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Citation: 2003TCC815
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Date: 20031114
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Docket: 2002-246(IT)G
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BETWEEN:
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GENERAL MOTORS OF CANADA LIMITED,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Mogan J.
[1] The Appellant is a Canadian
corporation in the business of designing, manufacturing,
assembling and distributing passenger cars and trucks as well as
related parts and accessories. The Appellant's fiscal period
and taxation year end on December 31 in each year. When computing
income for its 1995 taxation year, the Appellant deducted the
amount $13,834,902 with respect to a fund identified as the
Special Canadian Contingency Fund ("SCCF"). By Notice
of Reassessment dated November 22, 2000, the Minister of National
Revenue disallowed the deduction of the amount $13,834,902
claiming that it was a contingent liability. The Appellant has
appealed from that reassessment. The main issue is whether the
amount $13,834,902 is deductible in computing income. The only
taxation year under appeal is 1995.
[2] At the hearing, the parties filed
as Exhibit 1 a binder containing an Agreed Statement of Facts
("ASF") plus 13 documents (Tabs 1 to 13) referred to in
the ASF. They also agreed that each party could call evidence to
supplement but not contradict any fact in the ASF. The ASF
(comprising 28 paragraphs) is a good summary of the basic facts
relevant to the issue under appeal. I will therefore reproduce
the ASF verbatim and then comment on the other documents which I
find most relevant.
"Special Canadian Contingency Fund"
1. Every three
years since at least 1984 the Appellant has entered into a
collective agreement with the National Automobile, Aerospace and
Agricultural Implement Workers Union of Canada (the
"CAW").
2. Each
successive collective agreement from 1984 to 1999 provided that
for each overtime hour worked by employees covered by the
collective agreement in excess of 5% of straight time hours, the
Appellant would accrue a specified sum to a "Special
Canadian Contingency Fund" ("SCCF").
3. The
Appellant and the CAW entered into a collective agreement on
September 29, 1993 (the "1993 Collective Agreement").
Appendix "H" to the 1993 Collective Agreement provided
that an amount of $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
average would be accrued to the SCCF. Tab 1 is an authentic copy
of Appendix "H" to the 1993 Collective Agreement
"Memorandum of Understanding covering Special Canadian
Contingency Fund " (the "Memorandum of
Understanding") dated September 29, 1993, The balance of the
accrued amounts in the SCCF as at the end of the 1995 taxation
year was $13,834,902.
Uses of Funds
4. The amounts
accrued in the SCCF are to be used primarily for specific
purposes identified in the Memorandum of Understanding. The
amounts may also be used for "jointly agreed to initiatives
as determined by the President, National Union CAW and the Vice
President and General Director Personnel". [Please refer to
Tab 1 for particulars of the Memorandum of Understanding.]
5. The
specific uses identified in the Memorandum of Understanding are
the support of the "negotiated Child Care Programs",
the "Legal Services Plan" and to finance the "CSUB
Plan", as needed.
6. The Legal
Services Plan and the CSUB Plan each have both SCCF and non-SCCF
sources of funding (further specifics of the non-SCCF funding are
provided below).
7. Amounts
accrued in the SCCF are paid to the Legal Services Plan and the
CSUB Plan when, on the application of a formula, prescribed
thresholds in those two plans are reached.
8. Funds are
contributed to the Legal Services Plan reducing the balance in
the SCCF, only when non-SCCF funding to the Legal Services Plan
is insufficient to pay for the benefits provided for in the Legal
Services Plan. The Trustee of the Plan performs the necessary
calculation and advises the Appellant when the funding is
required for the Legal Services Plan.
9.
Contributions from the SCCF to the CSUB Plan are not dependent on
the balance in the CSUB Plan reaching zero. The level of
contributions to be made from the SCCF to the CSUB Plan is
determined by the "Credit Unit Cancellation Base" under
the CSUB Plan. The Credit Unit Cancellation Base is determined as
provided at pages 58-59 of Tab 4 to this Partial Agreed Statement
of Facts. The Appellant's Finance Department monitors the
relevant balances and performs the requisite calculations.
Contributions are made when the amount in the CUCB falls below a
specified minimum.
10. Payments in respect of
child care are not a function of prescribed thresholds. The
childcare program is administered by the CAW. When a need for
specific funds is identified by the CAW, a request is made, and,
there may be a discussion to ensure that the use falls within the
framework of child care as has been agreed upon. Once the
Appellant is satisfied that the use is included in what was
negotiated, the payment is made.
11. The SCCF accrues an
amount equal to four and on half cents per straight time hour
worked ($0.045) for mutually agreed child care activities. The
SCCF is the only means by which the Appellant funds the mutually
agreed child care activities. These funds are paid out when the
union requests the funds for a particular use and the usage is
accepted as appropriately employed for child care as described in
paragraph 10, above.
12. No funds are
segregated by the Appellant in relation to its obligations under
Appendix "H" at the time of the accrual. The parties to
this litigation dispute whether the $13,834,902 balance in the
SCCF as at the end of the taxation year is an accounting entry
that represents an actual liability that has been incurred, and
if incurred, whether the liability is contingent.
13. Appendix H-1 to the
Collective Agreement provides that, in the event of conflict
between the use of the accrual remaining in the SCCF, to support
the mutually agreed child care activities or Legal Services Plan
benefits or the Canadian Supplemental Unemployment Benefit Plan
("CSUB Plan"), the accrual would be used first to
support the mutually agreed child care activities and then to
support the Legal Services Plan. Tab 2 is an authentic copy of
Appendix "H-1" to the 1993 Collective Agreement.
