knocking on its doors.,,303. The latter view has to prevail over the former if one considers the absence of any need to encourage Canadian participation in hockey, the obvious capture by star players of any benefits adopted for the nominal benefit of the teams, and the extraordinary public attention paid to the NHL in Canada.

There is, of course, widespread cynicism about Canadian fiscal and tax policy in any event. In the words of one professor and commentator:

Hockey millionaires getting pogey was the sight that may finally shock us into seeing how corporate welfare works. A business that cannot compete by satisfying the customer, must survive by satisfying the politician.

It is a short step from understanding the perversity of

303 The National Hockey League In Canada, supra note 258, at 6.

102 a subsidy to the NHL, to seeing the wider perversity of corporate subsidies. By violating our sense of justice, the failed subsidy to the NHL may wake us up to the fact that corporate Canada is awash in subsidies. 304 ln truth, the NHL example is probably too narrow a basis from which to draw conclusions about Canadian fiscal and tax policy in general. But the manner in which the Ottawa Senators overcame the failure of the federal proposai may raise sorne interest in that broader issue.

304 F. Palda, "Pulling Manley from the Thames - What the NHL fiasco could tell Canadians about corporate welfare" The Ottawa Citizen (January 25,200) AIS.

103 v. THE IRONY OF THE SOLUTION TO THE OTTAWA SENATORS' FINANCIAL NEEDS

A. Introduction

When the federal government revoked its offer of financial assistance, the

Ottawa Senators requested and obtained the increased revenue that they needed not from the government, but from their advertising and ticket buying customers. In recent memory, the fastest growing employers and purchasers of advertising in the Ottawa area have been high-technology companies. It is somewhat ironie to note, however, that the dramatic economic growth which ultimately financed local private relief of the Ottawa Senators' financial troubles is fed in part by generous federal tax incentives programmes for the benefit of research and development in Canada. This irony would not be lost on the

Ottawa Senators' organization itself, which covetously noted the research and development tax credits to received by its high-technology neighbours in Ottawa when appearing before the parliamentary sub-committee in 1998.305

B. High Technology Businesses in Ottawa

ln Ottawa, the high-technology business community was the obvious place to look for private, rather than public assistance. When the proposed federal

305 Sub-Committee on Sport proceedings, supra note 241 (April 28, 1998, 10:00-10:05 AM) (testimony ofMr. Rod Bryden, Chairman and Governor, Ottawa Senators, National Hockey League).

104 package of assistance was revoked, the Ottawa Senators left the question of their next move unanswered for ten days, citing the need to evaluate the remaining options. 305 The City's mayor immediately stated his view that the

Ottawa Senators are "certainly very important and 1think the high-tech community has to be part of the solution.,,306 It was also reported that many members of Ottawa's high-tech community shared the mayor's view. "During the debate over the taxation of NHL teams, leading high tech executives have repeatedly suggested the Senators were an important part of their employee recruitment efforts. They added the professional hockey team plays a key role in boosting Ottawa's profile in the U.S.,,307 According to a Conference Board of

Canada report published the same week that John Manley proposed to step in and assist Ottawa's hockey team, Ottawa's economy had just experienced double-digit growth for the third consecutive year, and was expected to do so again in 2000 on the strength of its roaring high-tech sector. 308 Indeed, by the end of 2000 Ottawa's economy would boast over 1000 high technology companies, which combined to overtake the federal government as the largest

30S K. Chappel1, "Chiarelli Says: Tech firms critical to Sens future" Ottawa Business Journal (January 24,2000) at 21.

306 Ibid.

307 Ibid.

308 K. Goff& E. Beauchesne, "Ottawa to lead country in Job growth - Report says high­ tech boom fuels hiring binge" The Ottawa Citizen (January 19,2000).

105 employer in the region. 309

On February 2,2000, the Ottawa Senators held a press conference and published an open letter in the Ottawa Citizen which politely asked those supporters to pay up, or shut up. The full text of that open letter was as follows:

Wednesday, February 2,2000 An Open Letter to Hockey Fans and Concerned Citizens of our Community

The Past Eleven Months Eleven months ago the Ottawa Senators and the National Hockey League embarked on a program that would see ail levels of government recognize the unreasonable levels of tax burden and policies that were seriously threatening the viability of our NHL teams in Canada. For the Ottawa Senators and the fans of this area this has been an important initiative and a battle to keep the Senators here in our Community. While sorne considerable progress has been made on tax fairness, we are still faced with a significant shortfall in our revenues if we are to keep the Ottawa Senators here in this community.

