The taxpayers (two baseball players), who performed 40% of their duties in Canada rather than the US, agreed with the Toronto Blue Jays (the “Club”) that a portion of their total package would take the form of annual contributions to a retirement compensation arrangement (RCA). The Crown position was that the RCA contributions did not enter into computing the taxpayers’ income for the purposes of the allocation of 40% thereof to Canada because they were not received by the taxpayers and because of the specific exclusion under s. 6(1)(a)(ii) of RCA benefits from employment income.
Gagnon J instead agreed with the taxpayer submissions that the exclusion of RCA contributions in s. 6(1)(a)(ii) only applies against the amount of Canadian-source income subject to taxation in Canada, so that those contributions were to be deducted solely from the 40% of their remuneration that was earned in Canada.
Before so concluding, Gagnon J indicated inter alia:
- The ITA’s computational rules, including the exclusion in s. 6(1)(a)(ii) for RCA contribution benefits, “cannot apply to a non‑resident’s foreign-source income as the Act only grants jurisdiction over a non‑resident’s Canadian-source income” (para. 95, see also para. 105).
- Before their exclusion under that computational rule, the RCA contributions “made up a portion of the Appellants’ compensation and remuneration for the year” given the broad scope of the concept of an employment benefit, so that those contributions were “part of the Appellants’ compensation during the taxation years in which the contributions were made” (para. 98) - and it was this total income that was to be allocated between Canada and the US under s. 2(3) and s. 115((1)(a)(i) and in accordance with s. 4(1)(b) (before applying the domestic computational rules, as per the first point).
In connection with the second point, Gagnon J reviewed the jurisprudence under ss. 5(1) and 6(1)(b) and stated (at para. 72):
The Court also believes the foregoing analysis supports that, without the exclusion of benefits under a RCA, the RCA contributions could be included in employment income of the Appellants and therefore the applicable tax treatment could not be decided as foreseen by another provision within the Act. The interpretation and scope given to section 5 and paragraph 6(1)(a) ITA by the Federal Court of Appeal uphold the conclusion.