14. The Legal Services
Plan provides specified personal legal services regarding Wills
and Estates, Real Estate, Tenant's Rights, Family Law, Civil
Litigation, Criminal and Motor Vehicle Law, Consumer/Debtor Law,
and Administrative Law to employees, retirees, and dependents.
Tab 3 is an authentic copy of the Legal Services Plan dated
September 29,1993.
15. The CSUB Plan provides
benefits to employees of the Appellant who have been laid off or
otherwise rendered unemployed in specified circumstances. Tab 4
is an authentic copy of a Supplemental Agreement to the
Collective Agreement dated September 29, 1993 covering, inter
alia, the CSUB Plan, and including Exhibit C-1 to the
Collective Agreement "Canadian Supplemental Unemployment
Benefit Plan".
16. As noted above, the
Legal Services Plan is funded by the Appellant from the SCCF and
also from a non-SCCF source of funding. The Legal Services
Plan's non-SCCF funding is established by formula set out at
Article 6 of Exhibit F to the Collective Agreement, Supplemental
Agreement covering CAW-GM Canadian Legal Services Plan, which is
attached as Tab 3 of this Partial Agreed Statement of Facts, and
is further addressed at Appendix H-1 to the Collective Agreement
attached as Tab 2 to this Partial Agreed Statement of Facts. The
terms of this agreement provide that the Plan will be maintained
with a qualified trust company (or companies) as trustee. (The
deduction of non-SCCF funding to the Legal Services Plan is not
at issue in this litigation).
17. As noted above, during
the taxation year in issue, the CSUB Plan was also funded by the
Appellant both through the SCCF and from a non-SCCF source of
funding. The terms of Exhibit C to the collective agreement which
governed the CSUB Plan during the tax years in issue required
that the Appellant make contributions of funds into the CSUB Plan
in certain circumstances (quite apart from any obligation under
the terms of the SCCF), and that the CSUB Fund will be maintained
with a qualified trust company (or companies) as trustee. [See
page 57, Tab 4.] The Appellant contributes non-SCCF money to the
CSUB Plan according to the provisions set out at page 60 at Tab 4
to this Partial Agreed Statement of Facts. (The deduction of the
non-SCCF funding to the CSUB Plan is not at issue in this
litigation.)
18. Article 5 of the
Memorandum of Understanding 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.
This same term (other than the year of the Master Agreement
referred to ) also appeared in the Memoranda of Understanding
regarding SCCF entered into in conjunction with the 1984, 1987,
1990, 1996, 1999 and 2002 Collective Agreements. Authentic copes
of these Memoranda of Understanding are attached at Tabs 5, 6, 7,
8, 9, and 10, respectively, of this Partial Agreed Statement of
Facts.
19. The SCCF has been
continued in subsequent collective agreements effective 1996,
1999 and 2002. In all cases since the SCCF was established in
1984 the balance of the fund at the close of a collective
agreement has been carried over under the new collective
agreement. The future use of amounts accrued in the SCCF is open
to negotiation when collective bargaining takes place.
20. For example, the 1996
and 1999 collective agreement added as uses of the SCCF the
C.A.W. Leadership Training Program (Paid Educational Leave),
research, leadership and development activities of the CAW,
programs and activities of the GM/CAW Training Review Committee,
the Social Justice Fund, the Retiree Fund, the Skilled Trades
Fund, the Dependent Scholarship Fund, and the Medical Awareness
Fund. Tabs 8 and 9, respectively, are authentic copies of
Appendixes H and H-1 of the 1996 and 1999 collective
agreements.
21. No additional uses of
the SCCF were added in 2002. Tab 10 is an authentic copy of
Appendixes H and H-1 of the 2002 collective agreement.
22. During the 1995
taxation year a total of $2,270,817.70 was paid out of the
accrued balance in the SCCF, being $1,650,000 in respect of child
care and $620,817.70 in respect of the CSUB Plan. Tab 11 contains
authentic copies of monthly reports provided by the Appellant to
the CAW regarding the SCCF throughout the calendar year 1995. The
Appellant has been assessed on the basis that the amounts are
deductible in computing income for the 1995 taxation year.
23. Between the end of
1995 and the month of December 1999 a total of $19,574,234.78 was
paid out of the accrued balance in the SCCF. Of this total:
$4,649,840.77 was in respect of the Legal Services Plan;
$3,348,654 was in respect of childcare; $4,698,544.51 was in
respect of the CSUB Plan; $2,265,289.16 was in respect of the
P.E.L. (Paid Educational Leave) program; $1,127,805.66 was in
respect of activities of the GM/CAW Training Review Committee;
and $3,484,100.68 was in respect of the Health & Safety
Environment, Leadership Training and Research activities of the
CAW.
24. [There was no
paragraph 24 in the ASF.]
25. Tab 12 is a Schedule
accurately detailing the uses of funds in the years 1996, 1997,
1998 and 1999 from the amounts paid out of the balance recorded
in the SCCF as of the end the 1995 taxation year. The schedule
shows that the amount of $13,834,902, being the closing balance
in the SCCF account at the end of the 1995 taxation year, was
fully paid out by the end of January, 1999.
Appellant's Tax Treatment and Minister's
Reassessment
26. Each year, including
1995 and subsequent years, additional amounts are accrued to the
SCCF and deducted by the Appellant in the year that the overtime
to which they relate is worked by and employee of the Appellant.
