Date: 20260828

Dockets: A-13-25 (Lead file)

A-14-25

Citation: 2026 FCA 144

Heard at Montréal, Quebec, on March 11, 2026.

Judgment delivered at Ottawa, Ontario, on August 28, 2026.

Date: 20260828

Dockets: A-13-25 (Lead file)

A-14-25

Citation: 2026 FCA 144

REASONS FOR JUDGMENT

WEBB J.A.

[1] Russell Martin and Joshua (Josh) Donaldson played baseball for the Toronto Blue Jays. At that time, they were not residents of Canada. There is no dispute that each individual performed 60% of his employment duties in the United States and 40% of his employment duties in Canada in each of the taxation years under appeal. As part of their compensation for playing baseball, certain amounts were paid by their employer to retirement compensation arrangements (RCAs). Under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the Act), the amount paid to an RCA is excluded from the income of the individual (subparagraph 6(1)(a)(ii) of the Act).

[2] In filing their Canadian tax returns, Russell Martin and Josh Donaldson first allocated 40% of their total compensation for each year as the compensation for their services performed in Canada. The total compensation included the salary paid directly to them and the contributions made by their employer to their RCAs. Since the RCA contributions are excluded from income for the purposes of the Act, the amount that they reported as their taxable income earned in Canada was only the salary portion of the allocated compensation that was paid directly to them. The amounts as reported by Russell Martin and Josh Donalson are illustrated in the tables in paragraph 29 below.

[3] In reassessing Russell Martin and Josh Donaldson, the Minister of National Revenue (the Minister) first applied the Act to the entire compensation paid by their employer to determine what their total income would be for the purposes of the Act. Since the contributions to the RCAs are excluded from income for the purposes of the Act, the Minister determined that their total income was only the salary portion that was paid directly to them. The Minister then applied the 40% agreed upon percentage for the services rendered in Canada to the total income so determined. Their taxable income earned in Canada, as determined by the Minister, was therefore 40% of the salary portion of their compensation that was paid directly to them. The income as reassessed by the Minister is illustrated in the tables in paragraph 29 below.

[4] The Tax Court of Canada (per Gagnon J.) agreed with the approach adopted by Russell Martin and Josh Donaldson and allowed their appeals from the reassessments that were issued (2024 TCC 153).

[5] The Crown is appealing the decision of the Tax Court and is maintaining its view that the approach set out in paragraph 3 above is the correct approach.

[6] For the reasons that follow, I would dismiss these appeals. For ease of reference, all amounts in these reasons are stated in US dollars. In determining the taxable income earned in Canada for the purposes of the Act and the related tax liability under the Act, the amounts would need to be converted into Canadian dollars.

I. Background

[7] For Russell Martin, the three taxation years in issue are 2015, 2016, and 2017. On November 20, 2014, Russell Martin and Rogers Blue Jays Baseball Partnership, operating as the Toronto Blue Jays Baseball Club (the Club), entered into a Major League Uniform Player’s Contract (the Martin UPC) whereby Russell Martin would be paid the following amounts (not including playoff bonuses):

[8] Westcoast Actuaries prepared a report that set out the reasonable amount that could be contributed to an RCA for Russell Martin for the purposes of the Act based on the assumption that 40% of the salary would be “paid as Canadian income”. For a non-resident person, tax is imposed on that person’s “taxable income earned in Canada” (subsection 2(3) of the Act) and that person’s income is determined as if that person “had no income other than (i) incomes from the duties of offices and employments performed by the non-resident person in Canada” (subparagraph 115(1)(a)(i) of the Act). Therefore, the reference to the amount “paid as Canadian income” is presumably a reference to 40% of the salary being paid for services rendered in Canada. Although the first page of the report indicates that the date of the report is March 27, 2014, this date is before the Martin UPC was signed and before the valuation date stated in the report (which is January 1, 2015). The following pages of the report, however, correct the date to March 27, 2015. The Crown does not dispute that the amounts so determined by Westcoast Actuaries are reasonable.

[9] The Martin UPC was amended on April 22, 2015 to reflect the RCA. This agreement set out the amounts to be paid by the Club to the custodian of the RCA. As a result of implementing the RCA, the following payments were made for the services rendered by Russell Martin in 2015, 2016, and 2017:

[10] The amounts indicated as being paid to Russell Martin and his RCA include any source deductions or withholding tax deducted by the Club. The total amounts paid (including the contributions to his RCA) are equal to the amounts agreed upon in the Martin UPC as salary as set out in paragraph 7 above and the additional amounts paid as bonuses for the playoffs.

