The Queen v. Herman, 78 DTC 6311, [1978] CTC 442 (FCTD)

Walsh, J:—This is an appeal from a decision of the Tax Review Board rendered on May 31, 1976 allowing defendant’s appeal against reassessments for income tax for the 1971 and 1972 taxation years with respect to amounts of $7,717.99 received by him in each of the said years which he contended were not benefits deriving from a superannuation or pension fund and hence not taxable. His wife Stephanie Herman had also been re-assessed for an amount of $5,464.71 received by her in the 1971 taxation year and the appeal against the decision of the Tax Review Board in her favour bears record No T-3893-76 of the records of this court. Both appeals were heard together on common evidence and these reasons will apply to both appeals.

In the case of Lloyd Herman he had worked on a full-time basis on the permanent staff of the United Nations Secretariat in New York from August 1945 to August 31, 1969 when he retired. He is a Canadian citizen and was part of the Canadian quota. Originally the United Nations established what was called a provident fund for its employees which ran from March 23, 1946 to January 22, 1949 to which he contributed $1,282.03 with his employer contributing an equal amount. In 1949 the United Nations joint staff pension fund was created and he contributed $16,938.97 to it from January 23, 1949 to August 31, 1969 with his employer contributing double this amount. The two funds were amalgamated and the payments to them with interest accruing thereon are the source of the pension he is now receiving annually in monthly installments since his retirement. The pension fund was duly registered in Canada under the provisions of the Income Tax Act effective April 1, 1961.

In the case of Stephanie Herman she too had worked as a full-time member of the permanent staff of the United Nations in New York from August 1949 until her retirement on August 31, 1969. She had contributed $823.30 into the provident fund, as had her employer, and $17,741.07 to the joint staff pension fund to which her employer had contributed double this amount on her behalf.

Neither defendant had filed income tax returns in Canada or elsewhere nor been required to pay any tax in this country until the 1971 taxation year.

The uncontradicted evidence of Lloyd: Herman supported by United Nations forms filed as exhibits indicates that in addition to the pension deductions, deductions were made under the heading of “staff assessment” which he explained is equivalent to income tax payable to the United Nations. The amount is based on earnings and has no relation- ship to the national income tax laws of the various member countries. Employees pay this assessment in lieu of income taxes to their country of origin and irrespective of where they are serving in the employ of the United Nations. This latter then distributes the sums so collected to the member countries by deducting the amount attributable to each of them from the contributions due to the United Nations by each member country. The sums that are so distributed by way of set-off are global amounts, however, and, if my understanding of the arrangement is correct do not represent the total of the sums so withheld from the individual employees forming part of each country’s quota. In other words the United Nations cannot be said to be an agent collecting income tax at its rates on behalf of the country of origin of each employee, but each country does benefit by its share of the total amounts collected as staff assessments, as a result of deduction of its share of the amount so allocated from its contribution.

The individual employee does not file any tax return with the United Nations, but these deductions are calculated and made by the employer itself. While the amounts are affected by marital status and dependents there are no deductions for charitable donations, pension plan contributions and so forth.

With respect to the amount of the pension plan contributions they are not necessarily based on the entire remuneration. Mr Herman testified that the term ‘‘post adjustment” on the blank statement of earnings and deductions form which he filed refers to an attempt which was made to equalize salaries according to the cost of living in countries to which an employee was posted. Geneva was taken as the case and an attempt made to adjust the remuneration paid while an employee was stationed in other countries accordingly, but this failed because of the rapid changes in inflation which took place. In any event this additional amount was never taken into consideration in the calculation of pension contributions. Originally the pension contributions were based on net income, later on half the gross plus net income, and, as a final step after 1965, on gross income, the pension deduction being 7%. While statements furnished to Mr & Mrs Herman showing the record of their respective contributions to September 30, 1967, give a break-down of the actual amounts contributed, and the interest accrued to that date on these contributions, this is not up to date to the date of their retirement, and in any event there is nothing to indicate what portion of the pension payments they receive each year results from payments contributed by them, and of course interest continues to accrue on the amounts in the fund; moreover Mr Herman testified that the payments have been increased since 1972 by an escalation for cost of living. This breakdown which would ‘involve a complicated calculation does not appear to be an issue in this case in any event as I have concluded that the amounts received represent pension or superannuation payments and not annuities which would require a separation of the capital and interest elements.

The sections of the former Income Tax Act in issue relating to the 1971 taxation year are subparagraph 6(1 )(a)(iv)

6. (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year

(a) amounts received in the year as, on account or in lieu of payment of, or in satisfaction of

(iv) Superannuation or pension benefits.

and paragraph 139(1)(ar)

139. (1) In this Act,

(ar) “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 or to an employer or former employer of the beneficiary thereunder,

(i) in accordance with the terms of the fund or plan,

(ii) resulting from an amendment to or modification of the fund or plan, or

(iii) resulting from the termination of the fund or plan.

In the new Act applicable to the 1972 taxation year the sections are subparagraph 56(1 )(a)(i):

56. Amounts to be included in income for year.

(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

(a) Pension benefits, unemployment insurance benefits, etc—any amount received in the year as, on account or in lieu of payment of, or in Satisfaction of,

(i) a superannuation or pension benefit.

and subsection 248(1):

248. (1) “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 or to an employer or former employer of the beneficiary thereunder,

(a) in accordance with the terms of the fund or plan,

(b) resulting from an amendment to or modification of the fund or plan, or

(c) resulting from the termination of the fund or plan.