The Ottawa Senators are Important to the Community To keep the Senators in Ottawa has been my personal goal and that of our staff throughout this campaign. The Ottawa Senators very much want to continue to be a major part of the sports, entertainment, cultural, and sociological make up of our community. Not only do the Ottawa Senators provide a substantial economic engine for our

309 Ibid.

106 community but they help to improve our quality of life in many ways. Significant among these are the millions of dollars raised for local charities, the many good works that our players perform within the community and our ongoing involvement with many other worthy and important causes.

Unfortunately we were not able to convince ail levels of government of the importance of fair tax and fiscal policy. This has brought us to a position that 1 personally had hoped we would not face. That is, the very real prospect that without further commitment from our fans and corporate community, the Ottawa Senators would have to be moved. However, before taking that action, we felt it important to ask our fans and this community to help us work towards a home grown solution that was created in Ottawa, by Ottawans, for Ottawa. Our plan requires action now, in the next three weeks, to help keep the Ottawa Senators here in Ottawa.

What is the Plan? Our plan has two components: 1. To imp/ement a Ticket Campaign that has two important e/ements. a. We will be asking our existing season seat ho/ders to accept a modest 7% price increase and to renew their commitment for next year's season seats by February 1(jh. We need to achieve a minimum 90% renewa/ in our season tickets in this time. b. Based on achieving a 90% season seat renewa/ we will need to sell an additiona/ 1,500 st new season seats prior to February 21 • 2. To ask ail ofour corporate partners and sponsors to accept a one-fime 10% increase in the price oftheir contracts, and where it makes sense to do so, to increase further their participation with us. Again we will be asking our corporate partners to commit to this program by February 1(jh.

107 What can Vou Do? • Ifyou are a current season ticket holder, please sign your renewal form and retum it to us by February 1(J'h. • Ifyou are not a season ticket holder but want to keep the Senators in Ottawa, please contact us at our ticket hotlines (613) 599-0300 or (613) 755-1166. Help us reach our goal of 1,500 new season seat holders. • VOU CAN make a difference! For as little as $184 you can own a mini-plan; 7 mini plans equals one season ticket equivalent! • Ifyou represent a corporate partner ofthe Senators, please consider carefully our request to amend your contract and wherever possible to extend it as weil. We hope you will see your way clear to providing this very important support to the Ottawa Senators Hockey Club.

1will be holding a further press conference on February 11 th to update everyone on the results of our plan and program. If we have reached our ticket renewal and corporate response targets, we can focus on completing the season ticket program by 5t February 21 • 1am confident that by working together we can achieve our goal to keep the Ottawa Senators here for a very long time. Again to ail the hockey fans, our corporate partners and the citizens of this community, thank you again for your continued support, patience and commitment to the Ottawa Senators. Sincerely, Roderick M. Bryden Governor and Chairman Ottawa Senators Hockey Club310

310 R. Bryden, "An Open Letter to Hockey Fans and Concemed Citizens ofour Community" The Ottawa Citizen (February 2,2000) A9.

108 The Ottawa Senators heId another press conference on Friday February 11, announcing that renewals had already reached 73.8 per cent, and 1117 season tickets had been sold, and 126 companies had renewed their contracts on terms more favourable to the team311 . On February 16, 2000, a full-page "Ottawa

Senators Community Coalition" newspaper advertisement criticized Ottawa's high tech community for not matching the pace of ordinary fans in renewing season tickets or buying new tickets. The next day, three of Ottawa's local high- tech heavyweights, Corel Corp., Nortel Networks, and JDS Uniphase, announced that they would joïn in funding the Ottawa Senator's financial rally.312

By the next day, the team announced that they would remain in Ottawa for the foreseeable future as a result of 87.3 per cent of season-ticket holders renewing their subscriptions at the higher priees, 1,544 new seasons tickets having been sold, and more than half of the 300 companies with whom the team had contracts renewing or extending terms subject to 10 per cent priee increases in favour of the team. 313

311 A. Panzeri, "A countdown from 10 - Numbers move Bryden to extend drive" The Ottawa Citizen (February 12, 2000).

312 A. Panzeri, "Senators staying put - Final word is Bryden's with campaign goals in sight" The Ottawa Citizen (February 18, 2000).

313 A. Panzeri, "Bryden: Senators will stay 'for generations to come' - 'Bad years' not enough 'to abandon community'" The Ottawa Citizen (February 19, 2000).