The Appellant seeks to deduct the amounts in the year the
overtime is worked and the amounts are accrued to the SCCF. The
Respondent's view is that the amounts are deductible when
payments for qualifying purposes are triggered by either a
request or by the calculation producing a specific result,
depending on the purpose which is being supported.
27. The figure of
$13,834,902 which is employed in the pleadings is the closing
balance in the SCCF at the end of the 1995 year. The opening
balance in the SCCF at January 1, 1995 was $4,479,874. The
mechanics by which the reassessment at issue operated were to add
$13,834,902, i.e. the closing balance of the SCCF, to the
Appellant's income and to deduct under the heading
"Canadian Contingency Fund Accrual Reversed" the
opening balance of $4,479,874. The result was a net addition to
income of $13,834,902 - $4,479,874 equals $9,355,028 in respect
of SCCF. Tab 13 is an authentic copy of the T7W/C issued by the
Minister of National Revenue in conjunction with the assessment
under appeal.
28. The amount of
$9,355,028 ($13,834,902 less the opening balance of $4,479,874
equals $9,355,028) represents the net increase in the SCCF
balance during the 1995 taxation year, and is entirely
attributable to overtime worked in that year.
29. The Reassessment
issued by the Minister did not allow the Appellant the deduction
claimed in respect of the Special Canadian Contingency Fund.
[3] Paragraph 2 of the ASF describes
the method by which the Appellant would accrue a specific sum to
the SCCF; and paragraph 3 states that, for the 1993 Collective
Agreement, the specific sum was $2.00 per overtime hour worked by
all covered employees in excess of 5% of straight time hours
worked by all covered employees. The 1993 Collective Agreement
was in effect from September 1993 to September 1996.
Because the amount accrued each month to the SCCF was
calculated on a twelve-month rolling average, the amount accrued
for any particular month was based on that month and the 11
preceding months. Tab 11 of the ASF contains 12 monthly reports
from the Appellant to the Union ("CAW") regarding the
SCCF for the 1995 calendar year. To illustrate how the Appellant
accrued a specific amount to the SCCF for January 1995, the
following extract is taken from the first page of Tab 11.
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GM-CAW Special Canadian Contingency Fund
Pursuant to Appendix "H" of the
Master Agreement
Month: January 1995
Period:
February 1994 to January 1995
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Cumulative 12
Month Period
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Monthly
Average
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Straight Time Hours Worked
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44,386,576
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3,698,881
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Overtime Hours Worked
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8,202,436
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683,536
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5% of Straight Time Hours Worked
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XXX
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184,944
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Overtime Hours Worked in Excess of 5% Straight Time
Hours Worked
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XXX
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498,592
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Accrual Rate per Hour
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XXX
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$2.00
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Accrual @ $2.00 January 1995
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XXX
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$997,184
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[4] In paragraph 3 of the ASF, the
parties have agreed that the balance of accrual amounts in the
SCCF at the end of 1995 was $13,834,902. This amount is slightly
different from the amount $13,834,082 appearing in the Revenue
Canada reassessment form T7W-C at Tab 13 of the ASF. According to
the monthly statement for January 1995 at Tab 11 of the ASF, the
opening balance of accrued amounts in the SCCF at January 1, 1995
was $4,470,620. Again this amount is slightly different from the
amount $4,479,874 appearing in the Revenue Canada reassessment
form T7W-C at Tab 13 of the ASF. Although these differences are
not significant, I have attempted to compute the balance of
accrued amounts in the SCCF as at December 31, 1995 by using only
the monthly sheets at Tab 11 of the ASF.
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Opening Balance at January 1, 1995
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$4,470,620
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12 monthly accruals from January to December 1995
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11,463,857
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Subtotal
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15,934,477
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Amounts paid out of SCCF from January to December
1995
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2,270,817
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Balance of accrued amounts in SCCF at December 31,
1995
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$13,663,660
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[5] The above balance of $13,663,660
is consistent with the closing balance ($13,663,665) shown on the
monthly sheet for December 1995 at Tab 11 of the ASF. There is a
discrepancy, however, between the above year end balance and the
amount agreed between the parties as a year end balance:
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Balance at 31/12/95 per paragraph 3 of ASF
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$13,834,902
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Balance at 31/12/95 per Tab 11 of ASF
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13,663,665
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Difference
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$171,237
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The difference of $171,237 is not important to the issue which
must be decided in this appeal but, in my view, the method of
determining the year end balance of $13,663,660 as shown in
paragraph 4 above is important.
[6] As stated in paragraph 3 of the
ASF, Appendix "H" to the 1993 Collective Agreement set
the amount at $2.00 per overtime hour worked in excess of 5% of
straight time hours worked as the only source of amounts accrued
to the SCCF. Appendix "H" is a separate code which
defines the source of funds for the SCCF and the possible uses
for those funds. Because Appendix "H" is short, I will
set it out in full.
APPENDIX "H"
MEMORANDUM OF UNDERSTANDING
COVERING SPECIAL CANADIAN CONTINGENCY FUND
ENTERED into this twenty-ninth day of September
1993
BETWEEN
General Motors of Canada Limited, referred to hereinafter as
"Company"
AND:
National Union CAW, and its Locals No. 222, 1973, 199, 303,
1163, 27, and 636, said National Union CAW and said Local Unions
being referred to jointly hereinafter as "Union":
The Company and the Union agree that:
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, 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 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 Credit Units on
the payment of Regular Benefits under the CSUB Plan.
