Ex-Blue Jay stars sweep doubleheader in multi-million-dollar tax battle against feds

Toronto Blue Jays catcher Russell Martin (55) homers to right in the bottom of the 6th Inning and is congratulated by Josh Donaldson in Toronto, Ont. on Thursday July 6, 2017. Photo by Veronica Henri /Toronto Sun

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OTTAWA — Former Toronto Blue Jays all-stars Josh Donaldson and Russell Martin have swept a doubleheader court battle with the Canada Revenue Agency as an appeal court confirmed they do not owe taxes on millions of dollars of income.

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On Friday, the Federal Court of Appeal confirmed a 2024 Tax Court decision that found that the CRA’s calculation of Donaldson and Martin’s taxable income during some of the years they played in Canada was “faulty.”

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As a result, both players won’t have to pay additional taxes on millions of dollars of income, as claimed by the tax agency.

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As first reported by National Post in 2023, Donaldson and Martin’s cases raised a common issue that tax experts argued could have a chilling effect on Canadian sports teams’ ability to attract top international athletes: how non-resident top earners can protect their income and mitigate Canada’s higher income-tax rates.

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In this case, the tax agency challenged how much income the players could deduct from their taxes using contributions to a form of pension plan called a Retirement Compensation Agreement (RCA).

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RCAs are commonly used by high-earning athletes and top executives recruited by Canadian organizations. It defers income and tax payments, and isn’t subject to strict contribution limits like an RRSP.

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The taxpayer is allowed to contribute a “reasonable” amount to their retirement every year, but the CRA withholds half of it in a fund that cannot be invested.

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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 then also refund the 50-per-cent portion of all contributions that it withheld.

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The crux of the battle between CRA and the two former Blue Jays stars was a disagreement on how the players’ contributions should be deducted from their income tax while they played for Toronto.

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At issue was that Russell and Donaldson spent 60 per cent of their time in the United States and only 40 per cent in Canada, with taxes payable split accordingly. The time spent in Canada was called “duty days.”

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CRA argued that the retirement contributions should be deducted before the 60/40 American-Canadian split was calculated, meaning the players would end up paying more taxes on the Canadian portion.

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The two baseball stars, represented by Davies lawyer Marie-France Dompierre, argued the opposite: that the contributions should only be deducted from the Canadian portion after the split.

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The difference in taxable income was significant. For Donaldson, it was $2 million, whereas it topped $3.1 million for Russell.

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Ultimately, both the Tax Court and the Federal Court of Appeal sided with the players.

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“In my view, the correct interpretation of the provisions of the (Income Tax Act) is the approach adopted by Russell Martin and Josh Donaldson and confirmed by the Tax Court,” wrote Federal Court of Appeal Judge Wyman W. Webb on behalf of the panel of three magistrates.

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