Citation: 2010 TCC 106
Date: 20100224
Docket: 2008-518(IT)G
BETWEEN:
SHEILA WOODS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Boyle J.
[1]
Mrs. Woods, a
resident of Canada, received an amount of approximately $65,000 in 2004 as a
result of the death of her brother Martin Kaye, a resident of the United
Kingdom (“UK”), while he was employed in the UK by a UK employer, one of
QinetiQ Group PLC or QinetiQ Limited (the employer being hereinafter referred
to as “QinetiQ”).
[2]
The amount was paid to
Mrs. Woods in accordance with the Death Benefit provisions of the QinetiQ
Pension Scheme, a trust fund established by QinetiQ Group PLC for the purpose
of maintaining a retirement benefits scheme for employees of QinetiQ Group PLC and
associated employers. The Credit Advice issued to her by her Canadian bank
identifies the remitter as “QinetiQ Pension Scheme” and payment detail as
“QinetiQ Pension”. In her 2004 tax return Mrs. Woods disclosed the receipt
of this amount and took the position that it should be exempt from Canadian tax
as it was essentially a life insurance payment.
[3]
The taxpayer was
reassessed to include the amount in income. It is the respondent’s position
that the amount is a superannuation or pension benefit included under
subparagraph 56(1)(a)(i) of the Income Tax Act (the “Act”)
or, in the alternative, a death benefit included in income in accordance with
subparagraph 56(1)(a)(iii) of the Act. It is the appellant’s
position that the employer was carrying on an insurance activity in the
operation of the QinetiQ Pension Scheme to provide what are termed therein
Death Benefits, or, in the alternative, that the Death Benefits provided by the
QinetiQ Pension Scheme were the economic equivalent of insurance and, in either
case, should be treated in Canada for tax purposes as non‑taxable life
insurance proceeds.
I. Facts
[4]
Mrs. Woods’
brother Martin was a long‑time UK civil service employee working at a
defence research establishment in England. In 2001 the
government agency was privatized and QinetiQ became his successor employer. The
constitution and administration of the QinetiQ Pension Scheme is in accordance
with a Trust Deed and a detailed set of Rules. The trustees of the QinetiQ
Pension Scheme are individuals and it was administered in the years in question
by Towers Perrin in the UK. It provides for retirement benefits,
death benefits, pension increases and transfers of pension benefits. There are
provisions for both defined benefit employees and defined contribution
employees. The defined benefit provisions of the plan are only available to
QinetiQ’s former civil service employees. Mrs. Woods’ brother was governed
by the defined benefit provisions.
[5]
The retirement benefits
provisions for defined benefit employees provide for regular and recurring payments
to employees based upon their length of service and their earnings, as well as
provisions for early retirement, late retirement and ill‑health
retirement.
[6]
In addition the QinetiQ
Pension Scheme Rules applicable to defined benefit employees provide for Death Benefits
which, in the case of Mrs. Woods’ brother who died without a surviving
spouse or children, were a lump sum equal to three times his final pensionable
earnings which were essentially three times his annual salary at the time of
death. The amount is unaffected by an employee’s length of service.
[7]
The Rules provide for
the payment of the Death Benefits to a surviving spouse. If, as in this case,
the employee dies leaving no spouse, the Rules provide that the trustees of the
QinetiQ Pension Scheme have full discretion in the two years following death to
pay the death benefit amount to relatives, dependants, former spouses, etc. An
employee can file with the plan administrator a non‑binding written
Expression of Wish for this purpose. Apparently this has been carefully crafted
to minimize UK income and inheritance taxes as such
discretionary payments are received tax‑free in the UK. If no such discretionary payments are made within two
years of death, the Death Benefits must be paid to the personal representative
of the late employee.
[8]
In this case no Expression
of Wish was filed by Mrs. Woods’ brother but the trustees decided to pay
the Death Benefits equally to the late employee’s mother and three sisters.
Mrs. Woods, her mother and at least one of her two sisters are residents
of Canada.
[9]
The Rules provide for
the calculation of employee contributions to the QinetiQ Pension Scheme which,
in the case of defined benefit employees, is a function of their earnings.
