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OTTAWA – Blue Jays all-stars José Bautista, Josh Donaldson and Russell Martin had been family names of their years taking part in for Canada’s solely MLB workforce. No extra so than within the glory days of the 2015 and 2016 seasons, when the workforce’s playoff runs packed the stadium in Toronto to capability.

Who can overlook the well-known Bautista bat flip towards fierce rivals Texas Rangers within the 2015 American League playoffs? It was described as essentially the most ostentatious bat flip in baseball historical past. Topps commemorated it with a baseball card. A corn maze in New Brunswick was designed with the bat flip’s likeness. Or Donaldson’s dramatic division series-winning run within the tenth inning of the 2016 post-season — once more, the Rangers — when he raced dwelling from second base following a throwing error by Rougned Odor?

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All three gamers can be gone from the Toronto Blue Jays group not lengthy after these thrilling seasons, nevertheless it wouldn’t be the final time they heard from Canada. The previous all-stars at the moment are locked in court docket battles value thousands and thousands of {dollars} with the Canada Income Company, who’s calling foul on how Bautista, Martin and Donaldson calculated their earnings whereas taking part in for Toronto.

Bautista performed 10 seasons as a slugger and outfielder with the Jays, incomes him a particular pre-game ceremony in Toronto this coming August. Third baseman Donaldson, who performed for the Jays from 2015-2018, was named American League MVP the yr he arrived and likewise voted to the 2015 All-Star workforce after a Canadian marketing campaign, led by Don Cherry, was launched to elect him.

Russell Martin, the Gold-Glove catcher, was beloved by Toronto followers throughout his 5 seasons with the Jays, partly as a result of he was truly from the Toronto space (and raised in Montreal).

The superstars made some huge cash in Canada throughout 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.

Though the information differ of their battles with the CRA, they share a typical concern that specialists say may have a chilling impact on Canadian sports activities groups’ skill to draw prime worldwide athletes: How non-resident excessive earners can shield their earnings and mitigate Ca
nada’s excessive taxes.

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Particularly, the tax company is difficult how a lot earnings the gamers can deduct from their taxes via contributions to a type of pension plan via an employer referred to as a Retirement Compensation Settlement (RCA). Not one of the allegations have but been examined in court docket.

Pensions, particularly for professional athletes with brief careers, are a vital profit. RCAs are generally utilized by high-earning athletes and prime executives recruited by Canadian organizations. It defers tax funds and isn’t topic to strict contribution limits like an RRSP. The taxpayer is allowed to contribute a “cheap” quantity to their RCA yearly, however the CRA withholds half of it in a fund that can not be invested.

When an RCA holder retires or loses their job, the pension account will start paying out at which level the cash will likely be taxed, presumably when they’re in a decrease tax bracket. The CRA may also refund the 50 per cent portion of all contributions that it withheld.

In keeping with cross-border tax lawyer Mark Feigenbaum, who has in depth expertise establishing RCAs, “they’re used largely for executives and others, like athletes, who’re quickly in Canada.”

It seems the CRA has began wanting nearer at some RCAs signed by pro-athletes. In Bautista’s case, the CRA has disallowed greater than $16 million in whole deductions to his earnings from 2014 to 2017 via contributions to his RCA.

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The tax company says Bautista’s pension merely isn’t an RCA, and thus his $16 million in deductions are invalid. In court docket paperwork, the CRA argued the regulation “doesn’t allow the claimed RCA deductions,” and that Bautista’s RCA is “not a ‘pension plan’ or a ‘retirement compensation association’” as outlined by the Earnings Tax Act.

Bautista appealed the CRA’s reassessment of his tax declarations in court docket in August 2022. In his attraction, he says his RCA “displays all the hallmar
ks of a pension plan and ought to be handled as such,” thus making his contributions legally deductible.

Neither Bautista’s attraction nor the CRA’s reply to the attraction spell out why the tax company believes Bautista’s RCA doesn’t meet the definition of a pension plan. However CRA legal professionals highlighted of their response that Bautista’s RCA paid him a lump-sum of over $13 million in 2017 earlier than then doling out $1.4 million yearly beginning in 2019. In addition they argued that the plan didn’t have a set fee schedule after retirement and that Bautista may “direct how and when the funds can be made.”

