Gladys Vivian v. Her Majesty the Queen, [1993] 2 CTC 3131, 95 DTC 291

McArthur, T.C.C.J.:— This appeal was heard in St. John’s, Newfoundland pursuant to the informal procedure, concerning the appellant's 1991 taxation year.

The issue to be decided is whether the appellant may claim as a deduction an additional contribution to a Registered Pension Plan (R.P.P.) made under section 32 of the Public Service (Pensions) Act (P.S.(P.) Act) revised statutes of Newfoundland, Chapter 312.

The facts are not in dispute. The appellant commenced employment with the government of Newfoundland and Labrador in 1980 and remained as such during the relevant period. On August 30, 1982, she purchased 11 years 10 months of service for $21,606.66 under section 32 of the P.S.(P) Act. Her intention was to accumulate benefits to become eligible for retirement as soon as possible. During 1991, she made regular contributions to a R.P.P. in the amount of $2,488.60 and her employer also contributed, to the same plan, on her behalf. There is no argument over these two contributions.

During 1991 the appellant also made an additional voluntary contribution (A.V.C.) in the amount of $3,054.24 to the R.P.P. which the Minister disallowed giving rise to this appeal.

The appellant made reference to estoppel and past correspondence with Revenue Canada which I do not find relevant in determining the issue.

The dispute is whether the A.V.C. is deductible from her 1991 income. As a preliminary matter I find that the 1991 contribution in question is an additional voluntary contribution (A.V.C.) which is a money purchase provision of the pension plan in question. A.V.C. is defined in subsection 248(1) of the Income Tax Act (Act) as:

additional voluntary contribution” to a registered pension plan means a contribution that is made by a member to the plan, that is used to provide benefits under a money purchase provision (within the meaning assigned by subsection 147.1(1)) of the plan and that is not required as a general condition of membership in the plan;

Money purchase provision is defined in subsection 147.1(1) as:

money purchase provision” of a pension plan means terms of the plan

(a) which provide for a separate account to be maintained in respect of each member, to which are credited contributions made to the plan by, or in respect of, the member and any other amounts allocated to the member, and to which are charged payments made in respect of the member, and

(b) under which the only benefits in respect of a member are benefits determined solely with reference to, and provided by, the amount in the member's account;

The relevant legislation specifically governing employee deductions includes paragraphs 8(1)(m) and 147.2(4)(a), (b), (c) of the Act and section 32 of the P.S.(P.) Act, R.S.N. 1970 chapter 319 as amended. They read as follows:

8(1) In computing a taxpayer's income for a taxation year from an office or employment, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(m) the amount in respect of contributions to registered pension plans that, by reason of subsection 147.2(4), is deductible in computing the taxpayer's income for the year;

147.2(4) There may be deducted in computing the income of an individual for a taxation year ending after 1990 an amount equal to the aggregate of

(a) the aggregate of all amounts each of which is a contribution (other than a prescribed contribution) made by the individual in the year to a registered pension plan in respect of a period after 1989, to the extent that the contribution was made in accordance with the plan as registered,

(b) the least of

(i) the amount, if any, by which

(A) the aggregate of all amounts each of which is a contribution (other than an additional voluntary contribution or a prescribed contribution) made by the individual in the year or a preceding taxation year and after 1945 to a registered pension plan in respect of a particular year before 1990, if all or any part of the particular year is included in the individual's eligible service under the plan and if

(1) in the case of a contribution that the individual made before March 28, 1988 or was obliged to make under the terms of an agreement

in writing entered into before March 28, 1988, the individual was not a contributor to the plan in the particular year, or

(II) in any other case, the individual was not a contributor to any registered pension plan in the particular year

exceeds

(B) the aggregate of all amounts each of which is an amount deducted, in computing the individual’s income for a preceding taxation year, in respect of contributions included in the aggregate determined in respect of the individual for the year under clause (A),

(ii) $3,500, and

(iii) the amount determine by the formula

($3,500 x Y) — Z

where

Y is the number of calendar years before 1990 each of which is a year

(A) all or any part of which is included in the individual's eligible service under a registered pension plan to which the individual has made a contribution that is included in the aggregate determined under clause (i)(A) and in which the individual was not a contributor to any registered pension plan, or

