Josh Donaldson and Russell Martin won a major tax battle against the Canada Revenue Agency (CRA), with the Tax Court ruling that the CRA miscalculated their taxable income.
The decision reduces their taxable income by millions and sets a precedent for how foreign athletes’ income is taxed in Canada.
Content Highlights
- Former Blue Jays stars Josh Donaldson and Russell Martin win a major tax case against the CRA.
- Court found the CRA’s calculation of taxable income for the players was faulty.
- The case involved pension plan contributions and how they should be deducted from income tax.
- The ruling will benefit Canadian sports teams hiring foreign athletes.
- The case highlights issues with Canadian tax laws for non-resident athletes.
A landmark ruling has sent a wave of relief through the Canadian sports world, as former Toronto Blue Jays all-stars Josh Donaldson and Russell Martin emerged victorious in a high-stakes legal battle with the Canada Revenue Agency (CRA).
This decision not only impacts the players, but also serves as a critical precedent for Canadian sports teams that rely on attracting top international talent.
A Hard-Fought Victory
In a dramatic court decision, a Tax Court judge sided with the baseball stars, rejecting the CRA’s attempt to tax millions of dollars in additional income.
The CRA had initially claimed that Donaldson and Martin owed significantly more in taxes than what they had reported.
However, the judge found that the taxable income during the years under review—2015 to 2017—was far less than what the CRA had calculated.
For Martin, this ruling meant a reduction of approximately $4 million in taxable income, while Donaldson saw a $2.6 million decrease for the years 2016 and 2017.
This reduction is especially significant for those in the world of professional sports, where high salaries often come under heavy scrutiny by tax authorities.
An Ongoing Challenge for International Athletes
The case centered on the players’ contributions to a Retirement Compensation Agreement (RCA), a common pension plan for high-earning athletes and executives in Canada.
These contributions allow for the deferral of income tax payments, but the CRA contested how the players should calculate deductions on their Canadian income versus their U.S.-based earnings.
The issue arose from the fact that both players spent 60% of their time in the United States and only 40% in Canada.
The CRA argued that retirement contributions should be deducted before applying this 60/40 split, which would have resulted in higher taxes for the players on their Canadian income.
On the other hand, Donaldson and Martin, represented by tax lawyer Marie-France Dompierre, argued that the contributions should be calculated after the split, allowing them to lower their Canadian tax liability.
A Win for Canadian Teams
Veteran tax lawyer Mark Feigenbaum, a partner at KPMG, noted that the ruling would be welcomed by Canadian professional sports organizations, particularly those that recruit high-paid international talent.
Feigenbaum explained that, without the ability to properly mitigate high tax rates through contributions to plans like the RCA, it could have become more difficult for Canadian teams to attract elite athletes.
“[This ruling] mitigates the tax disadvantage athletes might face compared to other countries with lower tax rates,” Feigenbaum said, underlining the importance of the decision in keeping Canada competitive in the global sports market.
Legal Implications and CRA’s Misstep
In his ruling, Tax Court judge Jean-Marc Gagnon criticized the CRA’s approach, describing it as “faulty” and contrary to the spirit of the Retirement Compensation Agreement.
The judge pointed out that the RCA rules are intended to apply only to Canadian-source income and that foreign income is not subject to Canadian tax deductions under these rules.
Gagnon’s decision emphasizes that Canada’s tax jurisdiction extends only to Canadian income, not foreign earnings.
In practical terms, this means that Donaldson and Martin were right to deduct contributions from only their Canadian income, thus reducing their overall tax liabilities.
For example, Martin’s $20 million salary in 2017, originally calculated by the CRA to have a taxable Canadian portion of $7 million, was reduced to $5.5 million under the players’ interpretation.
A Move to Protect Future Players
This case, while specifically addressing the careers of two former Blue Jays stars, sets a crucial precedent for future athletes and foreign workers in high-paid positions within Canada.
With the decision, the door remains open for other professionals in similar tax situations to benefit from the RCA’s deferral provisions, potentially saving millions in tax payments.
As the ruling reverberates through the sports world, Canadian organizations now have a clearer path for structuring contracts with international talent.
Whether in baseball, hockey, or other high-profile sports, this victory provides reassurance that tax laws will allow for reasonable deductions, making Canada a more attractive destination for world-class athletes.
The CRA, which declined to comment on the case, will likely take this ruling into account in future disputes.
For now, the players and their representatives celebrate a hard-fought victory, while Canadian sports organizations breathe a collective sigh of relief.