CRA finds that the s. 6(1)(a)(ii) exclusion for employer RCA contributions was effectively allocated between Cdn and US employment income of an athlete

40% of a non-resident athlete’s $2 million compensation package from a Canadian team was in the form of annual team contributions to his retirement compensation arrangement. Upon retirement or loss of employment, the athlete would receive a lump sum cash-out payment from the RCA that would be subject to 25% Part XIII tax.

CRA indicated that the $800,000 annual team RCA contribution was excluded from employment income under s. 6(1)(a)(ii) and that the (net) employment income of $1,200,000 should be allocated as to 40% (or $480,000) to Canada based on the higher number of games played in the U.S. Thus a submission that the athlete’s Canadian employment income under s. 115(1)(a)(i) was nil through allocating the s. 6(1)(a)(ii) exclusion wholly to the Canadian income ($2 million x 40% - $800,000) was unsuccessful.

A variant of these facts entailed the athlete and team each annually contributing $400,000 to the RCA. In finding that the employee contributions would not qualify for deduction under s. 8(1)(m.2), which refers inter alia to deduction of “an amount contributed by the taxpayer in the year to a pension plan in respect of services rendered by the taxpayer … where the plan is a [RCA],” CRA stated:

[A] plan will not be a pension plan where the only payment provided for under the terms of the plan is a single lump sum payable on retirement or loss of employment. … [A] plan that is excluded from being a salary deferral arrangement (“SDA”) by virtue of the special exception for professional athletes in paragraph (j) of the SDA definition in subsection 248(1) [also] will not be a pension plan, regardless of the form of benefits provided.

The first reason for denial focuses on the implausible situation of a plan providing only for the payment of a lump sum on retirement or termination, rather than providing for a retirement pension but with provision for commutation on specified events. The second reason appears to be an exercise in policy making rather than statutory interpretation.

Neal Armstrong. Summaries of 21 February 2018 External T.I. 2017-0702061E5 under s. 115(1)(a)(i) and s. 8(1)(m.2).