OTTAWA — The Canada Revenue Agency says a Tax Court judge made multiple errors when siding with former Toronto Blue Jays all-stars Josh Donaldson and Russell Martin in a recent decision excluding millions of dollars from their taxable incomes.
In an appeal filed with the Federal Court of Appeal Tuesday, the CRA’s lawyers say Justice Jean-Marc Gagnon made numerous errors of law and fact when he ruled that the two star players’ taxable income was millions less than what CRA calculated.
The agency is crying foul over the fact the judge ruled that both American players’ retirement contributions — made through a form of pension plan called a Retirement Compensation Agreement (RCA) — should be deducted only from the Canadian portion (40 per cent) of their income while they played for the Toronto Blue Jays.
CRA argued unsuccessfully that the retirement contributions should be deducted before the 60/40 American-Canadian split was calculated.
The difference in interpretation — particularly in the case of professional athletes who receive seven- or eight-figure annual salaries — is worth potentially millions of dollars in unpaid income tax.
For example, the taxable portion in Canada of Martin’s US$20-million salary in 2017 was US$7 million in CRA’s view, but US$5.5 million in the players’ view.
Last month, Gagnon found that CRA’s interpretation was “faulty” for many reasons.
“The RCA regime is meant to be applied solely to Canadian-source income of non-residents. A non-resident’s foreign-source income is not subject to Canadian RCA rules, as it does not fall within the jurisdiction of Canada,” Gagnon wrote.
In its appeal to the Federal Court of Appeal, CRA says that Gagnon’s failure to recognize that RCA contributions should be deducted before the country split is a mistake in law and fact.
The agency also disagreed with the judge’s finding that the RCA contributions were based solely on work done by each player in Canada.
RCAs are commonly used by high-earning athletes and top executives recruited by Canadian organizations. They are one of a few tools used by Canadian sports teams to attract talent from countries with lower income.
An RCA defers income and tax payments and isn’t subject to strict contribution limits like an RRSP.
The taxpayer is allowed to contribute a “reasonable” amount to their retirement every year, but the CRA withholds half of it in a fund that cannot be invested.
When an RCA holder retires or loses their job, the pension account will begin paying out, at which point the money will be taxed, presumably when they are in a lower tax bracket. The CRA will then also refund the 50-per-cent portion of all contributions that it withheld.
National Post