In the event that such CUCB amount otherwise would fall below
the applicable amount that would require an increased Credit Unit
cancellation rate from 3.33 to 5.00 Units for
Employees with one but less than five years of Seniority, the
Company will make weekly contributions to the CSUB Fund from the
balance in the SCC Fund. Such additional contribution amount from
the SCC Fund would be an amount that, together with the amount of
regular Company contributions to the CSUB Fund that week, would
be sufficient to pay all CSUB Benefits then due and payable and
still keep such CUCB from falling below the amount requiring the
increased cancellation rate described above. At any time the
balance of the SCC Fund is exhausted, the regular provisions of
the CSUB Plan would apply.
5. 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.
NOTE:
The underlining is actually in Appendix "H" to indicate
changes from the 1990 Collective Agreement.
[7] Paragraph 1 of Appendix
"H" required the balance in the SCCF under the 1990
Collective Agreement (as at September 1993) to be carried forward
into the 1993 Collective Agreement. Paragraph 2 set the accrual
rate at $2.00 per overtime hour worked under the 5% formula.
Paragraph 3 described how the SCCF would be used during the term
of the 1993 Collective Agreement. Specifically, it was to be used
primarily to support (i) Child Care Programs; (ii) the Legal
Services Plan; and (iii) the Canadian Supplemental
Unemployment Benefit Plan (the "CSUB Plan"). Although
the SCCF could also be used to fund "jointly agreed to
initiatives" as determined by an officer of the CAW and an
officer of the Appellant, there is no evidence of any such
"agreed to initiatives" during the term of the 1993
Collective Agreement.
[8] To provide a better description of
the three primary beneficiaries of the SCCF, I will consolidate
and edit certain statements from the ASF (with the corresponding
paragraph noted in the margin), and will add two comments based
on Tab 3 and Tab 4 of Exhibit 1:
Legal Services Plan
6. The Legal
Services Plan and the CSUB Plan each has both SCCF and
non-SCCF sources of funding.
14. The Legal Services
Plan provides specified personal legal services regarding Wills
and Estates, Real Estate, Tenant's Rights, Family Law, Civil
Litigation, Criminal and Motor Vehicle Law, Consumer/Debtor Law,
and Administrative Law to employees, retirees, and
dependents.
16. The Legal Services
Plan is funded by the Appellant from the SCCF and also from a
non-SCCF source of funding. The Legal Services Plan's
non-SCCF funding is established by formula set out at Article 6
of Exhibit F to the 1993 Collective Agreement.
Exhibit 1, Tab 3
Under Article 6 of Exhibit F to the 1993 Collective Agreement,
the Appellant's non-SCCF payments to the Legal Services Plan
were approximately 12 ¢ for each straight time hour worked
when the Plan's "funding excess" and the SCCF
balance exceeded $3,000,000; and 18 ¢ for each straight time
hour worked when such "funding excess" and balance were
below $3,000,000.
16 The terms of the
Legal Services Plan provide that the Plan will be maintained with
a qualified trust company (or companies) as trustee.
8. Funds are
contributed from the SCCF to the Legal Services Plan only when
non-SCCF funding to the Legal Services Plan is insufficient to
pay for the benefits provided in the Legal Services Plan. The
Trustee of the Plan performs the necessary calculation and
advises the Appellant when funding is required for the Legal
Services Plan.
Supplemental Unemployment Benefit Plan
15. The CSUB Plan provides
benefits to employees of the Appellant who have been laid off or
otherwise rendered unemployed in specified circumstances. Tab 4
is an authentic copy of a Supplemental Agreement to the 1993
Collective Agreement covering, inter alia, the CSUB
Plan.
17. During the taxation
year in issue, the CSUB Plan was funded by the Appellant both
through the SCCF and from a non-SCCF source of funding. The terms
of Exhibit C to the 1993 Collective Agreement which governed the
CSUB Plan during the tax year in issue required the Appellant to
contribute funds into the CSUB Plan in certain circumstances
(quite apart from any obligation under the terms of the SCCF),
and the CSUB Plan would be maintained with a qualified trust
company as Trustee. The Appellant contributed non-SCCF money to
the CSUB Plan according to the provisions set out at page 60 of
Tab 4.
Exhibit 1, Tab 4
The formula at page 60 of Tab 4 is very complicated but the
amount contributed directly to the CSUB Plan by the Appellant in
1995 appears to be in the range of 26 ¢ to 59 ¢ per
straight time hour worked; with slightly higher rates for time
and one-half and double time.
9.
Contributions from the SCCF to the CSUB Plan are not dependent on
the balance in the CSUB Plan reaching zero. The level of
contributions to be made from the SCCF to the CSUB Plan is
determined by the "Credit Unit Cancellation Base"
("CUCB") under the CSUB Plan. The Appellant's
Finance Department monitors the relevant balances and performs
the require computations. Contributions are made from the SCCF
when the amount in the CUCB falls below a specified minimum.
7. Amounts
accrued in the SCCF are paid to the Legal Services Plan and the
CSUB Plan when, on the application of a particular formula
designed for each Plan, a prescribed threshold in each Plan is
reached.
Child Care Programs
10. Payments in respect of
child care are not a function of prescribed thresholds. The child
care program is administered by the CAW. When a need for specific
funds is identified by the CAW, a request is made, and, there may
be a discussion to ensure that the use falls within the framework
of child care as has been agreed upon. Once the Appellant is
satisfied that the use is included in what was negotiated, the
payment is made.
