OTTAWA – Blue Jays all-stars José Bautista, Josh Donaldson and Russell Martin were household names in their years playing for Canada’s only MLB team. No more so than in the glory days of the 2015 and 2016 seasons, when the team’s playoff runs packed the stadium in Toronto to capacity.
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Who can forget the famous Bautista bat flip against fierce rivals Texas Rangers in the 2015 American League playoffs? It was described as the most ostentatious bat flip in baseball history. Topps commemorated it with a baseball card. A corn maize in New Brunswick was designed with the bat flip’s likeness. Or Donaldson’s dramatic division series-winning run in the tenth inning of the 2016 post-season — again, the Rangers — when he raced home from second base following a throwing error by Roughned Odor?
All three players would be gone from the Toronto Blue Jays organization not long after those thrilling seasons, but it wouldn’t be the last time they heard from Canada. The former all-stars are now locked in court battles worth millions of dollars with the Canada Revenue Agency, who is calling foul on how Bautista, Martin and Donaldson calculated their income while playing for Toronto.
Bautista played 10 seasons as a slugger and outfielder with the Jays, earning him a special pre-game ceremony in Toronto this coming August. Third baseman Donaldson, who played for the Jays from 2015-2018, was named American League MVP the year he arrived and also voted to the 2015 All-Star team after a Canadian campaign, led by Don Cherry, was launched to elect him.
Russell Martin, the Gold-Glove catcher, was beloved by Toronto fans during his five seasons with the Jays, partly because he was actually from the Toronto area (and raised in Montreal).
The superstars made a lot of money in Canada during the years audited by the CRA. Bautista earned US$33 million between 2014 and 2017; Donaldson US$28.65 million from 2015-2017, and Martin US$42 million from 2015-2017.
Although the facts differ in their battles with the CRA, they share a common issue that experts say could have a chilling effect on Canadian sports teams’ ability to attract top international athletes: How non-resident high earners can protect their income and mitigate Canada’s high taxes.
Specifically, the tax agency is challenging how much income the players can deduct from their taxes through contributions to a form of pension plan through an employer called a Retirement Compensation Agreement (RCA). None of the allegations have yet been tested in court.
Pensions, especially for pro athletes with short careers, are a crucial benefit. RCAs are commonly used by high-earning athletes and top executives recruited by Canadian organizations. It defers tax payments and isn’t subject to strict contribution limits like an RRSP. The taxpayer is allowed to contribute a “reasonable” amount to their RCA 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 also refund the 50 per cent portion of all contributions that it withheld.
According to cross-border tax lawyer Mark Feigenbaum, who has extensive experience setting up RCAs, “they are used mostly for executives and others, like athletes, who are temporarily in Canada.”
It appears the CRA has started looking closer at some RCAs signed by pro-athletes. In Bautista’s case, the CRA has disallowed more than $16 million in total deductions to his income from 2014 to 2017 through contributions to his RCA.
The tax agency says Bautista’s pension simply isn’t an RCA, and thus his $16 million in deductions are invalid. In court documents, the CRA argued the law “does not permit the claimed RCA deductions,” and that Bautista’s RCA is “not a ‘pension plan’ or a ‘retirement compensation arrangement’” as defined by the Income Tax Act.
Bautista appealed the CRA’s reassessment of his tax declarations in court in August 2022. In his appeal, he says his RCA “exhibits all of the hallmarks of a pension plan and should be treated as such,” thus making his contributions legally deductible.
Neither Bautista’s appeal nor the CRA’s reply to the appeal spell out why the tax agency believes Bautista’s RCA does not meet the definition of a pension plan. But CRA lawyers highlighted in their response that Bautista’s RCA paid him a lump-sum of over $13 million in 2017 before then dolling out $1.4 million annually starting in 2019. They also argued that the plan did not have a fixed payment schedule after retirement and that Bautista could “direct how and when the payments would be made.”
Bautista’s lawyers said that the $13.3 million payment in 2017 was to “assist with this transition into retirement” and that his RCA “exhibits all of the hallmarks of a pension plan.”
The documents also do not indicate how much money CRA is trying to claw back in taxes, although income over $221,708 was taxed at 53.53 per cent in Ontario in 2022. Bautista earned $7.4 million in “Canadian employment income” in his last season in Toronto, according to his appeal.
Both the CRA and Bautista’s lawyer, Louise Summerhill, with Aird Berlis in Toronto, declined to comment on the case as it is in front of the courts.
It would be less enticing for any kind of talent to work in Canada if they’re not permitted to provide for retirement from the portion of their time working hereMark Feigenbaum
Experts agree that RCAs are an important tool for Canadian organizations to attract top international talent. Canada’s high tax rates for top earners can be a significant deterrent when compared with the United States, for example, where federal tax rates range from 10 to 37 per cent at the highest end.
“It would be less enticing for any kind of talent to work in Canada if they’re not permitted to provide for retirement from the portion of their time working here,” said Feigenbaum. “The Court has confirmed in the past that these are legitimate tax planning retirement plans that are already permitted under the legislation.”
A Tax Court ruling that either invalidates or significantly reviews the RCA regime as a result of the Bautista case, according to experts, would have a profound impact on Canadian organizations’ competitiveness.
Martin and Donaldson are also battling the CRA over deductions related to their RCA contributions. The key difference in their cases is that the tax agency agrees with the two players that their RCAs, set up at around the same time as Bautista’s, meet the legal definition in the Income Tax Act.
Instead, they disagree with the players on how their contributions should be deducted from their income tax because they spent 60 per cent of their time in the United States and only 40 per cent in Canada while they played for Toronto (as did Bautista). The time spent in Canada is called “duty days.”
Court documents explain that the three players were U.S. residents who lived in Florida. They only spent time in Canada during the baseball season, from April to October. Even then, they spent part of their time playing away games against U.S. teams.
Whether the contributions should be deducted before the 60/40 split is calculated — which means paying more taxes on the Canadian portion — or on the Canadian portion after the split, is at the heart of the battle. The CRA argues the former, the players argue the latter.
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In their court filings, the players say the CRA’s interpretation is “inconsistent” with the “structure… object, spirit and purpose” of the law and that it creates “double taxation.” They argue the RCA contributions should only be deducted from the Canadian income portion because “RCA is a Canadian construct.”
The CRA says that the split between countries should be taken only after a non-resident’s net income, including deductions from RCA contributions, has been calculated. Depending on who the court sides with, the result means increasing or reducing Martin’s income in the eyes of the taxman by nearly $5 million, and Donaldson’s by $2.58 million.
Donaldson and Martin’s cases are scheduled to be heard together in July. Their tax lawyer, Marie-France Dompierre, with Davies Ward Phillips & Vineberg in Montreal, declined to comment while their cases are before court.
But in an article she authored last year, Dompierre argued that “Canada’s high income tax rates can deter professional athletes from joining teams based in Canada,” and that it can be “arduous for Canadian teams to attract and recruit top talent to their rosters.”
Thus, “income tax mitigation strategies” such as RCAs are crucial for professional sports organizations to remain attractive, particularly in North American leagues.
“The ability to defer tax is often at the forefront of these discussions because this may permit Canadian teams to attract talent by reducing income tax rates to a level similar to those enjoyed by members of U.S.-based teams,” Dompierre wrote in Tax Notes International in 2022.