[11] For Josh Donaldson, the two taxation years in issue are 2016 and 2017. On March 19, 2016, Josh Donaldson and the Club entered into a Major League Uniform Player’s Contract (the Donaldson UPC) whereby Josh Donaldson would be paid the following amounts (not including playoff bonuses):

[12] Westcoast Actuaries prepared a report, dated March 31, 2016, that set out the reasonable amount that could be contributed to an RCA for Josh Donaldson for the purposes of the Act based on the assumption that 40% of the salary would be “paid as Canadian income”. As noted above, this reference to the salary being “paid as Canadian income” is presumably a reference to 40% of the salary being paid for services rendered in Canada. The Crown does not dispute that the amounts so determined by Westcoast Actuaries are reasonable.

[13] The Donaldson UPC was amended on June 20, 2016 to reflect the RCA. This agreement set out the amounts to be paid by the Club to the custodian of the RCA. As a result of implementing the RCA, the following payments were made for the services rendered by Josh Donaldson in 2016 and 2017:

[14] The amounts indicated as being paid to Josh Donaldson and his RCA include any source deductions or withholding tax deducted by the Club. The total amounts paid (including the contributions to his RCA) are equal to the amounts agreed upon in the Donaldson UPC as salary as set out in paragraph 11 above and the additional amount paid as a bonus for the playoffs.

II. RCAs

[15] An RCA is defined in subsection 248(1) of the Act. Essentially, it is a plan or arrangement funded by an employer to provide payments to an employee after their retirement or loss of employment. The contributions made by the employer are deductible in computing the income of the employer (paragraph 20(1)(r) of the Act) and are excluded from the income of the employee (subparagraph 6(1)(a)(ii) of the Act). When the distributions from the RCA are eventually made to the employee, if the employee is then a resident of Canada, such distributions are included in the income of the employee (paragraph 56(1)(x) of the Act). If the employee is not then a resident of Canada, the distributions are either included in income (if the election as set out in section 217 of the Act is made) or are subject to withholding tax (paragraph 212(1)(j) of the Act). The amount of the withholding tax may be reduced by an applicable tax treaty.

[16] Part XI.3 of the Act imposes a refundable tax on the custodian of an RCA (subsection 207.7(1) of the Act), which will apply to the contributions made by the employer. Paragraph 153(1)(p) of the Act and subsection 103(7) of the Income Tax Regulations, C.R.C., c. 945 provide that the employer is to deduct and remit this refundable tax when the payments are made to the custodian of the RCA.

[17] The refundable tax under Part XI.3 is defined in subsection 207.5(1) of the Act. In general terms, the refundable tax is the amount, if any, by which the total of:

• (a)50% of the contributions made to the RCA; and

• (b)50% of the amount by which the income of the RCA exceeds the losses of the RCA (including capital gains and capital losses)

exceeds

• (c)50% of all amounts paid as distributions under the RCA.

[18] When the amounts are distributed from the RCA to the employee, the refundable tax imposed under Part XI.3 is refunded and the amounts distributed will be subject to tax under Part I or withholding tax under Part XIII, as noted above.

[19] In these appeals, the Club deducted and remitted the required amounts for the refundable tax for all the payments that were made to the RCAs.

III. Decision of the Tax Court

[20] The Tax Court Judge noted that this was an issue of statutory interpretation and referred to paragraph 10 of Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54 and paragraph 21 of Placer Dome Canada Ltd. v. Ontario (Minister of Finance), 2006 SCC 20.

[21] The Tax Court Judge noted that, for non-residents, the Act imposes an income tax on the person’s taxable income earned in Canada for the year determined in accordance with Division D (subsection 2(3) of the Act). Subsection 115(1) of the Act (which is in Division D) provides that a non-resident employee’s income under section 3 is determined on the basis that the only income of that person is from the duties of offices and employments performed by that person in Canada.

[22] The Tax Court Judge also referred to paragraph 4(1)(b) of the Act which provides that, where an employee performs employment duties in different places, the income from employment is to be determined on a place-by-place basis. This reinforced the concept that, in determining the income of non-resident employees, the Act would only apply to the Canadian-sourced employment income.

[23] The Tax Court Judge also found that the contributions made by the Club to the RCAs were part of the compensation paid for the duties of employment performed in Canada by Russell Martin and Josh Donaldson (paragraph 110 of the reasons of the Tax Court Judge).

[24] The Tax Court Judge concluded that the income from employment for each of Russell Martin and Josh Donaldson for the purposes of the Act was to be determined by first allocating 40% of the entire compensation for each year to the particular individual as his Canadian-sourced compensation and then excluding from his income for the purposes of the Act the payments made to his respective RCA.