11. The SCCF accrues an
amount equal to four and on half cents per straight time hour
worked for mutually agreed child care activities. This appears to
be an accrual within the SCCF itself. The SCCF is the only means
by which the Appellant funds the mutually agreed child care
activities. These funds are paid out when the union requests the
funds for a particular use and the usage is accepted as
appropriately employed for child care.
13. Appendix H-1 (Exhibit
1, Tab 2) to the 1993 Collective Agreement provides that, in the
event of conflict between the use of the accrual remaining in the
SCCF, to support the mutually agreed child care activities or
Legal Services Plan benefits or the CSUB Plan, the accrual would
be used first to support the mutually agreed child care
activities and then to support the Legal Services Plan.
[9] There is only one "CAW Legal
Services Plan" which provides legal assistance to those
employees of 20 different corporations who are represented by the
CAW. Exhibit A-2, Tab 5 lists the 20 corporate employers
including General Motors, Ford, Chrysler, Lear-Kitchener, 3M,
Kenworth and Mack Montreal. Tab 5 is a letter from CAW Legal
Services Plan requesting funds for the estimated cash
requirements for October 1996 (total $1,013,105) and allocating
the total among the 20 employers based on weighted usage.
[10] Exhibit A-2, Tabs 8 and 9 are an
example of a request for child care funding. Tab 8 is a letter
dated September 11, 1995 from the CAW to the Appellant asking for
$1,400,000 for the construction of the CAW Child Care Centre in
Oshawa. Tab 9 is the Appellant's Remittance Advice dated
November 3, 1995 showing payment of the $1,400,000. Because
there is no funding for the Child Care Programs apart from the
SCCF (unlike the Legal Services Plan and the CSUB Plan), the
entire amount of $1,400,000 was paid out of the SCCF. This
payment can be seen at Exhibit 1, Tab 11, the monthly statement
for November 1995. It was the only payment out of the SCCF in
November 1995.
[11] In paragraph 4 above, there is a table
which shows how the balance of accrued amounts in the SCCF
increased from an opening balance of $4,470,000 at January 1,
1995 to a closing balance of $13,663,000 at December 31, 1995.
That table (derived from the monthly statement in Exhibit 1, Tab
11) shows that the total of all amounts paid out of the SCCF
during 1995 was only $2,270,817. Exhibit 1, Tab 12 is a schedule
showing payments out of the SCCF during the four-year period
January 1996 to December 1999. The extreme right-hand column of
the schedule is a "rolling total" month by month.
According to the rolling total, the $13,663,000 balance in the
SCCF at December 31, 1995 was actually paid out over the 35
months from January 1996 to November 1998. If I take the balance
in the SCCF at December 31, 1995 to be $13,834,902 in accordance
with the ASF, that higher balance was not paid out of SCCF until
January 1999. See paragraphs 23 and 25 of the ASF.
[12] The only witness who testified for the
Appellant was Jim Cameron, the director of labour relations for
General Motors of Canada Limited. Mr. Cameron stated that when
the 1996 Collective Agreement was negotiated, the balance in the
SCCF was carried forward into the new agreement, and certain
additional beneficiaries of the SCCF were added. Those additional
beneficiaries are listed in Appendix "H" to the 1996
Collective Agreement. See Exhibit 1, Tab 8. Their identity is not
relevant but all beneficiaries under the 1996 Collective
Agreement were potential recipients of payments out of the SCCF
after October 1996. All of those beneficiaries appear on the
schedule (Exhibit 1, Tab 12) showing payments out of the SCCF in
the four-year period January 1996 to December 1999.
[13] Independent of the ASF, the parties
have agreed (Exhibit A-1) as follows:
(i) the amount $13,834,902 (the
accrued balance in the SCCF at December 31, 1995) was treated as
an expense in the Appellant's financial statements for the
year ended December 31, 1995;
(ii) that amount is also
recorded in "other current liabilities" in those same
financial statements; and
(iii) the Appellant's financial
statements as at December 31, 1995 were audited, and the external
auditors were of the opinion that the financial statements were
prepared according to Generally Accepted Accounting Principles
("GAAP").
There is no issue in this appeal concerning GAAP. There is no
issue as to whether the amount $13,894,902 may be deducted in
computing income or profit under subsection 9(1) of the Income
Tax Act. The only issues are (i) whether the balance in the
SCCF at the end of 1995 is an actual liability which has been
incurred and, if so, (ii) whether that liability is contingent.
See paragraph 12 of the ASF.
Analysis
[14] This appeal will be decided on the
interpretation of paragraph 18(1)(e) of the Income
Tax Act and its application to the facts herein:
18(1) In computing the income of a taxpayer
from a business or property no deduction shall be made in respect
of
(a)
...
(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;
The basic questions are whether the obligation accepted by the
Appellant in Appendix "H" of the 1993 Collective
Agreement is an actual liability and, if so, is it a
"contingent liability" within the meaning of paragraph
18(1)(e). In a recent decision (Wawang Forest Products
Ltd. v. The Queen, 2001 DTC 5212), the Federal Court of
Appeal considered paragraph 18(1)(e) and adopted the
following test for determining whether a liability was
contingent:
I should define a contingency as an event which may or may not
occur and a contingent liability as a liability which depends for
its existence upon an event which may or may not
happen.
(at page 5215)
There is much case law concerning paragraph 18(1)(e)
and its predecessor in the Act but, before turning to the
law, I will review in detail the terms of
Appendix "H" which is set out in full in paragraph
6 above.