There is no separately identified contribution required for the Death Benefits
or any other benefit. The Trust Deed requires employer contributions sufficient
to make due provision for the benefits provided under the QinetiQ Pension
Scheme.
[10]
The trustees of the
QinetiQ Pension Scheme are authorized to effect life insurance policies to
insure the benefits payable on death. Based upon some of the correspondence
sent to Mrs. Woods and her sister by the administrator of the QinetiQ
Pension Scheme relating to a satisfactory death certificate being provided to
the insurer before payment could be made, I must infer that all or a portion of
the Death Benefits in this case were funded with life insurance on the life of
Martin Kaye.
II. Law
[11]
Subparagraph 56(1)(a)(i)
of the Act provides that “. . . there shall be included
in computing the income of a taxpayer for a taxation year, . . . any
amount received by the taxpayer in the year as, on account or in lieu of
payment of, or in satisfaction of, a superannuation or pension benefit . . . ”.
[12]
Subsection 248(1)
of the Act provides that a superannuation or pension benefit “includes
any amount received out of or under a superannuation or pension fund or plan
and, without restricting the generality of the foregoing, includes any payment
made to a beneficiary under the fund or plan . . . in
accordance with the terms of the fund or plan . . . ”.
[13]
Payments under a
foreign retirement arrangement are not included in income under
subparagraph 56(1)(a)(i) if the amount would not be subject to
income tax in the foreign country. However, a foreign retirement arrangement is
defined for this purpose to require that it be prescribed by regulation. The
only foreign retirement arrangement so prescribed under Regulation 6803 is
a United States Individual Retirement Account (“IRA”).
[14]
Subparagraph 56(1)(a)(iii)
of the Act provides that “. . . there shall be included
in computing the income of a taxpayer for a taxation year, . . . any
amount received by the taxpayer in the year as, on account or in lieu of
payment of, or in satisfaction of . . . a death
benefit . . . ”.
[15]
Subsection 248(1)
defines death benefit to be “the total of all amounts received by a taxpayer in
a taxation year on or after the death of an employee in recognition of the
employee’s service in an office or employment. . . ”. The
definition continues by establishing an exemption for the first $10,000 of
death benefits received, which $10,000 must be shared if more than one person
receives a portion of a death benefit as is the case here. (The $10,000 threshold
exemption for death benefits has remained unchanged under the Act for at
least 45 years.)
III. Analysis
[16]
There is simply no way
that the QinetiQ Pension Scheme can be considered in law to be a life insurance
policy issued by QinetiQ to Martin Kaye. It is clearly a pension fund. It
has all of the attributes normally found in a pension fund. I cannot accept
that the death benefit provisions constitute a life insurance regime separate
from the retirement pension provisions in the QinetiQ Pension Scheme. The funds
for retirement pension provisions and for death benefits are not required to be
kept separate. There is no provision for the contributions used in part to fund
the Death Benefits to reflect medical health risks, sex, age or similar factors
or any provision whatsoever for any medical or underwriting review. Nor does it
appear to be established and the employee cannot designate the person or
persons to whom the Death Benefits are to be paid or are not to be paid. This
has none of the hallmarks of a policy of life insurance.
[17]
Nor is there any basis
to conclude on these facts that the trustees of the QinetiQ Pension Scheme
acted as agent for either any insurer the scheme dealt with or as agent for
Martin Kaye with respect to a life insurance policy issued by any such
insurer in favour of Mr. Kaye.
[18]
It may be that the
death benefit can serve much of the same purposes of life insurance or that it
is the economical functional equivalent of life insurance. That however does
not make it life insurance. The interpretation and application of the
provisions of the Act are not governed by the courts’ assessment of
economic realities or by alternative commercial and legal structures that could
have accomplished the same economic objectives or results: see the Supreme
Court of Canada in Shell Canada Limited v. The Queen et al.,
99 DTC 5669.
[19]
I should add that, even
if this were considered to be employer provided life insurance, the taxpayer
may find that the Canada Revenue Agency would not agree that it was tax exempt
since there is no evidence of whether or not the employer was deducting the
amount paid as a premium or of other similar considerations.
