Date:
20130530
Docket: A-432-12
Citation: 2013 FCA 142
CORAM: PELLETIER
J.A.
GAUTHIER
J.A.
WEBB
J.A.
BETWEEN:
GARY JACKSON
PROFESSIONAL CORPORATION
Appellant
and
THE MINISTER OF
NATIONAL REVENUE
Respondent
REASONS FOR JUDGMENT
WEBB J.A.
[1]
This
is an appeal from the decision of Weisman D.J. (the Judge) of the Tax Court of
Canada (Court File No. 2012-1506(CPP)). The appellant had been assessed for
contributions under the Canada Pension Plan, R.S.C. 1985, c. C-8 (CPP)
for 2009 in relation to the amounts that the appellant claimed had been paid to
an employees profit sharing plan and allocated to Gary Jackson. The appellant’s
position was that no contributions under the CPP should have been payable in
relation to such payments. The Judge dismissed the appellant’s appeal on the
basis that the appellant had not established a valid employees profit sharing
plan for the purposes of the Income Tax Act, R.S.C. 1985, c. 1 (5th
Supp.), (the ITA).
[2]
In
this appeal, the appellant focused on the Judge’s findings that the documents
related to the arrangement in question did not contemplate that only one trustee
would perform the tasks that were to be performed by all three trustees and
that a portion of the amount was paid by Gary Jackson — not the appellant. The
position of the respondent is that the arrangement was not an employees profit
sharing plan for the purposes of the ITA. In particular, the respondent
submitted that the arrangement failed to comply with the requirement that
payments are required to be computed by reference to profits.
[3]
The
Canada Revenue Agency has taken the position for several years that the payment
of amounts by an employer to the trustees under a valid employees profit
sharing plan (and the allocation of such payments to employees) will not result
in contributions being payable under the CPP. The Respondent acknowledged that
this has been the position of the Canada Revenue Agency and that this position
has not changed. Since, in my opinion, the payments made by the appellant in
2009 would not be payments made to the trustees under an employees profit
sharing plan, it is not necessary to determine whether this position of the
Canada Revenue Agency is correct based on the provisions of sections 8, 9 and
12 of the CPP.
[4]
Gary
Jackson is a chartered accountant. The appellant is the company that he formed
to provide chartered accounting services to Roberts, Marlowe, Jackson, Jackson
& Associates. There were three employees of the appellant – Gary Jackson,
Gay Jackson (the spouse of Gary Jackson) and their son, however, Gary Jackson
was the only person who performed the chartered accounting services. The
appellant entered into an Employee Profit Sharing Plan Trust Indenture (Trust
Indenture). The appellant made the following payments during its fiscal year
ending October 31, 2009 (or within 120 days thereafter) to an account opened as
the bank account for this Trust Indenture:
|
Date
|
Amount
|
|
October
30, 2009
|
$100
|
|
October
30, 2009
|
$60,000
|
|
January
14, 2010
|
$50,000
|
|
January
14, 2010
|
$10,000
|
[5]
On
the same day that the payments were made to this account, the funds (except the
initial deposit of $100) were transferred to Gary Jackson.
[6]
An
employees profit sharing plan is defined in subsection 144(1) of the ITA. For
the purposes of this appeal, the relevant provisions of this definition are as
follows:
|
“employees profit sharing plan”
at a particular time means an arrangement
(a) under which payments
computed by reference to
(i) an employer’s profits from
the employer’s business, …
are required to be made by the
employer to a trustee under the arrangement for the benefit of employees of
the employer …; and
(b) in respect of which the
trustee has… allocated, either contingently or absolutely, to those employees
(i) in each year that ended at
or before the particular time, all amounts received in the year by the
trustee from the employer …
|
« régime de participation des
employés aux bénéfices » À un moment donné, arrangement dans le cadre duquel,
à la fois :
a) un employeur est tenu de
faire des versements — calculés en fonction soit des bénéfices qu’il tire de
son entreprise,… à un fiduciaire dans le cadre de l’arrangement au profit de
ses employés …;
b) le fiduciaire a attribué,
conditionnellement ou non, à ces employés … les montants suivants
(i) au cours de chaque année
terminée au moment donné ou antérieurement, les montants que le fiduciaire a
reçus au cours de l’année de l’employeur…
|
[7]
In
order for an arrangement to be an employees profit sharing plan:
(a) subject to the
comments below in relation to subsection 144(10) of the ITA, the employer must
be obligated to make payments to the trustees under the arrangement and such
payments must be computed by reference to profits; and
(b) the trustees must
annually allocate all of the payments received.