Bautista’s legal professionals mentioned that the $13.3 million fee in 2017 was to “help with this transition into retirement” and that his RCA has all the important thing parts of a pension plan.

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The paperwork additionally don’t point out how a lot cash CRA is making an attempt to claw again in taxes, though earnings over $221,708 was taxed at 53.53 per cent in Ontario in 2022. Bautista earned $7.4 million in “Canadian employment earnings” in his final season in Toronto, based on his attraction.

Each the CRA and Bautista’s lawyer, Louise Summerhill, with Aird Berlis in Toronto, declined to touch upon the case as it’s in entrance of the courts.

It could be much less attractive for any type of expertise to work in Canada in the event that they’re not permitted to offer for retirement from the portion of their time working right here

Mark Feigenbaum

Specialists agree that RCAs are an essential software for Canadian organizations to draw prime worldwide expertise. Canada’s excessive tax charges for prime earners generally is a vital deterrent in comparison with america, for instance, the place federal tax charges vary from 10 to 37 per cent on the highest finish.

“It could be much less attractive for any type of expertise to work in Canada in the event that they’re not permitted to offer for retirement from the portion of their time working right here,” mentioned Feigenbaum. “The Courtroom has confirmed prior to now that these are official tax planning retirement plans which might be already permitted underneath the laws.”

A Tax Courtroom ruling that both invalidates or considerably evaluations the RCA regime on account of the Bautista case, based on specialists, would have a profound impression on Canadian organizations’ competitiveness.

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Martin and Donaldson are additionally battling the CRA over deductions associated to their RCA contributions. The important thing distinction of their circumstances is that
the tax company agrees with the 2 gamers that their RCAs, arrange at across the identical time as Bautista’s, meet the authorized definition within the Earnings Tax Act.

As an alternative, they disagree with the gamers on how their contributions ought to be deducted from their earnings tax as a result of they spent 60 per cent of their time in america and solely 40 per cent in Canada whereas they performed for Toronto (as did Bautista). The time spent in Canada is named “responsibility days.”

Courtroom paperwork clarify that the three gamers had been U.S. residents who lived in Florida. They solely frolicked in Canada throughout the baseball season, from April to October. Even then, they spent a part of their time taking part in away video games towards U.S. groups.

Whether or not the contributions ought to be deducted earlier than the 60/40 break up is calculated — which implies paying extra taxes on the Canadian portion — or on the Canadian portion after the break up, is on the coronary heart of the battle. The CRA argues the previous, the gamers argue the latter.

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Of their court docket filings, the gamers say the CRA’s interpretation is “inconsistent” with the “construction… object, spirit and goal” of the regulation and that it creates “double taxation.” They argue the RCA contributions ought to solely be deducted from the Canadian earnings portion as a result of “RCA is a Canadian assemble.”

The CRA says that the break up between international locations ought to be taken solely after a non-resident’s web earnings, together with deductions from RCA contributions, has been calculated. Relying on who the court docket sides with, the outcome means rising or decreasing Martin’s earnings within the eyes of the taxman by almost $5 million, and Donaldson’s by $2.58 million.

Donaldson and Martin’s circumstances are scheduled to be heard collectively in July. Their tax lawyer, Marie-France Dompierre, with Davies Ward Phillips & Vineberg in Montreal, declined to remark whereas their circumstances are earlier than court docket.

However in an article she authored final yr, Dompierre argued that “Canada’s excessive earnings tax charges can deter skilled athletes from becoming a member of groups primarily based in Canada,” and that it may be “arduous for Canadian groups to draw and recruit prime expertise to their rosters.”

Thus, “earnings tax mitigation methods” reminiscent of RCAs are essential for skilled sports activities organizations to stay enticing, notably in North American leagues.

“The power to defer tax is commonly on the forefront of those discussions as a result of this may increasingly allow Canadian groups to draw expertise by decreasing earnings tax charges to a degree just like these loved by members of U.S.-based groups,” Dompierre wrote in Tax Notes Worldwide in 2022.

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