Two former Toronto Blue Jays players won their case against the Canada Revenue Agency over a dispute regarding their additional income while playing for the baseball team.
First reported by the National Post, former all-stars Josh Donaldson and Russell Martin won the precedent-setting case after it was proven that they earned far less in taxable income during their years in Canada than what the federal agency had claimed.
Tax Court of Canada judge Jean-Marc Gagnon ruled that the CRA’s income calculation of the two players was “faulty” in his decision published last week.
Martin’s income was reduced to roughly $4 million for the 2015-2-17 seasons and Donaldson’s was dropped by nearly $2.6 million for 2016 and 2017.
The CRA had challenged how much income the two could deduct from their taxes by way of making contributions to a form of pension plan called a Retirement Compensation Agreement.
High-earning athletes frequently use RCAs, particularly when recruited to Canadian teams from outside the country as they are not subjected to the same contribution limits as an RRSP.
Taxpayers are permitted to contribute a “reasonable” amount annually for their retirement, however, the CRA withholds half of the amount in a separate fund until the person retires.
Once the RCA holder retires, or if they lose their job, the pension will begin paying out at which point the finances will be taxed but generally, the recipient will be in a lower tax bracket at that point.
The dispute between the CRA and the two athletes was regarding how the players’ contributions to the fund should be deducted from their income tax while they played for the Toronto Blue Jays.
Both Russell and Donaldson spent 60% of their time residing in the U.S. and only 40% in Canada in what the CRA considers “duty days”, with their taxes split accordingly.
The CRA claimed that their retirement contributions should be deducted ahead of the 60/40 American-Canadian split calculation, effectively charging the athletes far more for their Canadian portion.
However, the Tax Court ruled in favour of the players, who argued the calculation should be made after.
“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,” wrote Gagnon in his ruling.
The judge went on to say that the CRA’s interpretation, “could not have been what Parliament intended when it created the RCA regime.”
Among the reasons for ruling in favour of Russell and Donaldson, Gagnon said that the Income Tax Act is “very clear that income earned in two places, whether that income is earned by a resident or a non-resident without distinction, must be calculated as two distinct sources.”
True North contacted the CRA for comment, however, a spokesperson said that the agency does “not comment on the specific details of court cases.”
What is known is that the CRA wanted to tax US $7 million of the US $20 million from Martin’s taxable portion of his Canadian earnings for 2017.
Ultimately, he paid US $5.5 million.
“If the government spent a fraction of the time looking for ways to save money as it does trying to squeeze more money from taxpayers, we’d be much better off. We have way too many tax bureaucrats in Canada looking for ways to take more money out of peoples’ pockets,” executive director of the Canadian Taxpayers Federation Franco Terrazzano told True North.
“The government needs to cut spending and the place it should start is by cutting the number of tax bureaucrats at the CRA.”