Douglas J. Squires v. Minister of National Revenue, [1990] 2 CTC 2640, 91 DTC 62

Rip, T.C.J.: —Douglas J. Squires ("Squires"), the appellant, appeals from reassessments of tax for 1985 and 1986 in which the Minister of National Revenue, the respondent, increased his tax liabilities by reducing deductions claimed for past service pension plan contributions from $6,165.47 and $6,269 respectively to the amount of $3,500 for each of 1985 and 1986 on account of current service contributions.

The facts are not in issue. The dispute between the parties is the interpretation of section 32 of the Public Service (Pensions) Act, R.S.N. 1970, c. 319 (“Pensions Act") and subparagraph 8(1)(m)(ii) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

Since 1965 Squires has been employed by the Marine Institute, previously known as College of Fisheries, Navigation, Marine Engineering and Electronics, an agency of the Government of Newfoundland. He contributed to his employer's pension plan, which was eventually merged into the pension plan established by the Pensions Act ("pension plan”). During the period 1958 to 1965 Squires was employed by The Bell Telephone Company of Canada (“Bell”) in Montreal. Bell had no pension plan at the time, according to Squires.

On May 26, 1982 Squires elected to purchase a period of five years for pension purposes in accordance with section 32 of the Pensions Act and regulations made thereunder at a cost of $23,234. The amount was to be paid by a payroll deduction of $209.04 for each pay period. Before making the election Squires spoke to officials of the Pension Branch of the Newfoundland government and personnel in the St. John's District Office of Revenue Canada. Squires was advised he would be eligible to deduct, in computing income, the contributions made to purchase the five years as a past service contribution in accordance with subparagraph 8(1)(m)(ii) in addition to his contribution for current services.

Squires' position is that in electing pursuant to section 32, he was purchasing past services for a five-year period while employed with Bell.

Section 32 of the Pensions Act reads:

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.

Regulation 387/78, the only regulation made by the Lieutenant-Governor in Council pursuant to section 32, provided:

1. These regulations may be cited as The Public Service (Pensions) (Purchase of Service) Regulations, 1969.

2. In these regulations

(a) "Act" means The Public Service (Pensions) Act, 1968;

(b) "employee" includes

(i) any person deemed to be an employee by regulations made under Section 34 of the Act;

(ii) a person who is about to become an employee.

3. The conditions under which an employee may purchase service which shall be counted as pensionable service are

(a) the employee shall pay a sum equivalent to twice the amount which he would have contributed under Section 4 of the Act if he had been an employee contributing under that section during the whole period in respect of which the service is purchased based upon the salary payable to him at the date of purchase or be payable to him on commencement of his employment;

(b) interest on any sum due under these regulations shall be payable by the employee from the date of purchase to the date of payment, said interest to be calculated annually on the balance of principal owing at the time at the rate of 6V2 per centum per annum; and

(c) the employee may pay all sums payable under this regulation by instalments over a period not exceeding the period of service purchased and the instalments may be deducted from the salary of the employee.

The regulation was repealed effective January 1, 1990.

Subparagraph 8(1)(m)(ii) of the Act reads:

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) amounts contributed by the taxpayer in the year to or under a registered pension fund or plan,

(ii) not exceeding in the aggregate, the lessor of

(A) his contribution limit for the year under this subparagraph in respect of the fund or plan, paid by him in the year into or under the fund or plan in respect of services rendered by him previous to the year while he was not a contributor, and

(B) that part of an amount paid by him in the year into or under the fund or plan in respect of services rendered by him previous to the year while he was not a contributor that is not in excess of the product obtained by multiplying the number of years previous to the year in which he rendered services while he was not a contributor by his contribution limit for the year under this subparagraph in respect of the fund or plan, and subtracting from the product so obtained the aggregate of all amounts deducted under this subparagraph in previous years,

to the extent not deductible in the immediately preceding year under paragraph 60(j), and. . . .