While subparagraph 56(1)(a)(i) is slightly different in wording from subparagraph 6(1)(a)(iv) of the former Act the difference does not appear to be significant. If anything the use of the words “any amount” instead of merely “amounts” would seem to be even more comprehensive in indicating that the origin of the amount has no significance.

The reasoning of the decision of the Tax Review Board was that since the Act defines what superannuation or pension benefits are, and in paragraph 139(1)(ahh) what a registered retirement savings plan is, but is silent as to defining what a pension or superannuation fund is, the court may interpret it by limiting it to a fund to provide a taxpayer with income on his retirement “where the contributions into the fund are deductible’’. In the present case contributions were, at least after 1965 calculated on gross income, and hence no deductions were made for the employees’ contributions in calculating the “staff assessment” or tax, and, of course none in Canada where no tax was payable by either defendant during the years of employment in New York. While the learned Chairman clearly states that he realizes that there is no equity in tax law and that he is not basing his decision on that ground, 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 either in the definitions of superannuation or pension benefit in paragraph 139(1)(ar) of the former Act (subsection 248(1) of the present Act) which refers to any amount paid out of a “superannuation or pension fund” in accordance with the terms of the fund, nor elsewhere in either Act, 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.

With respect to the registration of the Fund in Canada, the only Significance of this would appear to be that, if an employee of the United Nations resident in Canada (such as employees of ICAO which, like other similar agencies of the United Nations, come within the pension plan) had other taxable income in Canada as a result of which he had to file a return during the time of his employment with the United Nations, he might perhaps have been able to deduct his contributions to the plan after April 1, 1961, from his taxable income. I merely mention this, without so deciding, as except for this possibility there would appear to be no advantage to the taxpayer resulting from the registration. Employees of ICAO for example although residing in Montreal would still pay no Canadian income tax on United Nations income while in its employ anymore than the defendants herein became liable to United States income tax while working for the United Nations in New York.

In taxing superannuation or pension income the Act appears to make no distinction as to the origin of it. It merely taxes all of it when received by a taxpayer resident in Canada and liable to Canadian income tax. In this case it differs from the taxation of annuities in which only the interest element is taxable as income and part of each annuity payment received would represent a return of the annuitant’s capital and be treated as such.

Defendants’ most serious argument, in my view, is unfortunately also an equitable one, rather than one which can find any support in either the former or current Income Tax Acts. It was contended that the lump sum payments made by way of set-off against United Nations contributions due by Canada represented a return to Canada of tax money collected by the United Nations from members of the Canadian quota in its employ, and that Canada had therefore already in effect collected tax on the pension plan contributions which was not deducted by the United Nations when calculating the employees’ “staff assessment’’, so that by now taxing the benefits received double taxation is being imposed in Canada. It would certainly require a specific section of the Act to consider such a vague assumption and in effect credit the defendants as individuals with contributions to Canadian income tax in years when they were not taxable in Canada merely because the United Nations credited to Canada lump sums annually resulting from amounts collected .from defendants and other United Nations employees under the heading of “staff assessments”. It cannot be concluded therefore that defendants are being subjected to double taxation in Canada.

Some jurisprudence was referred to by plaintiff but no case appears to have been decided on this precise point although some of the comments made by the learned judges are helpful and confirm the conclusion which I have reached. The Tax Appeal Board case of William E Moore v Minister of National Revenue, 42. Tax ABC 145; 66 DTC 657, with which I fully agree, called attention to the distinction between an annuity and a pension. Paragraph 11 (1)(k) of the former Act (now paragraph 60(a)) permitted the deduction in calculating a taxpayer’s income of “the capital element of each annuity payment (other than a superannuation or pension benefit . . . included in computing the taxpayer’s income for the year’. A reading of the regulations and rules of the United Nations joint staff pension fund makes it clear, as I have already. indicated, that these payments constitute bona fide superannuation or pension fund benefits, and not benefits from an annuity. The reason why a distinction is made in the Income Tax Act is clearly explained by the Assistant Chairman, R S W Fordham, QC in his decision at page 659 where he states:

The reasoning underlying the exception to the provisions of paragraph 11(1)(k) is that where an annuity has been purchased by the annuitant solely with his own funds, it is only just that the capital element should be deductible; otherwise, he would be paying income tax on what unquestionably had been capital in his hands. When, however, the annuity has been obtained with money provided partly by the annuitant and partly by his former employer, the position is different. Still to give the annuitant the right to deduct the capital element would result in his getting a deduction in respect of money that had come not from him but from the employer. Patently, that would be giving the annuitant a benefit that was neither intended by Parliament nor merited.

In the absence of any provision of Canadian tax law or any convention between Canada and the United Nations which would allow the deduction claimed, I must regretfully maintain the appeals even though in the result both defendants Lloyd Herman and Stephanie Herman are required to pay income tax on the full pension benefits received by them from the United Nations without having previously benefited by any tax deductions resulting from the amounts contributed by them towards these pensions. Pursuant to subsection 178(2) of the Income Tax Act the Minister shall pay all reasonable costs of the taxpayer in connection with this appeal in which the amount of tax involved is less than $2500. Under the circumstances only one set of costs will be allowed on the two appeals, however.