[20]
The remaining questions
to be decided are:
(1)
is the amount received
by Mrs. Woods a superannuation or pension benefit included in her income
under subparagraph 56(1)(a)(i);
(2)
is the amount received
a death benefit included in her income under subparagraph 56(1)(a)(iii),
in which case Mrs. Woods’ reassessment will have to be revised to reflect
her share of the $10,000 exemption applicable to death benefits; and
(3)
if the amount can be
described as both a superannuation or pension benefit and a death benefit for
purposes of the Act, which regime governs it.
[21]
A superannuation or
pension benefit is deemed by subsection 248(1) to include any amount
received out of or under a superannuation or pension fund or plan. The Act
does not however define superannuation or pension fund or plan. The meaning of
“superannuation or pension benefit” goes on to expressly catch any payment made
to a beneficiary under the fund or plan in accordance with the terms of the
fund or plan. I do not think this last phrase adds anything to the first in
this case. The fundamental question is to determine whether the QinetiQ Pension
Scheme was a superannuation or pension fund or plan.
[22]
In Crown Trust Co.
(McArdle Estate) [No. 1] v. M.N.R., 65 DTC 5176, the
Supreme Court of Canada had to consider an amount payable out of a pension plan
pursuant to the pension plan agreement upon the death of the employee. The
pension plan agreement related to both insurance and pension benefits but the Court
was concerned only with the pension benefits. The amount payable was a pension
benefit upon death derived from employee contributions, employer contributions and
earnings of the fund. In that case the Supreme Court of Canada wrote “the
[amount] received by appellant was clearly an amount ‘received out of or under
a superannuation or pension fund or plan’”. And later “it was clearly a death
benefit under [a particular pension provision] of the Agreement. I can see no
difference in principle between such payment and any other pension benefit
payable after death from a pension fund or plan to which a deceased person has
contributed.” It is clear from the Court’s words that a superannuation or
pension fund or plan is one which entitles an employee to receive a pension
upon retirement. It is equally clear that a superannuation or pension fund or
plan can provide death benefits in the form of a return of premiums or otherwise.
[23]
In Lamash Estate v.
M.N.R., 91 DTC 9, this Court had occasion to consider the McArdle
decision. In that case the deceased federal public servant was entitled
under the terms of the Federal Public Service Superannuation Act to a
pension and, since she died without a surviving spouse or children, had a lump
sum guaranteed five year minimum benefit paid to her estate. This Court found
the Public Service Superannuation Act to be a superannuation or pension
fund or plan. The appellant in that case argued that the lump sum guaranteed five
year minimum benefit was a death benefit entitled to the more favourable
treatment given the $10,000 threshold exemption. The Court rejected that
argument because the amount could not be said to have been paid in recognition
of her service in the employment of the public service. Rather, it was received
because she was required to contribute to the superannuation or pension fund or
plan. The fact that the minimum benefit was described as a death benefit in the
superannuation fund’s governing documents did not make it a death benefit as
defined in subsection 248(1) of the Act.
[24]
The Lamash Estate
decision found support in The Queen v. Irene M. Cumming, 76 DTC 6265
(FCTD), which considered whether a death benefit under the Canada Pension
Plan was also a death benefit under the Act. In deciding that it was
not, the Court applied the same logic:
It is true that the deceased was a contributor to CPP because he was
employed; it is equally true that the CPP death benefit became payable because
he was a contributor but to say that it was paid “in recognition of his service
in employment” is to do considerable violence to the idea plainly conveyed by
those ordinary English words.
I would add that the French definition of “death
benefit” is similarly worded.