[15] In paragraph 1 of Appendix
"H", the SCCF from the 1990 Collective Agreement was
"continued during the term of" the 1993 Collective
Agreement. Paragraph 2 of Appendix "H" is important
because it clearly describes the only source of money for the SCC
Fund as a fund which "will equal an accrual by the Company
of two dollars ($2.00) per overtime hour worked" under the
5% formula. That formula is demonstrated in the table at the end
of paragraph 3 above. Paragraph 2 did not require the Company
(i.e. the Appellant herein) to pay any amount to a trustee,
custodian, agent or other person. Paragraph 2 did not require the
Company to set aside or segregate or withdraw any amount from its
ordinary working capital. See paragraph 12 of the ASF. Paragraph
2 required the Company only to accrue $2.00 per overtime hour
worked under the 5% formula. In other words, paragraph 2 required
the Company to make a bookkeeping entry and no more.
[16] Paragraph 3 of Appendix "H"
described how the amount accrued for the SCCF would be used. Here
is the first sentence in paragraph 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, and then only if needed.
This sentence deserves a number of comments:
(i) The first phrase refers to
the term of the 1993 Collective Agreement (September 1993 to
September 1996) which includes the 1995 calendar year - the year
under appeal.
(ii) The negotiated Child Care
Programs are funded only by the SCCF, and then, only when
"the Appellant is satisfied" that a use
"identified by the CAW" is included in "what was
negotiated". See paragraph 10 of the ASF. A request for
money by the CAW does not automatically trigger a payment by the
Appellant. The two parties (CAW and the Company) must agree with
respect to each identified use. See Exhibit A-2, Tabs 8 and
9 as an example of a request by the CAW.
(iii) The Legal Services Plan is
funded primarily by direct contributions from the Appellant,
based on a formula of 12 ¢ per straight time hour worked if
the Plan and the SCCF are above a certain threshold, and 18 ¢
per straight time hour worked if the Plan and the SCCF are below
that threshold. See Exhibit 1, Tab 3 summarized in paragraph 8
above. This primary funding flows directly from the Appellant to
the Legal Services Plan each month based on the estimated needs
of the Plan as determined by its independent administrator. See
Exhibit A-2, Tab 5 as an example of the administrator's
request for funds for the month of October 1996.
(iv) The CSUB Plan is funded primarily
by direct contributions from the Appellant, based on a
complicated sliding formula of at least 26 ¢ per straight
time hour worked in 1995. See Exhibit 1, Tab 4 summarized in
paragraph 8 above. I assume that this primary funding flows
directly from the Appellant to the trustee of the CSUB Plan each
month but I have not found any direct evidence or agreed fact on
this point.
(v) The first sentence of paragraph 3
of Appendix "H" ends with the phrase: "and then
only if needed". These words imply contingency. I will have
more to say about this phrase in paragraph 25 below.
[17] The second sentence in paragraph 3 of
Appendix "H" states:
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.
This is nothing more than an agreement to agree. It does not
create any liability. Mr. Cameron's evidence is that there
were no "jointly agreed to initiatives" in 1995. The
third and fourth sentences in paragraph 3 describe how the
balance in the SCCF will be computed at any point in time. Each
sentence uses the words "cumulative accrual"; no
reference to liability.
[18] Paragraph 4 of Appendix "H"
is concerned only with the "use of the SCC Fund for support
of the CSUB Plan". Its use is "determined solely by the
amount of the Credit Unit Cancellation Base ("CUCB").
According to paragraph 9 of the ASF, the Appellant's Finance
Department monitors the relevant balances and performs the
requisite calculations; and the Appellant contributes from the
SCCF when the amount in the CUCB falls below a specified minimum.
Paragraph 5 of Appendix "H" simply provides that the
Appellant and the CAW would negotiate the usage of "any
accrual" remaining in the SCCF at the end of the 1993
Collective Agreement. This ends my review in detail (paragraphs
15 to 18 inclusive) of the terms of Appendix "H".
[19] Left to myself, I would conclude that
Appendix "H" (Memorandum of Understanding Concerning
Special Canadian Contingency Fund) to the 1993 Collective
Agreement, by itself, did not create or impose any liability on
the Appellant with respect to payments out of that Fund.
Black's Law Dictionary, Seventh Edition (1999) defines
"liability" as follows:
liability:
The quality or state of being legally obligated or accountable;
legal responsibility to another or to society, enforceable by
civil remedy or criminal
punishment.
(Page 925)
Having regard to the accrued balance of $13,834,902 in the SCC
Fund as at December 31, 1995, I cannot find any identifiable
creditor who could make a legally enforceable claim against the
Appellant with respect to all or any part of that balance on that
date.
[20] Exhibit A-1 is a letter written the day
before the hearing from the Respondent's counsel to the
Appellant's counsel stating in part:
As you know, it is the Respondent's view that the fact
that the balance in the Special Canadian Contingency Fund was
deducted on the Appellant's financial statements and the
issue of whether the financial statements were prepared according
to GAAP are irrelevant. These facts might be relevant if the
"most accurate picture of profit" and the calculation
of profit under section 9 of the Income Tax Act were
issues raised in this appeal, however, the Respondent does not
take issue with the calculation of profit under section 9.