[8]
Under
the ITA, the payments made by the employer to the trustees under the
arrangement are deductible (subsection 144(5) and paragraph 20(1)(w) of the
ITA) and the amounts allocated to the employees are included in their income as
income from an office or employment (subsection 144(3) and paragraph 6(1)(d) of
the ITA) in the year that the amounts are allocated. Since the amounts are
included in the income of the employees when the amounts are allocated to them,
when the amounts are subsequently paid to those employees no amount is then
included in their income (subsection 144(6) of the ITA).
[9]
Subsection
144(10) of the ITA provides that:
|
(10)
Where the terms of an arrangement under which an employer makes payments to a
trustee specifically provide that the payments shall be made “out of
profits”, the arrangement shall, if the employer so elects in prescribed
manner, be deemed, for the purpose of subsection 144(1), to be an arrangement
under which payments computed by reference to the employer’s profits are
required.
|
(10)
Pour l’application du paragraphe (1), lorsque les modalités d’un arrangement
en vertu duquel un employeur fait des versements à un fiduciaire prévoient
expressément que les versements sont à faire « sur les bénéfices »,
l’arrangement est réputé, si l’employeur fait un choix en ce sens selon les
modalités réglementaires, constituer un arrangement dans le cadre duquel des
versements calculés en fonction des bénéfices de l’employeur sont à faire.
|
[10]
If
the election as provided in this subsection is made, and the arrangement
specifically provides that the payments will be made from profits, the
condition that the arrangement must provide that payments computed by reference
to profits are required will be satisfied. In this case, the appellant did not
make the election as contemplated by subsection 144(10) of the ITA. Therefore, the
arrangement must satisfy the condition that payments computed by reference to
the appellant’s profits are required to be made.
[11]
Paragraph
4.02 of the Trust Indenture provides that:
Within 120 days of each fiscal
year end, the Company, in its absolute discretion, will contribute the
following amounts from its accumulated undistributed Profits to the Trustees:
(i) a minimum of
One Hundred Canadian dollars ($100) per Participating Beneficiary per Plan
Year; or
(ii) an amount
that is determinable by a formula to be established from time to time by the
Board of Directors.
In any event the total Company
contribution for a Plan Year shall be not less than 1% of the Profits earned by
the Company for the fiscal year whose end falls during the Plan Year.
Participating Beneficiaries shall not be permitted to make contributions to the
Trust.
[12]
The
Board of Directors of the appellant did not, at any relevant time, establish
the formula contemplated by paragraph 4.02(ii) of the Trust Indenture.
[13]
In
Lade v. Minister of National Revenue, [1964] C.T.C. 305, [1965] 1
Ex. C.R. 214, Noël J. discussed the requirements for an employees profit
sharing plan and in particular the requirement that the payments must be
computed by reference to profits. He stated that:
25 The
definition contained in Section 79(1) “an arrangement under which payments
computed by reference to profits ... are made by an employer to a trustee”
restricts the above conception by limiting the plan to one only where the
payments of the employer are computed by reference to profits and paid into the
trust. This limitation is such that it apparently became necessary to insure by
Section 79(7) that a plan, which merely says that the employer's contributions
will be made “out of profits” be deemed an employees' profit sharing plan if
the employer so elects in accordance with the regulations, be brought back
under the definition as, although such a plan would have qualified under the
heading of the section, it would not without Section 79(7) have qualified under
the definition. Indeed, had this not been done, such a plan would not have been
considered an employees profit sharing plan under the Act although it would
have been one under the ordinary concept of an employees profit sharing plan.