(B) all or any part of which is included in the individual's eligible service under a registered pension plan to which the individual has made a contribution

(I) that is included in the aggregate determined under clause (i)(A),

(Il) that the individual made before March 28, 1988 or was obliged to make under the terms of an agreement in writing entered into before March 28, 1988, and in which the individual was not a contributor to the plan, and

Z is the aggregate of all amounts each of which is an amount deducted, in computing the individual’s income for a preceding taxation year,

(A) in respect of contributions included in the aggregate determined in

respect of the individual for the year under clause (i)(A), or

(B) under subparagraph 8(1)(m)(ii) (as it read in its application to the 1990 taxation year) in respect of additional voluntary contributions made in respect of a year that satisfies the conditions in the description of Y, and

(c) the lesser of

(i) the amount, if any, by which

(A) the aggregate of all amounts each of which is a contribution (other than an additional voluntary contribution, a prescribed contribution ora contribution included in the aggregate determined in respect of the individual for the year under clause (b)(i)(A)) made by the individual in the year or a preceding taxation year and after 1962 to a registered pension plan in respect of a particular year before 1990 that is included, in whole or in part, in the individual's eligible service under the plan

exceeds

(B) the aggregate of all amounts each of which is an amount deducted, in computing the individual’s income for a preceding taxation year, in respect of contributions included in the aggregate determined in respect of the individual for the year under clause (A), and

(ii) the amount, if any, by which $3,500 exceeds the aggregate of the amounts deducted by reason of paragraphs (a) and (b) in computing the individual’s income for the year.

32. Subject to this Act and the prior approval of the Lieutenant-Governor in Council, the Minister may make regulations establishing conditions under which an employee or a person who is about to become an employee may purchase service which shall be counted as pensionable service. (This section 32 and regulation are the same as the amended section and regulation that is applicable in the case at bar. New regulations did not come into effect until September 1, 1991.)

The scheme of the Act is such that in order to be deductible, a money purchase A.V.C. must meet the conditions of subsection 147.2(4).

The appellant submits that the A.V.C. is for service after 1989 pursuant to paragraph 147.2(4)(a) of the Act. The respondent concedes that the contribution can be made under section 32 of the P.S.(P.) Act, but takes the position that the A.V.C. was for past non-existent service and therefore paragraph 147.2(4)(b) applies. The respondent has taken this position because paragraph 147.2(4)(b) explicitly excludes A.V.C.s on account of past service. Therefore the contribution would not be deductible.

The distinction between past and current A.V.C.s is crucial. The Canadian Tax Service has the following commentary on A.V.C.s at page 147-313:

[P]ast service additional voluntary contributions (A.V.C.s), being optional contributions by a member to be used to provide benefits under a money purchase provision, are only deductible if made before Oct. 9, 1986 and then only in computing income for the 1986 tax year. Accordingly, A.V.C.s are excluded from the ambit of the rules in paragraph 147.2(4)(b) and (c) concerning service before 1990 — ie they are not deductible thereunder.

However, current service A.V.C.s made after 1990 are deductible by an employee under paragraph 147.2(4)(a) For the 1991 and subsequent taxation years, current service A.V.C.s are restricted by the P.A. pension adjustment limits.

The issue is therefore narrowly focused on the nature of non-existent service as purchased under section 32 of the P.S.(P.) Act. If the contribution was an A.V.C, for past service as prescribed under either paragraph 147.2(4)(b) or (c), it will not be deductible. On the other hand, if the contribution was a money purchase A.V.C. made according to the conditions found under paragraph 147.2(4)(a), it will be deductible subject to certain limits.

The legislation was changed immediately prior to 1991 and, as a result, there is no established case law. Section 32 of the PS.(P) Act however, was considered at length by Judge Rip in Squires v. M.N.R., [1990] 2 C.T.C. 2640, 91 D.T.C. 62 commencing at page 2641 (D.T.C. 63). In the Squires case the dispute was the interpretation of section 32 and how the contribution should be treated under, what was then, section 8 of the Act. At the time of the decision section 8 was structured similarly to subsection 147.2(4). With a liberal interpretation of subparagraph 8(1)(m)(i) current contributions could be deducted subject to a 3,500 limit.

