Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: 1. Whether employer RCA contributions can be deducted from a non-resident’s employment income allocated to Canada in determining their taxable income earned in Canada under subsection 115(1). 2. Whether employee RCA contributions are deductible under 8(1)(m.2) where the only payment provided for under the terms of the plan is a single lump sum or where the plan is an athlete’s salary deferral plan.
Position: 1. No. 2. No.
Reasons: 1. Employer RCA contributions are excluded from the calculation of employment income by virtue of subparagraph 6(1)(a)(ii) and therefore never enter into the calculation of taxable income earned in Canada. 2. The condition that the RCA be a pension plan is not met in either case.
February 21, 2018
Re: Taxable income earned in Canada of non-resident athlete with RCA
We are writing in response to your letter of May 4, 2017 asking how contributions to a retirement compensation arrangement (“RCA”) are to be taken into account in determining the taxable income earned in Canada under subsection 115(1) (footnote 1) of a non-resident professional athlete earning employment income in both Canada and the United States. We apologize for the delay in responding.
Your question can be answered with reference to the following general fact scenario:
1. The athlete is employed by a professional sports team in Canada that participates in a league having regularly scheduled games in Canada and the United States.
2. Pursuant to the terms of the athlete’s employment contract, the team established an RCA for the benefit of the athlete to which the team is required to make contributions in such amount as set out in the employment contract. Each employer contribution reduces the salary otherwise payable to the athlete. Upon retirement or loss of employment from the team, the athlete receives a lump sum payment from the RCA equal to the value of the RCA’s assets.
3. The purpose of the RCA is to defer receipt of part of the athlete’s salary until the athlete retires from or ceases to be employed by the team in order to take advantage of favourable tax treatment applicable to RCAs. This enables the athlete to defer taxation of the amount contributed by the team to the RCA until it is distributed from the RCA to the athlete when it will be subject to a tax rate of 25% under Part XIII of the Act. If the athlete had instead received the amount as salary it would have been taxable immediately and subject to graduated tax rates of up to 33% under Part I of the Act plus the applicable provincial tax rates.
4. Using a reasonable and consistent allocation method, the athlete’s salary is attributable 40% to Canada and 60% to the United States.
5. The team and the athlete have agreed to a total compensation package of $2 million for Year 1, of which $1.2 million is paid as salary and $800,000 is contributed by the team to the athlete’s RCA.
6. The athlete is a non-resident of Canada throughout Year 1.
You have asked whether the employer contributions made to the athlete’s RCA can be deducted entirely from the athlete’s employment income allocated to Canada in determining the athlete’s taxable income earned in Canada for Year 1. This would result in the athlete having no employment income allocated to Canada for Year 1 (0 = ($2 million x 40%) - $800,000).
You have also asked an additional question on a variation of the above scenario where the athlete’s employment contract requires the athlete and the team to each contribute $400,000 to the RCA in Year 1. You ask whether the athlete is entitled to a deduction under paragraph 8(1)(m.2) for their contributions to the RCA and, if so, whether this deduction (together with the employer contributions) can be deducted entirely from the athlete’s employment income allocated to Canada for purposes of subsection 115(1).
This technical interpretation provides general comments about the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
Employer RCA contributions
Pursuant to paragraph 2(3)(a), where a non-resident person was employed in Canada at any time in a taxation year, the person is subject to tax on the person's taxable income earned in Canada for the year. Subparagraph 115(1)(a)(i) includes in taxable income earned in Canada income from the duties of an office or employment performed by the non-resident person in Canada. Where the duties are performed partly in Canada and partly in another country, paragraph 4(1)(b) requires a reasonable allocation of the employment income between the two countries.
Sections 5 to 8 set out the rules for computing income from an office or employment for purposes of the Act (including subparagraph 115(1)(a)(i)). Of relevance to your question is subparagraph 6(1)(a)(ii), which excludes any benefit under an RCA from employment income.
Applying the provisions above to the given fact scenario, any amounts that the team contributes to the athlete’s RCA are excluded from the calculation of employment income by virtue of subparagraph 6(1)(a)(ii) and therefore never enter into the calculation for the purpose of subparagraph 115(1)(a)(i). The athlete’s employment income for Year 1 is $1.2 million, of which 40% is allocable to Canada. Accordingly, $480,000 is included in the athlete’s taxable income earned in Canada for Year 1.
Employee RCA contributions
Paragraph 8(1)(m.2) allows a deduction for contributions made by an employee to an RCA provided certain conditions are met. One of the conditions is that the RCA be a pension plan.
The determination of whether a plan is a pension plan is a question of fact. Generally, a plan will be considered to be a pension plan where contributions have been made to the plan by or on behalf of an employer or former employer of an employee in consideration for services rendered by the employee and the contributions are used to provide an annuity or other periodic payment on or after the employee's retirement.
It is our view that 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. It is also our view that 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) will not be a pension plan, regardless of the form of benefits provided.
As the athlete’s RCA fails as a pension plan on either basis, any employee contributions made to the RCA will not qualify for a deduction under paragraph 8(1)(m.2).
We trust these comments will be of assistance to you.
Acting Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 In this letter, all legislative references are to the Income Tax Act (the “Act”).
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