[25] In paragraph 26 of the Crown’s memorandum, the issue in this appeal is described as:

The Tax Court erred in law in interpreting subparagraph 115(1)(a)(i) and in finding that 40% of the Employer RCA contributions is to be included into the computation of the respondents’ income before being 100% deducted pursuant to subparagraph 6(1)(a)(ii).

[26] However, a fair reading of the Tax Court Judge’s reasons does not support this characterization of the Tax Court Judge’s finding. The Tax Court Judge’s conclusions on the application of the applicable provisions of the Act are set out in paragraphs 110 to 113 of his reasons. There are multiple references to the exclusion of the RCA contributions from the income of the individuals. These paragraphs confirm that the Tax Court Judge was isolating the Canadian-sourced components of the compensation and then applying the provisions of the Act to such components, recognizing that the contributions of the Club to the RCAs were excluded from the income of the employees and not, as described by the Crown, included in income and then deducted pursuant to subparagraph 6(1)(a)(ii).

IV. Issue

[27] The issue in these appeals is whether a non-resident person’s taxable income earned in Canada is determined by:

• (a)first applying the Act to the total compensation paid by an employer for services rendered by an employee (whether for services rendered in Canada or elsewhere) to determine the total income for the purposes of the Act (which would exclude contributions paid by an employer to an RCA) and then applying the appropriate percentage (40% in these appeals) to that total income to determine the taxable income earned in Canada by the non-resident employee; or

• (b)first determining what compensation (both type and quantum) is paid for the services rendered in Canada (40% of the total compensation in these appeals, which would include the contributions made by the Club to the RCAs in these appeals) and then applying the Act to the type and amount of the compensation so allocated, which would mean that in determining the taxable income earned in Canada by the non-resident employee, the RCA contributions would be excluded from income following the allocation of the total compensation.

[28] Since the issue is a question of statutory interpretation, the standard of review is correctness (Housen v. Nikolaisen, 2002 SCC 33).

V. Analysis

[29] The difference between the approach adopted by the Minister, and the approach adopted by the taxpayers and confirmed by the Tax Court, is illustrated in the following tables:

RUSSELL MARTIN

The Minister’s Determination of Taxable Income Earned in Canada

Russell Martin’s Determination of Taxable Income Earned in Canada

JOSH DONALDSON

The Minister’s Determination of Taxable Income Earned in Canada

Josh Donaldson’s Determination of Taxable Income Earned in Canada

[30] The majority of the Supreme Court of Canada in Piekut v. Canada (Minister of National Revenue), 2025 SCC 13 summarized the modern principle of statutory interpretation:

[43] The modern principle requires a court to interpret statutory language “according to a textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole” (Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601, at para. 10; R. v. Downes, 2023 SCC 6, at para. 24). Even so, a court need not address text, context, and purpose separately or in a formulaic way, since these elements are often closely related or interdependent (Bell ExpressVu [Bell ExpressVu Limited Partnership v. Rex, 2002 SCC 42], at para. 31; Chieu v. Canada (Minister of Citizenship and Immigration), 2002 SCC 3, [2002] 1 S.C.R. 84, at para. 28).

[31] Section 2 of the Act separates persons who are liable to pay tax under the Act on their taxable income into two groups – residents of Canada (subsection 2(1)) and non-residents of Canada (subsection 2(3)). Subsection 2(3) of the Act provides that a non-resident person will only be subject to tax, on their taxable income earned in Canada, if they are employed in Canada, carry on business in Canada or dispose of taxable Canadian property:

[32] Section 115 is in Division D. The relevant part of this subsection is subparagraph 115(1)(a)(i):

[33] Subsection 115(1) of the Act restricts a non-resident employee’s taxable income earned in Canada to what that person’s income would be under section 3 if the only source of that income was from the duties performed in Canada. The Crown, in both its written submissions and oral argument, focused mainly on the text of subsection 115(1) of the Act as support for its position that the taxable income of Russell Martin and Josh Donaldson earned in Canada for the purposes of the Act is 40% of the total amount that would be included in computing their income under the Act (which would exclude the contributions made to their RCAs). As the amounts contributed to their RCAs are excluded in determining the income of the individuals under the Act, these amounts, in the Crown’s view, do not factor into the income to be allocated to the individuals for the purposes of the Act. Only the amount that would otherwise be income of the individuals for the purposes of the Act would be allocated between Canada and the United States, in the Crown’s view.