Mr. Squires argued that the A.V.C. pension contribution he purchased was for past service while working for the Bell Telephone Company that had no pension plan. This situation was provided for under subparagraph 8(1)(m)(ii). He wanted to have the current contribution limit of $3,500 and an additional limit of $3,500 for past services.

Judge Rip stated at page 2645 (D.T.C. 67):

In order to be permitted to deduct a contribution to a pension plan in computing income for a taxation year, the contribution must be on account of current services or past services: paragraph 8(1)(m) of the Act. It is the terms of the pension plan to which the employee contributes which determine the quantum of the employee's contribution to the plan and toward what type of service the employee may make contributions. If the terms of the pension plan permit an employee to make contributions with respect to past service, the terms provide what past services are eligible for contribution : service when the employee had no pension plan, service when the employee did not contribute to the employer's pension plan, service with different employers. The terms of the plan ought to be clear.

Judge Rip goes on to hold that the purchase of non-existent service under section 32 of the plan does not fall into any of these situations (C.T.C. 2646; D.T.C. 67):

The service so purchased is not past service. Subsection 3(a) of the regulations is simply a mechanism to determine the amount the employee must pay to purchase service; the provision does not suggest the employee may purchase service actually done by that person in the past.

The purchase of service contemplated by section 32 is simply the acquisition of service by an employee, totally unrelated to his past employment, which is added to his pensionable service.

Judge Rip concluded, after a thorough review of section 32 and relevant regulations, that any pension contribution under section 32 was not for past service. It was simply service which he was permitted to add to his pensionable service within the purposes of the Pensions Act. Therefore the additional contributions were only deductible as A.V.C. within the limits set out in subparagraph 8(1)(m)(i) of the Act.

I agree with the ratio of the Squires case. The A.V.C. made by Ms. Vivian was not for past service as set out in paragraphs 147.2(4)(b) and (c) of the Act. I find that the A.V.C. fits within the qualifications set out in paragraph 147.2(4)(a). The contribution in question is part of a money purchase provision allowing the employee to make additional payments in a year for the purpose of building their pension plan. The most important qualifications under paragraph 147.2(4)(a) are that the contribution be made in a year after 1989 and that the payment be in accordance with the plan as registered. There was no evidence tendered disputing the fact that the appellant had made the contribution in 1991 and that the contribution was made pursuant to the plan. I therefore find that the A.V.C. for non-existent service falls under paragraph 147.2(4)(a).

Having reached this point I am still left with the question of what limits are placed on a contribution made under this section. After reviewing the materials and hearing the parties at trial, I concluded that the arguments presented did not fully address this matter. It was my view that some additional research was required in the area of limitations on employee contributions.

I have found some guidance from a number of secondary sources. For example a review of the new pension scheme of the Act has been conducted by John Solursh and Jeremy Forgie in “Tax Assisted Retirement Savings: An Overview of the New System and its Application to Registered Pension Plans”, as found in Income Tax and Goods and Services Tax Planning for Executive and Employee Compensation and Retirement, 1991 Corporate Management Tax Conference (Toronto: Canadian Tax Foundation, 1992). At page 7:5 the authors make the following comment regarding the legislative intention behind the pension reforms impacting on the 1991 tax year:

A major criticism of the pre-1991 provisions of the ITA concerning retirement savings was that the system effectively permitted a significantly higher degree of tax-assisted retirement savings through an employer-sponsored defined benefit pension plan than a private individual could provide through his or her RRSP. The new system attempts to remedy this imbalance by providing fairer and more flexible contribution limits.

