A Toronto-based limited partnership launched its bid yesterday to buy the Ottawa Senators for $175-million as controversy swirled about tax breaks generated by the deal.
Several members of Parliament raised concerns about the deal, proposed by Rod Bryden, which includes about $69-million in federal tax concessions to investors.
"The tax structure allows this kind of bizarre transaction," New Democratic Party Leader Jack Layton said. "At the least Canadians should be asked whether they want $60-million of theirs to be going into a transaction like this."
Progressive Conservative Leader Joe Clark, whose sister is married to Senators head coach Jacques Martin, was equally concerned. "There should not be any arrangement with the Department of Finance or the Department of Revenue before a deal is made," he said. "There should be no guarantees made to the Senators or any such group."
Bryden and officials with the limited partnership declined comment.
Sources familiar with the deal said most of the tax breaks are deferred and will be paid by investors in 10 years. They added that the tax breaks are not special and are consistent with other limited partnerships, which are designed to allow tax deductions to flow to investors in order to encourage investment.
Most of the tax concessions relate to deductions for normal business practices, sources said, including depreciation (mainly for player salaries) and operating expenses. For example, the partnership is paying about $50-million to break the current lease with the Corel Centre. That expense is an eligible tax deduction.
The partnership has not received approval from tax officials for the overall arrangement, but that is expected soon.
Bryden "is just a man who desperately wants to save this team and keep it in Ottawa and he is using all the ingenuity he can," one source said.
Units for the limited partnership went on sale yesterday at $19,120 each. The partnership expects to sell 15,050 units and raise $287-million.
Bryden is expected to acquire control of the partnership later and buy the Corel Centre in a separate deal for about $30-million. He and a partner, believed to be New York businessman Nelson Pelz, are expected to contribute about $100-million in financing.
Once all of the transactions are completed, expected in April, the Senators will emerge with a new ownership structure, a much lower debt and a new lease with the Corel Centre. The club's major creditors -- the National Hockey League, Canadian Imperial Bank of Commerce and FleetBoston Financial -- will receive about $109-million to pay off their loans to the club.
Sources close to the partnership said most of the tax concessions relate to depreciation on player salaries. Tax laws allow the partnership to apply 60 per cent of the purchase price, about $105-million, to "player rights" and write off that amount over two years.
"In hockey, it's accepted that that is the life of the assets," one source said. He noted that players are considered an asset for depreciation just as buildings and equipment are depreciated in other businesses.
The value of the club, $175-million, is based on an independent valuation, sources said. "The team is worth a lot because it is now debt-free and has a new lease with the arena," one source said. "That increases the value."
Some observers have questioned the value, saying it may be too high. They have also questioned why creditors accepted Bryden's complicated bid instead of an all-cash offer from Toronto billionaire Eugene Melnyk.
But sources familiar with the Bryden bid said Melnyk, who lives in Barbados for tax reasons, would generate most of the same tax concessions. "You mean to say he isn't going to depreciate the player salaries or deduct business expenses?" one source said.
Walter Robinson, the head of the Canadian Taxpayers Federation, said there is nothing improper with the tax concessions in the Bryden bid. However, the proposal raises general issues about the tax system and whether it should be used in this way.
Bryden "is doing nothing illegal," Robinson said. "He is playing by the rules. The issue is: are these rules fair to the taxpayer?"
Robinson noted that the federal government was criticized three years ago for proposing a $120-million plan to subsidize sports teams.
"The question is, at the end of the day, are we going to pay more for this deal than we would have paid last time around?" he said. "That's a real fundamental question that Ottawa and our federal politicians should be answering."