In filing his tax returns for 1982 and subsequent years Squires, in computing his income, deducted portions of the $23,234 deducted from his salary during the year as past service pension contributions in accordance with subparagraph 8(1)(m)(ii) of the Act. It appears the respondent did not query these deductions until 1988 when his officials were reviewing Squires’ tax returns for 1984, 1985 and 1986. By letter dated August 23, 1988 the respondent informed Squires that:

Contributions made in respect of non-existent service [1] are to be treated as being additional voluntary contributions (A.V.C.) on account of current service and are deductible only under section 8(1)(m)(i) of the Act. Taxpayers are entitled to claim normal current year contributions plus all or a portion of the A.V.C. to a maximum of $3500.00. . . .

and notices of reassessment would be issued.

William Matthews ("Matthews"), presently Manager, Pension Benefits Standards at the Office of the Superintendent of Pensions of Newfoundland, testified how section 32 of the Pensions Act was administered. He has been employed by the Superintendent of Pensions since 1986. From the mid-1970s to 1986 he was Manager of Pension Research for the Newfoundland government. Matthews helped formulate policy with respect to the Pensions Act and was "involved" in the 1977 amendments to the Pensions Act and the preparation of the regulations.

Matthews explained that an employee with the Newfoundland government is permitted to purchase pensionable service for past years' service under sections 24 and 34 of the Pensions Act. [2] An employee with any employer being described by regulation to be in the Newfoundland public sector is eligible to join the pension plan. Such an employee may not have been part of the pension plan at a given time but may have joined subsequently and be eligible to contribute for past services. Past services, Matthews explained, have always been treated administratively within the framework of the pension plan. Section 34 authorizes the Lieutenant-Governor in Council by regulation to include certain employees as eligible to contribute for past services.

Section 27 grants a person who was covered under a pension plan established by the Memorial University (Pensions) Act, The Members of the House Assembly (Retiring Allowances) Act, The Education (Teachers' Pensions) Act, The Uniformed Services (Pensions) Act, or Acts replacing such statutes the right to purchase past service pension under certain conditions. Section 33 permits past service contributions by employees where reciprocal agreements have been entered into by their former employer and the Lieutenant-Governor in Council.

The Pensions Act restricts the recognition of an employee's prior service to his employment with certain employers only. Matthews stated the Pensions Act does not, in his view, provide that past services to any employer in this country are recognized for purposes of past service contributions to the pension plan.

Section 32 has been interpreted by Matthews not to permit an employee to purchase a period of time, that is, a period of employment with defined dates. All section 32 does, according to Matthews, is to permit an employee to purchase time, that is any number of years, months and days. Matthews stated that under section 32, an employee of the Newfoundland government aged twenty years could theoretically purchase, if he had the money, thirty years service to be counted as pensionable service.

During the latter part of 1976 and early 1977 Matthews was in contact with Mr. E.A. Chater ("Chater"), Director of the Registration Division of Revenue Canada, Taxation, One of the issues being addressed was section 32 of the Pensions Act. In Chater's view, pensionable service, for purposes of the Act, must be actual services with the employee or under a reciprocal agreement. Matthews was of a similar view.

As far as Matthews was concerned past service contributions were permitted firstly to persons in the Pension Plan who may have had service in the public service previously, resigned and returned and secondly, to those persons who were in a type of employment that was not pensionable at the time but later was made pensionable; the latter case contemplates an employee to make past service contributions for the period of his employment with his employer when he had not made contributions. Past service, Matthews explained, is a specific period of employment with an employer who is covered by the pension plan either by statute or by reciprocal agreement.

Subsection 3(a) of Regulation 387/78 contains the phrase ”. . .if he had been an employee contributing under that section [3] during the whole period in trespect of which the service is purchased. . .”. In cross-examination Matthews acknowledged Revenue Canada was concerned with this wording since it was suggested that the words could refer to past services. However, in his view, the words did not; subsection 3(a) referred to an acquisition of time.

Mr. Goodrich, appellant's counsel, submitted that since the phrase "purchase service" in section 32 of the Pensions Act is silent as to whether it includes past, current or future service, it is reasonable to conclude it may include past services. In the appellant's view the phrase "purchase service” means the purchase of all possible service: past, present and future.

