On his best days, former Toronto Blue Jays’ player José Bautista was pounding homers, flipping bats and making a mockery of Major League pitching. I mean, let’s face it, his blast against the Texas Rangers in the 2015 American League playoffs is the stuff of Canadian legend.
Now it seems that Bautista’s bat flip is not the only memory he’s left behind. The former slugger, along with former Blue Jay teammates Josh Donaldson and Russell Martin, is embroiled in a cat fight with the Canada Revenue Agency (CRA) over millions of dollars in taxes. Seems Canada’s version of the IRS is not too keen on how the trio’s gaggle of accountants calculated their incomes while playing in the Queen City.
During their careers, Bautista earned $33 million between 2014 and 2017; Donaldson $28.65 million from 2015-2017 and Martin $42 million from 2015-2017 (amounts in USD).
As for Donaldson and Martin, the issues surrounding their woes rest on where they claimed residence while they made contributions to their RCAs. The CRA states their deductions as residents of Florida should be calculated based on splitting their time (60% in the US and 40% in Canada for the season).
Retirement compensation arrangements (RCAs) allow 100 percent tax-deductible corporate dollars to be deposited into an RCA, on behalf of the private business owner and/or key employee. No tax is paid by the owner/employee until benefits are received at retirement. Contributions to an RCA should not exceed what is required to fund the entitlement under the generally accepted guidelines for pensions. Thanks, Wikipedia.
Of the three players, it is Bautista’s case that caught the flailing tentacles of the CRA. In his case, the CRA reportedly disallowed $16 million in deductions from his income through contributions made from 2014-17.
… 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.
His side’s response:
Bautista appealed the CRA’s reassessment of his tax declarations in court in August 2022 [The cases for Donaldson and Martin are set to be heard in court in July]. 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.
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.”
More details from the National Post story:
Specifically, the tax agency [CRA] 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.”
RCAs were introduced into the Canada’s Income Tax Act (ITA) during the 1980s to discourage employers from setting aside monies to fund unregistered retirement benefit arrangements, including supplemental pension plans. Today, they are used to deliver a variety of post-employment arrangements, including severance and change-in-control agreements.
The good news is that there may be good news on the horizon thanks to proposed changes to the way RCAs are taxed—a move that would benefit employers offering registered pension plans.
In a recent Investment Executive story, Lea Koiv, President of Lea Koiv & Associates in Toronto, said [in an email]:
“… the change, which would apply to retirement benefits after March 28 (budget day), is good news for the pension industry. A number of employers will benefit.”
But until then, the attack on three players from a Blue Jays’ team that made memorable postseason runs in 2015 and 2016, is a kick in the ass. More than anything else, some talking heads say the publicity will have a pretty shitty effect on Canadian sports teams’ wanting to attract top international athletes (other than the fact they actually have to convince them to play in Canada).
Cross-border tax lawyer and talking head Mark Feigenbaum:
“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. The Court has confirmed in the past that these are legitimate tax planning retirement plans that are already permitted under the legislation.”
And so, as long as income tax mitigation strategies such as RCAs continue to hold Canadian teams ransom in their attempts to attract really cool players, the bat flips on.