[34] In my view, however, the text of this provision does not necessarily require an examination of the entire compensation (which is paid for duties performed in Canada and for duties performed elsewhere) to determine what, of the entire compensation, would be included or excluded in determining income for the purposes of the Act. To determine how the Act would apply to the entire compensation package implies that the Act applies to the entire compensation package and not just to the part thereof that is for duties performed in Canada.

[35] If, as submitted by the Crown, the first step is to apply the Act to the entire compensation package to determine what would be income of the individuals, and then to allocate 40% of what would be included in income for the purposes of the Act to each individual as their income earned in Canada, this would result in more than 40% of the compensation being subject to tax under the Act, even though the parties agreed that 40% of the duties were performed in Canada. As a result, in effect, the Crown’s position would result in part of the compensation that was paid for duties being performed in the United States being subject to tax under the Act.

[36] The net effect of the Crown’s interpretation in relation to the percentage of total compensation (which would include the contributions to the RCAs) that would be subject to tax in Canada (either immediately as salary or with respect to the RCA contributions, subject to a refundable tax when the contributions are made and then later subject to tax when withdrawn) is illustrated in the following tables, using the amounts as determined by the Minister as the taxable income earned in Canada:

Russell Martin

Josh Donaldson

[37] The Crown submitted that it was not appropriate to consider the amounts paid by the Club to the RCA to be part of the compensation paid only for the duties performed in Canada by Russell Martin and Josh Donaldson. In my view, however, although the contributions to the RCAs are excluded from their income for the purposes of the Act, the contributions are nonetheless compensation for services rendered in Canada to which the Act applies. As well, this submission of the Crown is contrary to the finding of the Tax Court Judge that these payments were for their duties performed in Canada and the Crown has not challenged that finding in this appeal.

[38] The evidence presented at the Tax Court hearing amply supports the finding that the payments made by the Club to the RCAs were part of the compensation paid for the duties performed by Russell Martin and Josh Donaldson in Canada. The actuaries determined the reasonable amount that could be contributed to the RCAs on the assumption that 40% of their duties were performed in Canada and hence that 40% of the amount that would have been paid to them as salary would be for services performed in Canada.

[39] The UPCs were amended following the actuarial reports and diverted a portion of what would otherwise have been paid to them as salary to their respective RCAs. The amounts contributed to the RCAs reduced the amounts paid as salary. When the total amount paid directly to each individual for each year is added to the amount contributed to the respective RCA for that year, the total amount for each year is equal to the agreed upon compensation in their respective UPCs, as set out in paragraphs 7 and 11 above, and the additional amounts paid as playoff bonuses.

[40] The RCA is an arrangement under the Act. Therefore, the logical conclusion is that each individual directed that a portion of the amount that would otherwise have been paid to him for his services performed in Canada would be paid by the Club to the custodian of his respective RCA. It would be illogical to assume that any part of the amounts diverted to the RCAs would be for duties performed in the United States.

[41] The Crown also argued that it was not appropriate to consider the contributions to the RCAs because the refundable tax paid on the contributions to the RCAs was paid by a different person than the individuals, under a different Part of the Act. However, the tax imposed under Part XI.3 was nonetheless imposed under the Act and was imposed on the part of the compensation that was paid by the Club to the RCAs.

[42] In my view, the taxation of the contributions to the RCAs and the distributions from the RCAs are relevant parts of the context in these appeals. The contributions made to the RCAs were deducted from the salaries that the Club had previously agreed to pay to Russell Martin and Josh Donaldson and therefore were part of their compensation. If the RCAs had not been interposed, those same amounts would have been paid to Russell Martin and Josh Donaldson as salary. When the amounts are eventually distributed from the RCAs to Russell Martin and Josh Donaldson, such amounts will be subject to tax under the Act. Diverting a portion of what would otherwise have been paid to them for their services rendered in Canada to the RCAs should not alter the amount of compensation paid for their services rendered in Canada.

[43] The purpose of the relevant provisions of the Act is to tax non-resident employees on their compensation for their duties performed in Canada. This would first require a determination of what compensation (both quantum and type) is paid for the services rendered in Canada.

[44] As a result, in my view, the correct interpretation of the provisions of the Act is the approach adopted by Russell Martin and Josh Donaldson and confirmed by the Tax Court, i.e., to first determine the compensation (both quantum and type) that is paid for the duties performed in Canada and to then determine what part or parts of that compensation would be included or excluded from income for the purposes of the Act.

VI. Conclusion

[45] I would dismiss each appeal with costs.

“Wyman W. Webb”

FEDERAL COURT OF APPEAL

NAMES OF COUNSEL AND SOLICITORS OF RECORD

APPEARANCES:

SOLICITORS OF RECORD: