Date: 20041103
Docket: A-560-03
Citation: 2004 FCA 370
CORAM: DÉCARY J.A.
NADON J.A.
MALONE J.A.
BETWEEN:
GENERAL MOTORS OF CANADA LTD.
Appellant
and
HER MAJESTY THE QUEEN
Respondent
Heard at Vancouver, British Columbia, on October 6, 2004.
Judgment delivered at Ottawa, Ontario, on November 3, 2004.
REASONS FOR JUDGMENT BY: MALONE J.A.
CONCURRED IN BY: DÉCARY J.A.
NADON J.A.
Date: 20041103
Docket: A-560-03
Citation: 2004 FCA 370
CORAM: DÉCARY J.A.
NADON J.A.
MALONE J.A.
BETWEEN:
GENERAL MOTORS OF CANADA LTD.
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
MALONE J.A.
I. Introduction
[1] The question raised on this appeal is whether General Motors of Canada Ltd. (General Motors or GM) is entitled to deduct as an expense in its 1995 taxation year, the sum of $13,834,902 (the Overtime Balance), which it had accrued to its Special Canadian Contingency Fund (the Contingency Fund). The Overtime Balance arose from a Memorandum of Understanding attached to a collective labour agreement signed by GM in 1993 (the MOU). The MOU specified that for each overtime hour worked by bargaining unit employees in excess of 5% of straight overtime hours as calculated on a twelve month rolling average, GM would accrue the sum of $2 to the Contingency Fund.
[2] A judge of the Tax Court of Canada decided that General Motors had no actual liability to pay the Overtime Balance to anyone and further, that the fund itself was a contingent liability and that the 1995 deduction was therefore not permitted by virtue of paragraph 18(1)(e) of the Income Tax Act, R.S.C. 1985 c. 1 (5th Supp.) (the Act) [Reported at [2004] 1 C.T.C. 2999, 2003 D.T.C. 1533].
[3] For the reasons which follow I would dismiss the appeal.
II. Background Facts
[4] A careful recitation of the facts surrounding this appeal is essential.
[5] GM's fiscal period and taxation year end on December 31 of each year. For each year since the establishment of the Contingency Fund in 1984, amounts were accrued by GM to the Contingency Fund based on relevant overtime hours worked by its employees. These amounts were to be utilized for specific uses as identified in various Memorandums of Understanding covering the Contingency Fund, including the MOU attached to the 1993 collective agreement between General Motors and the National Automobile, Aerospace and Agricultural Implement Workers Union of Canada (the CAW) which is now in issue. All of the collective agreements covered a three year period.
[6] Articles 1 through 4 of the MOU outline the understanding surrounding the obligation and uses of the Contingency Fund:
1. The Special Canadian Contingency Fund will be continued during the term of the 1993 Master Agreement.
2. Such Special Canadian Contingency Fund will equal an accrual by the Company of two dollars ($2.00) per overtime hour worked by all covered employees in excess of five percent (5%) of straight time hours worked by such covered employees calculated on a twelve month rolling average.
3. During the term of the 1993 Master Agreement, the Special Canadian Contingency Fund will be utilized primarily in support of the negotiated Child Care Programs, the Legal Services Plan and to finance the CSUB Plan [the Canadian Supplementary Unemployment Benefit Plan], and then only if needed. It may also be used to fund jointly agreed to initiatives as determined by the President, National Union CAW and the Vice President and General Director of Personnel. At any point in time, the Special Contingency Fund Balance shall be equal to the cumulative accrual calculated in Section 2 above, less the cumulative utilization calculated in this Section 3. The cumulative accrual and utilization shall include balances carried forward from prior Agreements.
4. The use of the SCC Fund [the Contingency Fund] for support of the CSUB Plan would be determined solely by the amount of the Credit Unit Cancellation Base (CUCB) as determined from time to time under the CSUB Plan for the purpose of determining the cancellation rate of the Credit Units on the payment of Regular Benefits under the CSUB Plan. ...
[7] Whenever the collective agreements expired, the use of the balance of remaining amounts in the Contingency Fund was open to negotiations. For example, article 5 of the MOU provides as follows:
As of the end of the 1993 Master Agreement period, the parties would negotiate the usage of any accrual then remaining in the Special Canadian Contingency Fund.
In all cases since the Contingency Fund was established, the balance of the fund at the end of the life of a collective agreement was carried over into a new collective agreement.
[8] At the end of the 1995 taxation year, no funds were segregated by General Motors in relation to the Contingency Fund. Rather, the Overtime Balance was recorded as 'Other Current Liabilities' in GM's financial statements for that year; statements which, according to its external auditors, were prepared according to Generally Accepted Accounting Principles. General Motors asserted that the word 'contingent' used to describe the Contingency Fund referred only to the contingency that the overtime must first be worked and not to the nature of its liability.
[9] General Motors also treated the Overtime Balance as a labour expense that it incurred during that year for other internal reporting purposes. For instance, GM reported the results of its collective agreement settlements to its shareholder, General Motors Corporation. In calculating its projected expenses, GM treated its projected overtime as a 1995 labour expense and reported on the assumption that as soon as overtime was worked and funds were accrued, the funds were committed to be used for the benefit of CAW members.
[10] For the 1995 taxation year, General Motors claimed a deduction for the Overtime Balance pursuant to the relevant overtime hours worked by GM employees. A reassessment issued by the Minister of National Revenue (the Minister) on November 22, 2000 disallowed GM's deduction, claiming that it was a contingent liability. The position of the Minister was, and is, that the accrual amounts are deductible only when payments for qualified purposes are triggered by the occurrence of events provided for in the MOU in the years after 1995.
[11] The Overtime Balance was fully paid out by the end of January 1999 in order to provide funds for the Legal Services Plan, childcare programs, the CSUB Plan as well as newly negotiated programs such as the Paid Educational Leave program and the GM/CAW Training Review Committee; all in accordance with articles 3 and 4 of the MOU.
III. The Judgement Below
[12] The Tax Court Judge carefully analysed the MOU. Since article 2 did not require GM to segregate any amount from its ordinary working capital or pay any amount to a trustee, he determined that article 2 only gave rise to a requirement to make a bookkeeping entry. Furthermore, article 3 describes how the accrued amounts were to be used and how the balance in the Contingency Fund would be computed at any point in time. In his view, the words 'cumulative accrual' used in article 3, fall short of creating liability. Nor did article 4 or 5 create liability in the opinion of the Tax Court Judge; article 5 merely providing for a negotiated use of any accrual remaining in the Contingency Fund at the end of the 1993 collective agreement. Quoting a dictionary definition of 'liability', he concluded that no actual liability had been incurred as there was no identifiable creditor who could make a legally enforceable claim against GM for the Overtime Balance on December 31, 1995.
[13] Following the test set out in Wawang Forest Products Limited et. al. v. The Queen, [2001] 2 C.T.C. 233, 2001 D.T.C. 5212 (F.C.A.), the Tax Court Judge then proceeded to ascertain whether any of the provisions for the payment of the amounts accrued in the Contingency Fund created a liability which depended for its existence upon an event which may or may not happen. He concluded that they all did. In his view, the phrase "and then only if needed", included in article 3 of the MOU, reinforced his ultimate conclusion that any obligation on GM to pay an amount out of the Contingency Fund was a contingent obligation.
IV. Standard of Review
[14] The standard of review to be applied by this Court in this appeal was established by the Supreme Court of Canada in Housen v. Nikolaisen, [2002] 2 S.C.R. 235. In the present appeal, the issues are whether an actual liability to pay the Overtime Balance had been incurred at the end of 1995 and, if so, whether the liability was contingent upon events which may or may not occur. The Tax Court Judge was obliged to interpret the MOU in order to determine if an expense had been incurred in 1995 or if the obligation was a 'contingent liability' within the meaning of paragraph 18(1)(e) of the Act. Interpreting the MOU and applying the legal construction to the facts is properly qualified as a question of mixed fact and law and is generally governed by the standard of palpable and overriding error.
[15] Paragraph 18(1)(e) of the Act reads as follows:
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18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
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18. (1) Dans le calcul du revenu du contribuable tiré d'une entreprise ou d'un bien, les éléments suivants ne sont pas déductibles :
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(e) an amount as, or on account of, a reserve, a contingent liability or amount or a sinking fund except as expressly permitted by this Part;
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e) un montant au titre d'une provision, d'une éventualité ou d'un fonds d'amortissement, sauf ce qui est expressément permis par la présente partie;
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V. Analysis
i) Interpreting the Collective Agreement
[16] Central to the resolution of this appeal is the need to determine the intention of the parties in drafting the MOU. In Metropolitan Toronto v. C.U.P.E. (1990), 69 D.L.R. (4th) 268 at 287 (Ont. C.A.), the Ontario Court of Appeal noted how the collective bargaining context affects the interpretation of a collective agreement:
...it is true that a collective agreement is an intricate contract, which attempts to reflect the outcome of bargaining on a myriad of issues. It is also true that parties intent on reaching a settlement do not always have the time, the incentive, or the resources to consider the full implications of each and every phrase. There is, therefore, a place for some creativity, some recourse to arbitral principles, and some overall notion of reasonableness.
[17] The labour relations context does not, however, change the general rule of interpretation that intention is to be derived from the written words rather than from extrinsic evidence. Only where the terms of the written agreement are ambiguous may extrinsic evidence be permitted as an aid to interpretation to resolve the ambiguity. (See The Queen v. CAE Industries Ltd. (1985), [1986] 1 F.C. 129 at 155 (C.A.)). In the present appeal, unless there is ambiguity in the words used in articles 2 through 5 of the MOU, which constitute the essence of the 'bargain' struck between the parties, extrinsic evidence cannot be used.
ii) The Leading Authority
[18] The characterization of the obligation created by articles 2 through 5 as either an absolute or contingent liability depends on the interpretation to be given to the words used by the parties. In Wawang, supra, Sharlow J.A., writing for a unanimous court, described the test in the following words at paragraph 16:
... the correct question to ask, in determining whether a legal obligation is contingent at a particular point in time, is whether the legal obligation has come into existence at that time, or whether no obligation will come into existence until the occurrence of an event that may not occur.
Therefore, in the present situation, the question that must be asked is whether the Overtime Balance was an absolute or contingent liability once the overtime hours were worked.
iii) Is the Obligation Absolute or Contingent?
[19] Key to the Tax Court Judge's decision was his determination that while GM had a legal duty to accrue the Overtime Balance, there was no obligation in 1995 to pay out any part of that amount. The only obligation, according the Tax Court Judge, was to make a bookkeeping entry and no more. The appellant says that this amounts to a legal error in that the Tax Court Judge ignored the meaning of the words 'accrual' and 'fund' used in article 2 as well as the legal right of the CAW to enforce the provisions of the MOU through an arbitration process. GM urges that the wording of article 2, properly interpreted, establishes an absolute liability.
[20] It is argued that in a labour law setting the word 'accrue' creates more than an obligation to make a bookkeeping entry. For example, in a J. Sack and E. Poskanzer's dictionary of Canadian labour law entitled Labour Law Terms (Toronto: Lancaster House, 1984 at 20), the word 'accrue' is defined as: "increase, become legally enforceable; e.g. his seniority accrued until he was promoted out of the bargaining unit." Similarly, in Black's Law Dictionary, 7th ed. at 21, 'accrue' includes "to come into existence as an enforceable claim or right, to accumulate periodically."
[21] Further, it is submitted that the word 'fund' reflects a clear intention that the amounts accrued are committed to be used for the benefit of union members. In support of that contention, reference is made to The Canadian Law Dictionary, (Don Mills, Ontario: Law and Business Publications (Canada) Inc., 1980) where 'fund' is defined as:
A sum of money set apart for a specific purpose. The term can be used with various shades of meaning. It can be used to denote capital assets, liquid assets, money in hand, notes, bills and the meaning depends on the context.
[22] As to articles 3 and 4, General Motors argues that the rate at which amounts were paid out is not relevant to the determination of whether a legal obligation in respect of those amounts was created. It notes that this Court in Fédération des Caisses Popularies v. The Queen, [2002] 2 C.T.C. 1, 2002 D.T.C. 7413 (F.C.A.) at paragraphs 31 - 36 distinguishes between provisions which impose liability and provisions which govern the time at which payments are to be made. GM submits that the MOU governing the Contingency Fund is also organized into provisions which govern the creation of the legal liability (article 2) and provisions which govern the manner in which that liability is to be discharged (articles 3, 4 and 5).
[23] Accordingly, once the overtime was worked, it was under an obligation to use the funds for the benefit of the union members and the deduction was therefore appropriately made during the year the liability arose, rather than in the year it would be paid. Collectively, according to General Motors, no contingent liability is created by these provisions.
[24] It is not disputed that in an accounting context, the Closing Balance in the Contingency Fund was properly treated as an expense in GM's 1995 audited financial statements and was recorded among "other current liabilities" in those statements. However, it must be remembered that what is recorded as an obligation for accounting purposes may not be considered an absolute liability at law if a creditor with a legally enforceable claim cannot be identified.
[25] In my view, the requirement that General Motors accrue amounts in the Contingency Fund did not create an absolute liability in 1995. General Motors was not obliged to contribute $2 per relevant overtime hour worked to a qualified trustee or to otherwise segregate or set aside any amount from its ordinary working capital. All GM was required to do during that year was to maintain a running account in which it accumulated amounts as specified by article 2. It was only upon the occurrence of various contingent events, as outlined in articles 3 and 4, that General Motors became legally obligated to pay a sum of money. Similarly, article 5 did not create an absolute liability; it simply provided that the parties would be obligated to negotiate the usage of any accrual remaining in the Contingency Fund at the end of the collective agreement.
