Former Leafs GM Finally Gets a Win
Nonis v. H.M.Q. 2021 TCC 31
Summary
A former Leafs GM was assessed to include income he earned following his termination. The Tax Court of Canada (“TCC”) fundamentally disagreed with the assessment and allowed the appeal.
Background
To the chagrin of many readers, this discussion will unfortunately not review the Kessel and Phaneuf contracts!
The Appellant David Nonis (“Mr. Nonis”) was employed by Maple Leaf Sports & Entertainment (“MLSE”) and was the GM of the Toronto Maple Leafs from January 9, 2013 to April 12, 2015, although is contract extension signed in 2013 would have kept in place until 2018. Mr. Nonis received his compensation twice monthly. Following his termination without cause, MLSE continued to pay him on the same basis.
In the 2013 and 2014 taxation years, Mr. Nonis’ returns calculated his Canadian and US income based on the number of days he spent earning income in each jurisdiction. He used the same calculation to determine his income in 2015 (where he was only employed in Canada for part of the year) and 2016 (where he was no longer in Canada).
The only true issue for the TCC was which part of section 115 (non-resident’s taxable income in Canada) of the Income Tax Act applied to Mr. Nonis’ filings. Was it 115(1) and 115(2)(e)(i) as alleged by Mr. Nonis, or was it a special carve-out contained in paragraph 115(2)(c.1) as alleged by the Crown?
Law
The charging provisions to tax a resident or non-resident are found at subsections 2(1) and 2(3) of the Act. Subsection 2(1) taxes a resident on its worldwide income. Subsection 2(3) taxes a non-resident if s/he earned employment or business income in Canada or disposed of taxable Canadian property If subsection 2(3) applies, then the tax is determined by Division D, section 115. The relevant provisions are as follows[1]:
DIVISION D –Taxable Income Earned in Canada by Non-Residents
Non-resident’s taxable income in Canada
115 (1) For the purposes of this Act, the taxable income earned in Canada for a taxation year of a person who at no time in the year is resident in Canada is the amount, if any, by which the amount that would be the non-resident person’s income for the year under section 3 if
(a) the non-resident person had no income other than
(i) income from the duties of offices and employments performed by the non-resident person in Canada
(v) in the case of a non-resident person described in subsection 115(2), the total determined under paragraph 115(2)(e) in respect of the non-resident person, and […]
Idem
115 (2) Where, in a taxation year, a non-resident person was
(c.1) a person who received in the year an amount, under a contract, that was or will be deductible in computing the income of a taxpayer subject to tax under this Part and the amount can, irrespective of when the contract was entered into or the form or legal effect of the contract, reasonably be regarded as having been received, in whole or in part,
(i) as consideration or partial consideration for entering into a contract of service or an agreement to perform a service where any such service is to be performed in Canada, or for undertaking not to enter into such a contract or agreement with another party, or
(ii) as remuneration or partial remuneration from the duties of an office or employment or as compensation or partial compensation for services to be performed in Canada,
the following rules apply:
(d) for the purposes of subsection 2(3) the non-resident person shall be deemed to have been employed in Canada in the year,
(e) for the purposes of subparagraph 115(1)(a)(v), the total determined under this paragraph in respect of the non-resident person is the total of
(i) any remuneration in respect of an office or employment that was paid to the non-resident person directly or indirectly by a person resident in Canada and was received by the non-resident person in the year, except to the extent that the remuneration is attributable to the duties of an office or employment performed by the non-resident person anywhere outside Canada
(v) amounts described in paragraph 115(2)(c.1) received by the non-resident person in the year, except to the extent that they are otherwise required to be included in computing the non-resident person’s taxable income earned in Canada for the year, and […]
Decision & Analysis
Crown’s Position
The Crown asserted that Mr. Nonis was employed in Canada during the 2015 and 2016 taxation years, despite not physically being here. The Crown’s position was that Mr. Nonis received amounts that were captured by paragraph 115(2)(c.l) of the Act resulting in Mr. Nonis being deemed, pursuant to paragraph 115(2)(d), to be “employed in Canada” under subsection 2(3) of the Act. According to subparagraph 115(l)(a)(v) of the Act, once it is established that a non-resident person is deemed to be “employed in Canada” under paragraph 115(2)(d), that person’s “taxable income earned in Canada” is determined pursuant to paragraph 115(2)(e) of the Act.
The Crown assessed Mr. Nonis on the basis that his prorated share of Canadian income in 2015 and 2016 should have been the same as it was in 2013 and 2014, when he actually was present in Canada.
The Crown further argued that the relevant treaty provisions supported its assessing position.
Appellant’s Position
Mr. Nonis’ argument was quite simple. Paragraph 115(2)(c.1) applies in a very specific situation, namely, signing bonuses for professional athletes. In the absence of this provision, a US athlete who signed to a Canadian team but was paid his/her signing bonus prior to arriving in Canada would not be taxable in Canada on that bonus. This is especially important since many athletes front-end their income by negotiating large signing bonuses with relatively small annual salaries.
In this case, the amount received by Mr. Nonis was not a signing bonus. He was paid employment income. The method for determining tax payable in each of the four years was reasonable. Furthermore, the Treaty did not apply since Mr. Nonis was always a non-resident.
The TCC rejected the Crown’s reasoning. Specifically, the TCC found that the technical notes to paragraph 115(2)(c.1) specifically contemplated signing bonuses or similar payments. This simply was not one of those situations. Furthermore, the Crown’s interpretation of paragraph 115(2)(c.1) would render other related provisions redundant. It would also mean that any terminated non-resident with salary continuation would be taxable on that salary despite no services being performed in Canada. The TCC, therefore, allowed the appeal with costs to Mr. Nonis.
[1] The TCC also addressed paragraph 4(1)(b) of the Act, which states that if a taxpayer works partly in Canada and partly in another country in the same taxation year, the taxpayer’s taxable Canadian income for the year is the amount earned while working physically in Canada.