109 C. The Tax Treatment of Research and Development Businesses in Canada

It is ironie that the Ottawa Senators ultimately had to rely upon the support of an

industry that derives great benefit from a particularly generous scheme of federal and provincial tax incentives. For many years, the ITA has provided favourable tax treatment for expenditures on research and development made in Canada.

ln the first instance, businesses in Canada are allowed to deduct numerous

SR&ED expenditures from the income upon which their tax is calculated. 314 The

ITA also allows Canadian businesses to reduce the tax for which they would

otherwise be liable by credits equal to between 20% and 35% of applicable

SR&ED expenditures. A Canadian business that does not have any tax liability,

and also falls within the definition of a Canadian controlled private corporation

("CCPC"), can even receive a cash subsidy representing a portion of the SR&ED

credit to which it would be entitled if it had actually generated a profit.

SR&ED is defined for purposes of the ITA as "systematic investigation or search

that is carried out in a field of science or technology by means of experiment or

314 Income Tax Act, supra note 176, s.37.

110 analysis.... "315 The definition of these activities explicitly includes basic scientific research, applied scientific research, or experimental development of technological advancements, but specifically excludes:

- market research or sales promotion, - quality control or routine testing of materials, devices, products, or processes, - research in the social sciences or humanities, - prospecting, exploring or drilling for, or producing, minerais, petroleum or natural gas, - the commercial production of a new or improved material, device or product or the commercial use of a new or improved process, - style changes, or - routine data collection. 316

The types of research activities excluded from the ITA definition of SR&ED may, of course, arise as legitimate business expenses that can quite properly be deducted from a business' taxable income in any event,317

By specifically allowing the deduction of SR&ED expenses, the ITA encourages businesses in Canada to incur SR&ED expenses that might not otherwise qualify as legitimate deductions from revenue in calculating income for taxation

315 See ibid, s.248(1) for the full definition ofscientific research and experimental development.

316 Ibid.

317 Ibid. s.18(1)(a).

111 purposes. Section 18(1)(a) states a general principle of the ITA that expenses can only de deducted in calculating taxable income if those expenses are incurred "for the purpose of gaining or producing income fram the business or property."318 The ultimate results of SR&ED are by definition uncertain, and in many cases the possibility of ultimately deriving income from SR&ED activities is therefore remote. It is not difficult to imagine scenarios in which this could raise a fundamental question about whether SR&ED expenses could reasonably be categorized as business activities undertaken in order to gain or produce income. In order for SR&ED expenses to be deductible under ITA section 37(1), however, they must only be "related to a business of the taxpayer',.319 This language is far more permissive than the general rule of section 18, since it allows for the deduction of expenses which may only "Iead to or faci1 itate an extension of' the business to which they relate. 320 If not for this more permissive approach, businesses seeking to fund SR&ED might have to consider either funding the SR&ED with after tax dollars, or through charitable donations qualifying for favourable tax treatment but preventing businesses from owning the results of the SR&ED work.

318 Ibid. s.18(1)(a).

319 See ibid. ss. 37(1)(a)(i) through 37(1)(a)(iii), and 37(1)(b)(i), where the "related to a business" requirement is repeated as a qualifier ofaIl expenditures included in the deduction.

320 Ibid. s.37(8)(e).

112 Besides deducting SR&ED expenditures from income, a Canadian business that incurs SR&ED expenditures is entitled to claim a credit which reduces the tax payable by an amount equal to 20% or more of its SR&ED expenditures. The definition of the "SR&ED qualified expenditure pool," from which the 20% tax credit is calculated,321 overlaps to a great extent the SR&ED expenditures that are deductible from income under section 37. 322 As one would expect, a business cannot include the 20% portion of SR&ED expenditures for which it receives a credit as part of the SR&ED expenditures which are deducted from its income.323 A CCPC with between zero and $200,000 in income, however, is entitled to have the amount of its SR&ED tax credit adjusted upward by up to an additional15% of its SR&ED qualified expenditure pool.324 The amount for which a CCPC can claim this 15% upward adjustment is limited to the lesser of its SR&ED expenditure pool and a figure that ranges from $2,000,000 in the case of a CCPC with not more than $200,000 in income and $10,000,000 in capital, and $0 in the case of a CCPC with $400,000 in taxable income or

