
The Taxation of Athletes in Canada: Implications from Martin v. the King on the Future of Sports
The case of Martin v. The King, 2024 TCC 153 stands as a pivotal moment in Canadian tax law, particularly concerning the taxation of professional athletes’ income. This landmark decision, which is now under appeal by the Department of Justice, has significant implications on the sports industry in Canada, influencing how athletes’ earnings are assessed and taxed.
Background of the Case
In Martin v. The King, the Appellants, former Toronto Blue Jays players Russell Martin and Joshua Donaldson, contested the taxation of their income earned both domestically and internationally. The central issue revolved around the allocation of employer contributions to Retirement Compensation Arrangements (RCAs) and whether these should be subject to Canadian income tax.
The Appellants argued that the income earned outside of Canada should not be taxed domestically, citing the complexities of international taxation and the potential for double taxation. The Department of Justice, however, maintained that as a Canadian resident, the Appellants were liable to pay taxes on their worldwide income, irrespective of where it was earned.
What is an RCA?
In the context of sports in Canada, an RCA is often used by professional sports teams or organizations as a retirement savings vehicle, particularly for high-earning athletes who may not be covered by traditional pension plans due to the nature of their careers.
It serves as a mechanism for teams or employers to provide additional retirement benefits and savings that are more flexible than traditional pension plans, while minimizing immediate tax obligations. In essence, it is designed to help ensure financial stability after their sports careers end. For the Appellants, RCAs were part of their compensation package while signing with the Blue Jays.
Legal Issues
The primary legal question in this case was the interpretation of the RCA contributions and whether they should be deducted from the Appellants’ total income before allocating their earning between Canada and the United States (U.S.). Under the CRA’s interpretation, the RCA contributions would effectively reduce the taxable Canadian income for both athletes.
The Appellants contended that the RCA contributions should only be excluded from the Canadian-source portion of their income. Since they performed 40% of their duties in Canada, their taxable Canadian income would be based on this allocation.
Tax Court’s Decision
Ultimately, the Tax Court agreed with the players’ interpretation, ruling that the RCA contributions should be deducted only from the portion of income earned in Canada, rather than before the income split between Canada and the U.S.. This decision meant that a significant portion of their income, previously considered taxable in Canada by the CRA, would now be excluded from their Canadian tax obligations.
For Martin and Donaldson, the Tax Court’s decision presented a significant victory. For Martin, the CRA had calculated that his taxable Canadian income for the 2017 tax year was US$7 million, based on its method of excluding RCA contributions from his total compensation before the income split. However, under the Tax Court’s ruling, Martin’s taxable Canadian income was reduced to US$5.5 million.
This difference is due to the fact that RCA contributions were excluded only from the 40% of his income earned in Canada, rather than from his entire compensation package. This change resulted in a substantial reduction in his tax liability in Canada.
Department of Justice’s Appeal
On January 7, 2025, the Department of Justice filed an appeal to the Federal Court of Appeal, citing multiple errors in the Tax Court’s ruling. Specifically, they disagreed with Justice Jean-Marc Gagnon’s finding that the RCA contributions should only be excluded from Canadian-source income. In their appeal, the Minister asserts that the Justice failed to account for the fact that RCA contributions should be deducted before applying the 60/40 split between Canadian and U.S. income.
The agency also contended that the RCA contributions should be considered as part of the players’ total compensation and that Justice Gagnon erroneously concluded that the contributions applied solely to Canadian-source income. In essence, the Department of Justice argued that the contributions should have been factored into the overall calculation of taxable income, including the U.S.-source income, rather than just the Canadian portion.
However, Justice Gagnon, in his ruling, emphasized that RCAs are a Canadian tax mechanism, meant only for Canadian-source income. This is why, in the case of Martin and Donaldson, only the income earned in Canada could be subject to the RCA rules. He also noted that applying the RCA exclusions to U.S.-source income would be outside of Canada’s jurisdiction, further supporting his decision that the CRA’s approach was flawed.
Implications on Sports in Canada
The ruling in Martin v. The King, should it be upheld at the Federal Court of Appeal, has significant implications for professional athletes in Canada. This ruling is significant as it clarifies how retirement contributions are treated for non-resident athletes working in Canada, ensuring they are fairly accounted for when dividing income between the two countries.
As players like Martin and Donaldson earn substantial salaries and benefit from tax deferral mechanisms like RCAs, the question of how income is allocated between countries and how retirement contributions are treated has become a critical issue.
If the Department of Justice prevails in its appeal, it could change the way Canadian-source income is calculated for athletes who split their time between Canada and other countries. It could also impact how RCAs are used by Canadian teams to attract foreign talent, particularly in high-income sports like baseball and hockey.
It is imperative that professional athletes properly understand and structure their compensation and retirement arrangements, especially for high-profile non-resident athletes who play in multiple countries.
For a detailed understanding of the case, you can refer to the full text of the decision here.
***Disclaimer: This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions, you should consult a lawyer.
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