Counsel referred the Court to paragraphs 7 and 8 of the respondent's Interpretation Bulletin IT-167R5 dated March 14, 1985:

7. The Income Tax Act places a ceiling on the amount that will be recognized as an allowable contribution to a registered pension fund or plan for past services when the employee was not a contributor to that fund or plan. The ceiling is calculated by multiplying $3,500 by the number of the employee's eligible past service years. For example, if an employee had been in the present employment for 2 years during which time the employee did not contribute to a registered pension fund or plan in respect of that employment, and had 3 years employment with another employer that was eligible service under the present plan, the employee would be entitled to make allowable contributions of up to $17,500 to the present fund or plan and claim a deduction in respect of the contribution in the manner described in 5 and 6 above. The above entitlement may, however, be limited by terms of the plan that are required as a condition of registration as outlined in Information Circular 72-13R7, paragraph 11(b).

8. For purposes of 7 above, “eligible past service years" include all years for which the employee is permitted to make a contribution pursuant to the terms of the plan to which the employee currently belongs, whether the service was with the present employer or a former employer. A "year" means a calendar year as distinct from the fiscal period of the employer which may not coincide with the calendar year. Each calendar year in which the employee rendered service, even for as little as one day, is to be counted as one year. If at any time in a past year an employee made an allowable contribution to the pension fund or plan to which the past service contribution is now being made, that year does not count for purposes of the ceiling on past service contributions.

Counsel says the pension plan permits an employee to purchase service. In his view the service purchased under the pension plan pursuant to section 32 constitutes eligible past service year contemplated by paragraphs 7 and 8 in Interpretation Bulletin IT-167R5. Counsel acknowledged no previous employment is necessary for an employee to contribute to the pension plan pursuant to section 32, or sections 24 or 34 for that matter. These provisions permit an employee wishing to increase his pension to contribute to the plan "as if he was an employee at the relevant time". Counsel stated that although the “relevant time” is not specified, it includes past, present and future time. He admits section 32 does not restrict the number of years which may be purchased.

Section 32, according to appellant's counsel, was the province's unilateral attempt to include past service to include service with all previous employers. He submitted, however, the deduction in computing income of any amount of service purchased in excess of actual past service would be restricted for purposes of the Act.

The respondent's counsel, Ms. Miller, took the position that only sections 24 and 34 of the Pensions Act provide for past service contributions. In her view, section 32 is not ambiguous: it permits an employee to acquire additional pension but the contributions do not relate to past service.

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.

The pension plan established by the Pensions Act provides for contributions on account of at least current services and past services. There is no question that sections 24 and 34 grant employers the right to contribute for past service; section 27 permits certain employees who were covered under certain provincial pension plan legislation to acquire past service; and section 33 provides for reciprocity of pension plans between Newfoundland and other employers. Sections 24, 27, 33 and 34 do not leave room for misunderstanding.

May the purchase of service contemplated by section 32 of the Pensions Act be reasonably interpreted to include past service? Section 32 does not refer to past service. Regulation 387/78 did not refer to past service. The phrase ”. . .an employee may purchase service" is used in both section 32 and regulation 387/78. The regulation provides at subsection 3(a) for payment by the employee of a calculated amount he would have contributed if he had been an employee contributing ”. . .during the whole period in respect of which the service is purchased" based upon the salary payable to him at the time of the purchase or when he began his employment.

Section 24 provides that the employee may be credited for service done by him as a civil servant or Crown employee before or after a particular time.

Section 34 authorizes regulations prescribing the terms and conditions upon which "prior service. . .with such . . .[employer]. . . may be counted as pensionable service. . .”. Similarly, sections 27 and 33 refer to a specific period of time which an employee may elect to purchase as a result to his past employment. In these provisions there is reference to maximum pensionable service based on the employee's past service which he may elect to acquire. The service that may be acquired by section 32, however, is unrestricted save only as to the employee's ability or willingness to pay for its purchase. Neither in section 32 itself nor in regulation 387/78 is there specific reference to a purchase of service related to the employee's past service. Section 32 refers to the purchase of service “which shall be counted as pensionable service". The regulations that may be made under section 32 are with respect to the purchase of service “which shall be counted as pensionable service”. This, in my view, contemplates the purchase of service which otherwise would not be counted as pensionable service. 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.

Accordingly the appeals are dismissed.

Appeals dismissed.