This exclusion by the definition of subsection (1) of Section 79 of a plan
based merely on the employees' contributions being made “out of profits” points
out that something else than a mere contribution out of profits is required to
qualify a plan under the section.
…
27 The
definition of a profit sharing plan under the Act is therefore, except to the
extent it is or may be affected by what I have just pointed out above, to be
taken to mean what it says which is that a set formula is worked out by
reference to the employer's profits whereby a total amount of profits to be
distributed to his employees or shared by the employer with them is determined
and must be paid to a trustee when there is such a profit.
28
It
may be useful here to reproduce the definition of such a plan under Section
79(1):
“79. (1) In this Act ‘an employees profit sharing
plan’ means an arrangement under which payments computed by reference to
his profits from his business ... are made by an employer to a trustee
in trust for the benefit of officers or employees ...” (emphasis added by Noël,
J.).
29 What
indeed appears to be required is a binding obligation by the employer to make
payments in accordance with a formula which refers to profits and which must be
paid in the event of profits. It is in this sense only, I believe, that it can
be “computed by reference to profits” and paid as required under the section.
[14]
The
appeal of this decision of Noël J. was dismissed by the Supreme Court of Canada
([1965] C.T.C. 525). The definition of employees profit sharing plan has been
amended to make it clear that the employer is required to make payments
computed by reference to profits. Therefore, if the election under subsection
144(10) of the ITA has not been made, there must be a set formula which, when
applied, will produce an amount that has been computed by reference to profits
and the employer must be obligated to pay that amount to the trustees under the
arrangement.
[15]
Paragraph
4.02 of the Trust Indenture (which is the only provision that was submitted
that could be considered to contain an obligation to make payments) provides
that the Company in its absolute discretion will contribute the amounts
referred to in paragraph 4.02 (i) or (ii). Since no formula was determined by
the board of directors of the appellant, the only remaining part of this
paragraph that is relevant is paragraph 4.02 (i). The payment under this
paragraph is based on the number of Participating Beneficiaries. This payment
is not computed by reference to profits but since this payment is subject to
the absolute discretion of the appellant, it would appear that the appellant may
not be obligated to make this payment in any event.
[16]
Paragraph
4.02 of the Trust Indenture also provides that the total Company contribution
for a Plan Year must not be less than 1% of the Profits for the fiscal year
referred to therein. This could create an obligation to make this minimum
payment. However, according to the Income Statement submitted by the appellant,
it would appear that its gross profit for the 2009 fiscal year before any
expenses are deducted (which will produce an amount that is greater than the
profit of the appellant when the expenses are taken into account) was $157,800.
One percent of this amount (which would also be greater than 1% of the profit) is
only $1,578.
[17]
The
payments made by the appellant (which are listed in paragraph 3 above) were
arbitrary payments that Gary Jackson stated were made from profits. However,
since no election had been filed under subsection 144(10) of the ITA, the
payments had to be payments that the appellant was required to make and that
were computed by reference to profits. The payments that were made bore no
resemblance to the minimum required payment of 1% of profits. Therefore, these
payments were not payments made under an arrangement that would qualify as an
employees profit sharing plan under the ITA. These payments would be
contributory salary and wages of Gary Jackson for the purposes of the CPP.
Since the Year’s Maximum Pensionable Earnings for the purposes of the CPP in
2009 were $46,300, the payment of $60,000 on October 30, 2009 would generate
the maximum contributions payable under the CPP for 2009.
[18]
As
a result, I would dismiss the appeal with costs.
"Wyman
W. Webb"
“I
agree,
J.D. Pelletier J.A.”
“I
agree,
Johanne
Gauthier J.A.”
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