Three players who were essential to the Toronto Blue Jays' success during their 2015 and 2016 playoff runs appear to be in a dispute with the Canada Revenue Agency.
Jose Bautista, Josh Donaldson, and Russell Martin are reportedly embroiled in legal battles with the CRA over how much of their income they were able to deduct through contributions to Retirement Compensation Agreements (RCA).
RCA contributions allow for the deferral of tax payments, but don't come with the same contribution limits as an RRSP. RCAs pay out after their holder retires or loses their job, which is a common circumstance for professional athletes at a relatively young age.
While setting up RCAs is common for pro athletes who will only be in Canada temporarily, what the CRA is disputing in these cases is whether the amount the players contributed was reasonable. In Bautista's case, the agency is reportedly disallowing as much as $16 million in contributions over a four-year span.
The dispute appears to be over whether Bautista's deductions can be considered a pension plan or not, with his lawyers claiming they should be treated as such because his payments were "to assist with the transition into retirement."
Donaldson and Martin's cases are different as they relate to how deductions should be calculated based on where the players — both U.S. residents — spent their time. The CRA is reportedly pushing to have their deductions calculated before their time split is calculated, while the players' case is that the deductions should be made after.
The difference between the two interpretations of the situation would be over $2 million in both cases, which are scheduled be heard at the same time in July.
While it's unclear what the ultimate outcome of these legal battle will be, a concern this situation is raising is how unappealing Canada may become to professional athletes.
Because the country's tax rates on people with the highest incomes exceeds the percentage those south of the border are expected to pay, high earners — like athletes — are often disincentivized to come to Canada if they have a choice.
Mechanisms like RCAs can help mitigate the difference between the countries' income taxes, and reduce the financial barrier athletes face by coming to Canada. If you're a fan of a Canadian team, that may sound like a fine idea that helps avoid competitive imbalance — and a CRA crackdown like this might not seem particularly appealing.
A common issue encountered by athletes in North American sports leagues is that they earn substantial amounts of income as employees with massive tax implications. The issue is central to most negotiations between Canada-based sports teams and the nonresident athletes they covet.
The ability to defer tax is often at the forefront of these discussions because this may permit Canadian teams to attract talent by reducing income tax rates to a level similar to those enjoyed by members of U.S.-based teams.
On the other hand, if you're a Canadian citizen you might not be particularly fond of extremely high earners finding ways to pay as little in taxes as humanly possible — something that is likely of more interest to them, their lawyers, and their accountants than how Canadian teams will fare at attracting free agents in the years to come.