[25]
In The Queen v. Herman,
78 DTC 6311 (FCTD), the Court considered the United Nations Joint Staff
Pension Fund. The taxpayers argued that the monthly pension amounts received by
them were not benefits derived from a superannuation or pension fund or plan
because they were not entitled to deduct their contributions to the plan when
they had been made under the peculiar assessment regime in lieu of tax payable
by the United Nations employees. The Tax Review Board had found in favour of
the taxpayers by interpreting the phrase superannuation or pension fund or plan
as a fund to provide retirement income where the contributions into the fund
are deductible. In finding against the taxpayers, the Federal Court wrote at
6314:
I cannot agree that a pension fund must be limited to one to which
contributions are deductible for tax purposes when made. Certainly there was a
superannuation or pension fund here, and the Regulations which were filed as an
exhibit in the present trial make this abundantly clear, and I can find no
justification . . . in the [definition of a superannuation
or pension fund or plan] which refers to any amount paid out of a
“superannuation or pension fund” in accordance with the terms of the fund, nor
elsewhere in [the tax legislation], for breaking down such a fund into its
elements and holding it is not such a fund with respect to the payments made by
a taxpayer into it and not deductible by him from income tax when made, but is
nevertheless a superannuation or pension fund with respect to payments made by
the employer. While this might seem to be an equitable result, the text of the Act
does not give any indication that this can be done.
[26]
And later the Federal
Court wrote at 6315:
In taxing superannuation or pension income the Act appears to make
no distinction as to origin of it. It merely taxes all of it when received by a
taxpayer resident in Canada and
liable to Canadian income tax.
[27]
In this regard I should
note that paragraph 6(1)(g) of the Act makes it clear that
superannuation or pension benefits under the Act can include amounts
related to employment outside Canada.
[28]
In Abrahamson v. M.N.R.,
91 DTC 213, this Court had occasion to consider whether a US IRA
was a superannuation or pension fund or plan and whether amounts received by
the taxpayer from his IRA were superannuation or pension benefits. The Court held
that a superannuation or pension fund or plan is a formal program which
determines the amount and regularity of an allowance paid at regular intervals
to a person usually but not always as a result of the termination of employment
for the purpose of providing that person with a minimum means of existence. The
US IRA did not provide for such payments at all as the beneficiary of the
account could have demanded the balance in his account at anytime much as with
a Canadian Registered Retirement Savings Plan. The Court held the IRA was not a
superannuation or pension fund or plan.
[29]
In Bardsley v.
M.N.R., 70 DTC 1546, the Tax Appeal Board held that amounts
paid to an employee’s widow under the death benefit provisions of a plan by way
of a return of employee contributions, and those by way of a return of the
employer and employee contributions plus interest, were superannuation or
pension benefits and not death benefits. The Board reasoned that they were
superannuation or pension benefits because they were “any amount received out
of or under a superannuation or pension fund . . . including
any payments made to the beneficiary under the plans . . . in
accordance with the terms of the fund or plan . . . ”. The Board
held that a so‑called death benefit under a superannuation or pension
fund or plan cannot be a death benefit as defined in the Act.
[30]
From these cases and
the provisions of the Act themselves I can summarize as follows:
(1)
A superannuation or
pension fund or plan is an arrangement which provides for payment of regular
post‑retirement income to employees and determines the entitlement, the
amount and frequency of such payments;
(2)
A superannuation or
pension fund or plan may also provide for other entitlements and payments to or
for the benefit of the employees that relate to retiring from work;
(3)
Any amount received
from a superannuation or pension fund or plan is a superannuation or pension
benefit except where the Act specifically provides otherwise. There is
no exception for payments to persons other than the employee or his or her
estate. Nor is there an exception for amounts that relate to employment
exercised outside Canada by a non‑resident of Canada.
A death benefit provided for in a superannuation or pension fund or plan is a
superannuation or pension benefit for purposes of the Act and is not a
death benefit as defined in the Act. It is not paid in recognition of an
employee’s service in employment but is paid because the employee participated
in, and usually contributed to, the superannuation or pension fund or plan.
[31]
Applying this to the
case at bar, Mrs. Woods’ appeal cannot succeed. The QinetiQ Pension Scheme
is a superannuation or pension fund or plan and the Death Benefits received by
her thereunder are a superannuation or pension benefit that is not a death
benefit as defined under the Act.
[32]
The appeal will be
dismissed with costs.
Signed at Toronto, Ontario, this 24th day of February 2010.
"Patrick Boyle"
Email this Content