Notwithstanding the above, for the purposes of this litigation
and without prejudice to the Respondent's objection that this
is irrelevant, the Respondent admits the following:
· the amount
of $13,834,902 was treated as an expense in the Appellant's
financial statements for its year ended December 31, 1995;
· the amount
is also recorded in "Other current liabilities" in the
Appellant's financial statements for that year;
· the
financial statements were audited and the external auditors were
of the opinion that these statements were prepared according to
Generally Accepted Accounting Principles; ...
The position of the parties on the question of
"liability" is confirmed in the following sentence
taken from paragraph 12 of the ASF:
... The parties to this litigation dispute whether the
$13,834,902 balance in the SCCF as at the end of the taxation
year is an accounting entry that represents an actual liability
that has been incurred, and if incurred, whether the liability is
contingent.
There is no doubt that the $13,834,902 amount was treated as
an expense in the Appellant's audited financial statements
for 1995, and was also recorded among "other current
liabilities" in those same financial statements. This case
may illustrate one of the differences between accounting and law.
An accountant may look at what appears to be a de facto
obligation and, as a matter of caution, record it as a liability;
but a lawyer looking at the same obligation may conclude that
there is no liability unless an identified creditor has a legally
enforceable claim.
[21] The SCC Fund grew during 1995 from an
opening balance of $4,479,874 to a year end balance of
$13,834,902 because there were so few amounts paid out of the
Fund in contrast with the amounts accrued during the year.
According to Exhibit 1, Tab 11, the following amounts were paid
out month-by-month through 1995.
|
|
Child Care
Program
|
Legal
Services
Plan
|
CSUB Plan
|
|
January
|
-
|
-
|
-
|
|
February
|
-
|
-
|
-
|
|
March
|
-
|
-
|
-
|
|
April
|
-
|
-
|
-
|
|
May
|
$250,000
|
-
|
-
|
|
June
|
-
|
-
|
-
|
|
July
|
-
|
-
|
-
|
|
August
|
-
|
-
|
$502,568
|
|
September
|
-
|
-
|
$118,249
|
|
October
|
-
|
-
|
-
|
|
November
|
$1,400,000
|
-
|
-
|
|
December
|
-
|
-
|
-
|
|
Totals
|
$1,650,000
|
-
|
$620,817
|
Similarly, according to Exhibit 1, Tab 12, during the 12
months of 1996 there was one amount paid out of the SCCF for
Child Care; four amounts for legal services; and one amount for
CSUB. The rate at which amounts were paid out of the SCCF in 1995
and 1996 indicate that the Appellant's obligation with
respect to the SCCF was not a liability at law. If it was a
liability in accordance with "well-accepted principles of
business (or accounting) practice", then I think it was a
contingent liability depending upon defined thresholds in the
legal services plan and CSUB plan, and the acceptance of specific
requests from the CAW with respect to child care.
[22] Appellant's counsel relied on three
recent court decisions. Canadian Pacific Limited v. The
Minister of Revenue (Ontario), 99 DTC 5286, is a decision of
the Ontario Court of Appeal. As a Schedule 2 employer under the
Ontario Workmen's Compensation Act, CP was liable to
reimburse the Workmen's Compensation Board for benefits
payable to CP workers. When the Board made an award to a CP
worker, CP would calculate an amount based on the worker's
life expectancy; that amount would be added to its "Deferred
Liabilities - Workmen's Compensation" account; and that
amount would then be deducted as a charge to income. In the
taxation years 1981 to 1984, CP deducted in computing income
those amounts which had been added to its "Deferred
Liabilities" account. The deduction of those amounts was
disallowed by the Ontario Minister of Revenue under paragraph
18(1)(e) of the Federal Act which was worded
somewhat differently for 1981-1984. At trial, CP's claim was
dismissed. Upon appeal, CP was successful. Borins J.A., writing
for the Court, stated at page 5293:
[34] Following the reasoning of
Pigeon, J. in Time Motors, the annual amounts which CP
added to its account should not be considered apart from its
statutory liability under the Workmen's Compensation
Act. Under that Act, CP was obligated to reimburse the
Workmen's Compensation Board for awards made by the Board to
its disabled workers. At the time CP added the capitalized amount
to the account, in respect to a disabled worker, it did so
pursuant to a statutory obligation. Thus, as in Time
Motors, each time an amount was added to the account, it was
on the basis of an existing liability, or obligation. That
liability was not contingent, in the sense that, at the relevant
time, it was a liability that was not fixed and absolute, but one
which may become so in the future with the occurrence of
some uncertain event. Rather, at the time of transfer to the
account, there was an existing, ascertained liability; and not a
liability which would arise only upon the happening of a future
event. At the time a payment was made to the account, the
following facts were ascertained: CP's statutory liability to
pay the award made to its disabled worker; the monthly amount of
the award; the effective date of the award; and that monthly
payments would be paid to the worker for the duration of his or
her disability.
The last sentence in the passage just quoted shows that CP had
a real liability when it added the particular amount to its
"Deferred Liabilities" account. In this appeal by
General Motors, the Appellant had no real liability to any person
with respect to any part of the $13,834,902 as at December 31,
1995.
[23] In Fédération des
caisses populaire Desjardins de Montréal et de l'Ouest
du Québec v. Canada, 2002 DTC 7413, the taxpayer's
office workers were required to take their vacations in years
after the year in which a particular vacation was actually
earned. In 1992, the Fédération deducted $752,000
representing employer contributions payable with respect to
vacation pay earned by employees in 1992 but to be paid in
subsequent years. The Minister disallowed the deduction and, on
appeal, the taxpayer's appeal to this Court was dismissed.