[26] In the present analysis as to the applicability of paragraph 18(1)(e) of the Act, the only relevant question is whether the MOU created an absolute liability or debt obligation on GM at the end of 1995. It is acknowledged that the MOU required GM to accrue amounts into the Contingency Fund and to negotiate the usage of any amounts remaining at the end of the collective agreement. However, since no funds were contributed to a qualified trustee or otherwise segregated or set aside from ordinary working capital, I can find no absolute liability or identifiable debt that was incurred by General Motors. Correspondingly, there is also no identifiable creditor who could make a legally enforceable claim against General Motors with respect to the Overtime Balance as the workforce constituting the membership of the CAW changed from month to month. In addition, I am not prepared to speculate as to the relevance of the rights and remedies available to the CAW under the 1993 collective agreement in determining the nature of the obligation incurred by GM in 1995.
[27] Since an absolute liability only arises upon the occurrence of various contingent events, as outlined in articles 3 and 4, GM's legal obligation is properly characterized as a contingent liability in 1995. In coming to this conclusion I am in substantial agreement with the decision of the Tax Court Judge, who concluded at paragraph 25 of his reasons:
There were no amounts to be paid out of the SCCF [the Contingency Fund] to the legal services plan or the CSUB plan unless a specified funding threshold (for each plan) had been crossed. For the child care program, the Appellant had to accept a request from the CAW before an amount was paid out of the SCCF. I have no hesitation in concluding that any obligation on the Appellant to pay an amount out of the SCCF during the 1993 Collective Agreement was a contingent obligation.
[28] General Motors and the CAW could have created an absolute legal liability by drafting express terms in the MOU that reflected this intention. For example, GM could have agreed to contribute funds to a qualified trustee or otherwise segregate or set aside funds from its ordinary working capital. This would have created an identifiable debt and an identifiable creditor. In this example, the amounts provided would be deductible in the year in which they were contributed, even if the funds were not ultimately paid out until some future date. (See Fédération des Caisses Populaires, supra at paragraphs 31 - 36 and Wawang Forest Products, supra at paragraph 9.)
[29] In fact, supplemental arrangements of this type were entered into between the parties to the 1993 collective agreement. For both the Legal Services Plan and the CSUB Plan, General Motors assumed an absolute liability when it agreed to contribute money to a qualified trustee, with the understanding that the amounts contributed in respect of those plans were properly deductible in the year in which the contributions were made. The language used in the supplemental agreements creating and continuing the Legal Services Plan and the CSUB Plan specifically required that GM contribute funds to a qualified trustee and also referenced the parties expectations that the contributions made under these plans would be a acceptable as a legitimate business expense deductible under the Income Tax Act. (See Ex. 1, Appeal Book, Vol. 1, pp. 137, 139 and 217, 239.) The creation of an absolute liability under these plans can be contrasted with the more general language used in the MOU with respect to the Contingency Fund. These differences further support the conclusion that no absolute liability was incurred with respect to the Contingency Fund in 1995.
[30] Furthermore, the definition of fund, as quoted by General Motors (supra at paragraph 21 of these reasons), also supports the proposition that no absolute liability was incurred. That definition of 'fund' refers to assets that are actually set apart or segregated for a specific purpose. Nowhere in this definition is it suggested that a mere accounting entry would create a 'fund' in the manner suggested by General Motors.
VI. Conclusion
[31] In summary, even when viewed in a collective bargaining context, articles 2 through 5 do not create an absolute liability incurred by General Motors in 1995 for the purpose of producing income. The Overtime Balance is accordingly not a proper expense deduction under paragraph 18(1)(e) of the Act and the Tax Court Judge did not err in law, nor did he make a palpable or overriding error, in concluding that the liability was contingent.
[32] The appeal should be dismissed. The respondent should be awarded her costs in this Court and the Tax Court of Canada.
"B. Malone"
J.A.
"I agree
Robert Décary J.A."
"I agree
M. Nadon J.A."
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-560-03
STYLE OF CAUSE: General Motors of Canada Limited v. Her Majesty the Queen
PLACE OF HEARING: Vancouver, B.C.
DATE OF HEARING: October 6, 2004
REASONS FOR JUDGMENT BY: Malone J.A.
CONCURRED IN BY: Décary J.A.
Nadon J.A.
DATED: November 3, 2004
APPEARANCES:
Mr. Al Meghji FOR THE APPELLANT
Mr. Gerald Grenon
Ms. Alexandra Brown FOR THE RESPONDENT
Mr. Bobby Sood
SOLICITORS OF RECORD:
Osler, Hoskin & Harcourt LLP FOR THE APPELLANT
Calgary, Alberta
Mr. Morris Rosenberg FOR THE RESPONDENT
Deputy Attorney General for Canada
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