The new legislation recognizes that employees with very good employer sponsored plans were previously much better off than the private individual with only an R.R.S.P. The authors further note the limitation scheme that will be imposed on pension plan contributions in the new era was designed to rectify this imbalance:

Under the new system, commencing in the 1991 tax year, there is a uniform comprehensive limit on tax-assisted retirement savings of 18 per cent of an individual's earnings. The 18 per cent contribution limit applies (directly or indirectly) to all types of registered retirement income vehicles (that is, RPPs, deferred profit- sharing plans [DPSPs], and RRSPs). The limit also applies to aggregate contributions by both employees and their employers.

The learned authors specifically refer to the limits on deductions under section 147.2 of the Act beginning at page 7:19:

Unlike the former provisions under the ITA, new section 147.2 and the draft regulations do not directly limit contributions under money purchase provisions. In general, contributions, both employee and employer, will be fully deductible to the extent that they are made in accordance with the terms of the plan as registered. However, contribution limits are indirectly regulated through the application of PA [pension adjustment] limits contained in subsection 147.1(8) and (9).

A more detailed explanation on the limitations imposed by the new legislative regime can be found in a paper by Mary M. Meany entitled, “ Income Tax Rules Affecting Pensions and Pension Plans”, in Pensions: Advising Clients in a Changing Environment, The Law Society of Upper Canada, Department of Continuing Education (Oct., 1991). Ms. Meany's discussion on the limits on money purchase and R.R.S.P. contributions is particularly helpful. The author describes a money purchase plan and the limits imposed upon it thusly:

A money purchase pension plan (also called a defined contribution pension plan) is an RPP to which the employer contributes fixed amounts, which could be based on a percentage of salary. Employees may be required or permitted to contribute. A money purchase R.P.P. does not promise a specific amount of an annual pension to its members. Instead a retiring or terminated member will receive the pension which can be purchased with the contributions and income that have accumulated to his credit.

Commencing in 1991, the limit on the total of contributions made by or on behalf of an individual to a money purchase R.P.P. for a calender year is the lesser of (a) 18 per cent of the individual’s compensation in that year, and (b) the dollar maximum amount.

The money purchase limits are defined in subsection 147.1(1) of the Act. These limits are not applicable in the case at bar as the appellant is governed by the lower of the two limits or 18 per cent of her income.

The conclusion that I draw from Ms. Meany's definition is that employer and employee contributions to a plan are restricted to 18 per cent of income. This total of employer and employee contributions under a money purchase plan is known as the pension adjustment for the year. Therefore the pension adjustment in any year cannot exceed 18 per cent of the employee's income in the year.

The second tier to this regime is the R.R.S.P. limits. The purpose of the R.R.S.P. limits is to allow employees who either have an insufficient plan or no plan at all to supplement the contributions on their own. This provision will allow these employees to close the gap between themselves and employees with more fully funded employer-sponsored plans.

Ms. Meany describes R.R.S.P. contribution limits in the following manner:

The total of all contributions to an individual’s R.R.S.P. for a calender year cannot be greater than 18 per cent of his earnings in the previous year (up to a dollar maximum), less his PA of the previous year and less his PSPA (if any). See paragraph 146(1)(g.1) of the Act.

What the legislation has done is to recognize that employees with a fully funded employer-sponsored pension plan, will have a very high pension adjustment. As a result, they will have adequate funds for their pension plan and will not need to supplement it with an R.R.S.P. contribution.

However, an employee with a poorly funded plan will have a low pension adjustment level in the year. This will mean that there will be a gap between 18 per cent of income and the pension adjustment in the year. An employee who experiences this shortfall in one year, can, in the following year, bridge this gap with an R.R.S.P. contribution. The net effect is that employees, whether with or without plans, are limited to this 18 per cent of income figure or the applicable money purchase limit figure.

I conclude that the contributions in question are deductible under paragraph 147.2(4)(a) subject to the limitations noted above and found at subsection 147.1(8) and paragraph 146(1)(g.1). The appeal is therefore allowed and the assessment is referred back to the Minister for reconsideration and reassessment.

The appellant has been successful in her subsection 147.2(4) argument. While the appellant may not be able to claim this deduction due to the fact that it would cause her to exceed either her pension adjustment, or her R.R.S.P. contribution limits, I find that she has been substantially successful in a complex appeal, she is allowed costs.

Appeal allowed.