Former Blue Jays in Tax Court of Canada — RCA Contributions and Canadian Tax Jurisdiction: A Deep Dive into the Martin and Donaldson Case

By: Amit Ummat and Alisha Butani

Former Toronto Blue Jays players Russell Martin (“Mr. Martin”) and Joshua Donaldson (“Mr. Donaldson”) were each subject to reassessments, resulting in significant adjustments to their Canadian-source employment income. These cases are noteworthy as they reaffirm the principle that Canada’s tax jurisdiction does not extend to foreign-source income earned by non-residents.

Mr. Martin was reassessed for the 2015, 2016 and 2017 taxation years, reducing his Canadian source employment income by $29,076 in 2015 and increasing his Canadian source-employment income by $1,361,162 in 2016 and $2,353,786 in 2017.

Mr. Donaldson was reassessed for the 2016 and 2017 taxation years, increasing his Canadian-source employment income by $1,210,475 in 2016 and $1,415,961 in 2017.

The Minister’s readjustments for both Mr. Martin and Mr. Donaldson (collectively, the “Appellants”), stems from contributions made by the Toronto Blue Jays Baseball Club (“Club”) to the Appellants’ respective Retirement Compensation Arrangements (“RCA”), which are defined and governed by the Income Tax Act R.S.C., 1985, c. 1 (5th Supp.), as amended (“Act”).

Legal Issue and Position of the Parties

The issue in the Appellants’ respective tax appeals (the “Appeals”) is whether the Appellants were permitted to exclude the RCA from only their Canadian-sourced income when computing their taxable income for purposes of the Act.

The Respondent argued that “upon reading the applicable provisions of the Act, the contributions from an employer into an RCA never entered into the calculations of a non‑resident employee’s income, regardless of where the income is earned” (Para 21 of Case).

The Appellants disagreed with the Respondent’s position and instead contended that the employer’s RCA contributions are initially included in the income allocation between Canada and the foreign jurisdiction, including in the non-resident employee’s income and are subsequently excluded from Canadian sourced employment income.

Tax Court’s Analysis

Overview of taxation of non-resident individuals of Canada under Part I of the Act

The Court explained that when a non-resident earns income from employment duties performed partly in Canada and partly in a foreign jurisdiction, they must separate the income earned in Canada from the income earned abroad to compute their taxable income earned in Canada.

The term income in that context refers to income sourced from each jurisdiction. After isolating their Canadian-source income, the non-resident will apply the relevant computational rules in Subdivision A of Division B, Part I of the Act to calculate their total income for the year under section 3 of the Act.

The resulting amount is then considered the non-resident’s taxable income earned in Canada for purposes of subsection 2(3) of the Act. In conclusion, the Court stated that sections 2, 3, 4, and 115 of the Act do not allow for the exclusion or reduction of income earned from duties of office and employment performed by a non-resident in Canada before calculating employment income under sections 5 to 8 of the Act.

Computing income from employment

Paragraph 6(1)(a) of the Act states:

“6(1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable,

the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer, or by a person who does not deal at arm’s length with the taxpayer, in the year in respect of, in the course of, or by virtue of the taxpayer’s office or employment,

except any benefit

…

(ii) under a retirement compensation arrangement, an employee benefit plan or an employee trust”.

[emphasis added with underlying]

The wording in subsection 6(1) of the Act, specifically the parts underlined, is very broad such that most employment-related benefits are included in a taxpayer’s employment income. However, pursuant to paragraph 6(1)(a) of the Act, if a taxpayer receives benefits under an RCA, those benefits will be excluded from said taxpayer’s employment income.

The RCA Rules

The RCA is a strictly Canadian tax regime under the Act and is not available to non-residents who are not subject to Canadian tax. Non-residents who do not earn income in Canada cannot apply the RCA rules to a foreign pension, and RCA contributions cannot offset income earned outside Canada. Therefore, the exclusion provided in subparagraph 6(1)(a)(ii) of the Act only applies to Canadian-source income.

Additionally, the RCA rules do not allow for the allocation of RCA contributions between Canada and a foreign country, nor do they provide an allocation for the refundable tax applied to these contributions. The refundable tax provisions apply to all contributions made to an RCA.

RCA’s do not pay tax under Part I of the Act, but rather are subject to Part XI.3 of the Act. Consequently, a 50% refundable tax is applied to all RCA contributions, withheld at source. A further 50% refundable tax is levied on the RCA’s income from business, property, and capital gains for the year. These taxes are refunded to the RCA’s custodian based on 50% of funds allocated to the RCA trust beneficiaries.

Employer contributions to an RCA are typically deductible on a current basis and must be made by the employer in connection with benefits received/enjoyed by the taxpayer or another person, in anticipation of significant changes to the taxpayer’s services, retirement or loss of employment.

Appellant’s Context

The Appellants agreed to perform duties for the Club under their respective player contracts for agreed upon compensation and remuneration. Both the Club and the Appellants decided to defer a portion of their compensation and remuneration using an RCA. As RCAs are a “Canadian salary deferral vehicle” stated as such in each of the Appellants’ player contract, the contributions by the Club to the Appellants’ respective RCA (“RCA Contributions”) were a result of the duties the Appellants performed in Canada (Para 110 of Case).

The Court explained that to determine if the RCA Contributions should be included in the Appellants’ taxable income earned in Canada, the rules in Subdivision A Division B Part I of the Act must be applied to the portion of the income earned in Canada. The compensation from the Appellants’ respective player contract needs to be allocated between Canada and the United States so that income from duties performed in the United States would not be included in Canada’s tax base.

The Appellants and Respondent agreed that 40% of the Appellants’ duties were performed in Canada and 60% was performed in the United States. This allocation allows for the calculation of the Appellants’ employment income under Subdivision A Division B Part I of the Act. In any event, pursuant to subparagraph 6(1)(a)(ii) of the Act, RCA Contributions are excluded from employment income. Based on the foregoing, the Appellant’s employment income is equivalent to the total compensation they earned in Canada less the RCA Contributions.

Tax Court’s Conclusion

The Tax Court of Canada ruled in favor of the Appellants, concluding that the RCA regime is a tax mechanism that applies exclusively in Canada. This means that RCA contributions should only be excluded from Canadian-source income. Consequently, the Appeal was allowed, and the Notices of Reassessment for both Appellants were sent back to the Minister for reconsideration and reassessment.

by Amit Ummat and Alisha Butani

Ummat Tax Law PC
5500 North Service Road, Suite 302
Burlington, ON L7L 6W6