$15,000,000 in capital. 325

321 Ibid., s.127(5).

322 Ibid, s.127(9).

323 Ibid, ss.37(1)(e).

324 Ibid., s.127(10.1)

325 Ibid, s.127(10.1) See 1994 Budget Supplementary Notes.

113 CCPCs are not only entitled to the SR&ED credits that ail Canadian businesses can use to reduce their income tax liability, they are actually entitled to receive money under the ITA for a significant portion of their SR&ED credits. The ITA specifically allows corporations, but not individuals, to accumulate more SR&ED credits in a given year than their actual income tax liability.326 Under section

127.1 of the ITA, a taxpayer wi Il be "deemed to have paid '" on account of the taxpayer's tax payable ... for the year" as much of it's "refundable investment tax credit" as the taxpayer decides to designate.327 By definition, a "refundable tax credit" is calculated with reference to the amount of the SR&ED credit available to the taxpayer under section 127(5), and is available only to a CCPC or an individual.328 A corporation that is a CCPC, and has enough SR&ED credits to yield a "refundable investment tax credit" portion of SR&ED credits in excess of its tax liability, is therefore entitled to a "refund" of the amount of the

"overpayment" which the government is deemed to have received fram the

326 For individuals only, the amount ofthe credit that is available under ibid., s.127(5) is capped at: the amount oftax payable on income in that year under the ITA not including any income surtax. Ibid., s.127(5) caps the amount ofthe SR&ED credit that can be claimed for any year at the lesser of(a) the SR&ED expenditures and (b) ifapplicable, the amount oftax (not including surtax) that is actually payable by an individual during the year for which a credit is claimed. Because the cap is related to the amount oftax actu~lly payable only in the case ofindividuals, corporations can actually daim credits in excess of the amount oftax they owe in a particular year.

327 Ibid., s.127.1(1).

328 Ibid, s.127.1(2), 127.1(2.01).

114 taxpayer in that year. 329

The amount of the refundable ITC available to a CCPC depends on the size of that corporation's business. A CCPC which qualifies for the small business deduction for CCPC's (i.e. the most preferential federal tax rate for corporations)33o, is also a "qualifying corporation" entitled to the most generous amount of refundable investment tax credits. These small business CCPCs are entitled to receive refundable credits equal to 100% of the underlying SR&ED credits based on current SR&ED expenditures, and 40% of the underlying

SR&ED credits based on capital SR&ED expenditures. 331 Accordingly, for the most favourably treated CCPC, the 35% (20% + 15% upward adjustment) of

SR&ED expenditures for which SR&ED credits are available are completely refundable to the extent that they relate to current expenditures, and 40% refundable to the extent that they relate to capital expenditures.

Following the federal lead, the Ontario Corporations Tax Act also provides

329 Ibid., s.164(1). Although they can obtain refundable investment tax credits for SR&ED, individuals are not entitled to receive either SR&ED credits, or any resulting refundable investment tax credits, in excess oftheir actual tax liability in a given year. Accordingly, the remainder ofthe discussion concerning refundable ITC's will focus on the refundable credits to which corporations are entitled.

330 Ibid., ss.248, 125 and note 321 above.

331 Ibid., ss.127.1(2) and 127.1(2.01). See 1994 Budget Supplementary Information.

115 preferential tax treatrnent to SR&ED expenditures through a "research and developrnent super allowance". and an "innovation tax credit". The basic calculation of taxable incorne of a corporation for purposes of the Ontario

Corporations Tax Act substantially rnirrors the basic calculation of taxable incorne under the federal ITA. 332 The Ontario "research and developrnent super aHowance" is an extra calculation which reduces the taxable incorne subject to the provincial tax. 333 Canadian-controlled private corporations with incarne only in Ontario are entitled to an allowance of 35% of the sarne types of SR&ED expenditures as are deductible under section 37 of the ITA. 334 Other corporations with incorne only in Ontario are entitled to an allowance of 25% of those expenditures. If a corporation has incorne in Ontario and elsewhere, the portion of SR&ED expenditures that can be allocated to Ontario is deterrnined using the sarne proportion in which the corporation's incorne is allocated inside and outside Ontario. The allowance is then calculated on that Ontario allocation of the corporation's SR&ED expenditures.335

332 Corporations TaxAct, supra note 158, ss.7, 34.

333 Ibid., s.12(2).

334 Ibid., s.12. Section 12(1) defines the expenditures upon which the allowance is calculated by reference to section 37 ofthe Income Tax Act, supra note 176. Ibid. s.12(2) sets the percentage ofthe expenditures that the allowance represents.