Upon further appeal to the Federal Court of Appeal, the
Fédération was successful. Writing for the majority
in a divided Court, Desjardins J.A. stated in paragraphs 44 to
46:
[44] It follows that once the
vacation pay is earned, the obligation to pay the employer
contributions comes into being. The vacation pay will be paid
later and the employer contributions will be paid within the next
fifteen days. However, the employer's debt to the
Unemployment Insurance Commission and the various provincial
administrative bodies is "incurred" from the day on
which the vacation pay originates was acquired.
[45] My interpretation
corresponds to that adopted by the respondent herself on vacation
pay. The respondent agreed that in the case at bar the vacation
pay which was all accumulated by the appellant's employees
during 1992 was a debt to those employees in 1992 even though the
debt was not yet liquidated. ...
[46] In my opinion, however, the
respondent and the trial judge did not take into account the
nexus existing between the vacation pay and the employer
contributions. Once the legal obligation in respect of future
vacations becomes a reality, the obligation in respect of
employer contributions becomes one as well. The one does not go
without the other.
In paragraph 46, the learned appeal court Justice writes of a
"legal obligation". In this appeal, the Appellant had a
legal obligation to accrue the $13,834,902 but no legal
obligation in 1995 to pay any part of that amount.
[24] And lastly, in Wawang Forest
Products Limited et al v. The Queen, 2001 DTC 5212,
Wawang and Nerak were in the forestry business, and they
contracted out their logging activities. Upon each payment to a
subcontractor, they held back a certain amount pending
confirmation from the Ontario Worker's Compensation Board
that the subcontractor had made the required payments to the
Board. In the taxation years 1987 to 1991, the corporations
deducted the holdbacks in question. The Minister disallowed the
deductions and, upon appeal to this Court, the assessments were
upheld. Upon further appeal to the Federal Court of Appeal, the
corporations were successful. Writing for a unanimous Court,
Sharlow J.A. stated in part:
[11] The generally accepted test
for determining whether a liability is contingent comes from
Winter and Others (Executors of Sir Arthur Munro Sutherland
(deceased)) v. Inland Revenue Commissioners, [1963] A.C. 235
(H.L.), in which Lord Guest said this (at page 262):
I should define a contingency as an event which may or may not
occur and a contingent liability as a liability which depends for
its existence upon an event which may or may not happen.
[17] It remains only to apply
the Winter principle to the facts of this case. The facts
are not disputed. The Wawang contractors were engaged to cut,
delimb and skid logs. Their contract provided that they would be
paid bi-weekly on the basis of a stipulated amount per cord. The
Nerak contractors were engaged to haul wood from various logging
sites to the mills. They were to be paid bi-weekly on the
basis of a stipulated amount per metric tonne of wood
delivered.
[18] The amount of wood cut or
delivered was determined by independent scalers, who would
provide a scaling slip. The practice was that the completed
scaling slip was accepted as conclusive proof as to the work
done. Once the scaling slips were presented to the taxpayers, the
work of the contractors was considered complete.
[20] The taxpayers were aware
that if they paid a contractor in full upon completion of its
work, they might find later that the contractor had failed to
make the required workers' compensation contributions. In
that event, the taxpayers could be in the position of having to
make good a contractor's default and being left only with an
unsecured right of recovery against the contractor.
[32] ... the contract price
becomes an absolute obligation of the taxpayers when the
contractors complete their work, as evidenced by the scalers
slips.
[33] ... The holdbacks thus
constitute amounts due to the contractors and the taxpayers have
a continuing obligation to pay the holdbacks even though, as long
as no clearance certificates are provided, they may choose
whether to pay them to the contractors or to the Workers'
Compensation Board for the account of the contractors. Until
payment by one of these methods (or by setoff in the event of a
penalty for trespass), the obligation remains outstanding.
In paragraph 33, the Federal Court of Appeal speaks of "a
continuing obligation to pay the holdbacks". At December 31,
1995, General Motors did not have any legal "obligation to
pay" any part of the $13,834,902 in dispute.
[25] In paragraph 16 above, I reviewed in
detail the first sentence in paragraph 3 of Appendix
"H" (Exhibit 1, Tab 1). That sentence (describing how
the amount accrued for the SCCF would be used) ends with the
phrase "and then only if needed". For me, that phrase
is at least an indication of contingency. There were no amounts
to be paid out of the SCCF 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. The contingent
nature of the Appellant's obligation is reinforced by the
phrase "and then only if needed".
[26] Having regard to the three cases relied
on by counsel for the Appellant, nothing in those cases causes me
to qualify the conclusion just expressed. Indeed, the description
of "contingent liability" from Winter adopted by
the Federal Court of Appeal in Wawang persuades me that
any obligation on the Appellant to pay an amount out of the SCCF
during the 1993 Collective Agreement was a contingent
obligation.
[27] In paragraphs 25 and 26 above, I refer
only to the Appellant's "obligation" to pay an
amount out of the SCC Fund because I am not satisfied that the
Appellant had a legal liability to pay any amount out of the
$13,894,902 as at December 31, 1995. In my view, there is
little merit in the Appellant's case. The appeal is
dismissed, with costs with respect to the issue discussed
above.
[28] There were four other significant
issues which were settled (without costs) by the parties before
the hearing. The appeal for the 1995 taxation year will be
allowed, in part, only for the purpose of giving effect to that
settlement.
Signed at Ottawa, Canada, this 14th day of November, 2003.
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