335 Corporations Tax Act, supra note 158, s.12.

116 ln addition to the deductions available under the Ontario super allowance provisions, CCPCs in Ontario may also qualify for a provincial"innovation tax credit" based on the federal modal. A qualifying corporation can claim a credit against the tax that it would otherwise have to pay under the Ontario

Corporations Tax Act in an amount equal to 10% of the its qualified SR&ED expenditure limit as calculated under the provincial act. 336 The SR&ED expenditure Iimit for the innovation tax credit purposes is essentially the same figure as applies for ITA purposes,337 and the amount of the expenditure limit for innovation tax credit will range from an amount equal to the expenditure pool for

ITA purposes and $0 in the case of a corporation with taxable paid up capital of

$25,000,000 or more.338 The formula for the calculation of the expenditure Iimit is based upon the calculation used under the federal income Tax Act to determine whether a CCPC is eligible to increase the amount of its federal credits from 20% up to as much as 35% of its SR&ED expenditure pool.339 By reference to the federal formula, the availability of the Ontario credit is therefore essentially Iimited to CCPCs to the same extent as the federal credits.

336 Ibid., 88.43.3(1 )-(3).

337 Ibid., 8.43.5(6).

338 Ibid., 8.43.5(3.2).

339 See Ibid., 88.43.5(3.1)-(3.3). See a180 Income Tax Act, supra note 176, 8.127(10.1) and 1994 Budget Supplementary Note8.

117 The dramatic difference that SR&ED incentives can make to a company's bottom line was demonstrated in January of 2000 by the troubled software company whose name adorns the Ottawa Senators home rink. Following the completion of its 1999 fiscal year, Corel Software Corporation surprised observers by announcing that, despite declining sales, it had realized a profit of $4.6 million dollars during the last financial period. 34O The surprising profit resulted from

$14.5 million dollars in research and development tax credits that became available to the company when a tax ruling which the company had been pursuing for several years was obtained.

D. Conclusion

ln the wake of having the federal government's assistance snatched back, the

Ottawa Senators succeeded almost as quickly in extracting increases in ticket priees, luxury box rentai rates, and advertising fees from customers in the city of

Ottawa's high- technology based economy. The Ottawa Senators ultimate ability to rely upon the support of an industry that derives great benefit from a

340 See B. Hill, "Corel draws on unexpected tax credits to show unexpected profit" The Ottawa Citizen (January 19, 2000) Dl; Corel Corporation, Press Re1ease, "Corel Announces Profitable Fourth Quarter and Fiscal 1999: One time gain results in third consecutive profitable quarter" (January 18,2000); Corel Corporation, "Management's Discussion and Analysis ofFinancial Condition and Results ofOperations" (Corel Corporation, Consolidated Financial Statements, Quarter and Year Ended November 30, 1999).

118 particularly generous scheme of federal and provincial tax incentives could be

viewed, cynically, as reducing the public outrage which forced the revocation of the federal proposai to a benign moral statement. Less cynically and to a lesser

extent than the case of the culturally rationalized tax incentives that fund 50

much non-Canadian entertainment, the apparent diversion of Canadian research

and development tax incentives to fund the business of NHL hockey in Ottawa at

least highlights the inherent difficulty of predicting or controlling the actual

effects that any discriminatory tax policy might yield.

119 VI. CONCLUSION

As already noted, history may yield positive observations about the current state of NHL hockey in Canada. Those observations would, of course, have been little consolation to NHL hockey fans in Ottawa at the start of the year 2000. To those fans, the rapid withdrawal of proposed federal aid for the team in January of 2000 left the property tax relief that the team had already obtained through the combined actions of provincial and municipal governments seeming like too little too late. In that context, the Ottawa Senators quickly succeeded in obtaining increases in ticket prices, luxury box rentai rates, and advertising fees from customers in the city of Ottawa's high- technology based economy.

Looking back on the entire lobbying episode, the Ottawa Senators should be commended for eschewing the ail too familiar economic impact studies of dubious validity, and instead charting new waters for a professional sports franchise in search of government aid. The team put forth an argument of being unfairly taxed that had the unusual virtue of being almost undeniably true in respect of the property taxes from which the team was given relief. In addition, the Senator's argument was plausible in the context of tax incentives denied to professional hockey but made available to other businesses with links to

Canadian culture and heritage. Ultimately, however, the absence of any need to encourage Canadian participation in hockey, the obvious capture of any

120 benefits by star players unwilling to participate in the structuring of an assistance programme, and the extraordinary public appetite for the NHL in Canada, distinguish hockey trom those comparable businesses.

121