Stephanie Herman, Lloyd Herman v. Minister of National Revenue, [1976] CTC 2220, 76 DTC 1157

The Chairman:—The appeal of Lloyd Herman from income tax assessments in respect of the 1971 and 1972 taxation years was heard by consent simultaneously and on common evidence with the appeal of Stephanie Herman from an assessment in respect of her 1971 taxation year.

The issue in both appeals is whether an amount of $7,717:99 received by Lloyd Herman in each of the years 1971 and 1972 and an amount of $5,464.71 received by Stephanie Herman in the 1971 taxation year are in the nature of a pension within the meaning of and subject to the provisions of subparagraph 6(1)(a)(iv) of the Income Tax Act RSC 1952, c 148 (as amended) and/or subsection 56(1) of the new Act, SC 1970-71-72, c 63 (as amended), or whether, as claimed by the appellants, these amounts are returns of investment capital.

In August of 1945 Lloyd Herman and his wife Stephanie, who are both Canadian citizens, were hired on a full-time basis as members of the permanent staff of the United Nations Secretariat and made their home in New York City until August 31, 1969 at which time their employment with the UN Secretariat ceased and they both returned to Canada.

While in the employ of the United Nations, Lloyd Herman contributed into the Provident Fund (for UN employees) an amount of $1,282.03 during the period from March 23, 1946 to January 22, 1949, and Stephanie Herman contributed $823.30 to the same fund for the same period of time. The employer paid an equal amount into the said Provident Fund. In 1949 the UN Joint Staff Pension Fund was estab- lished, and from January 23, 1949 to August 31, 1969 Lloyd Herman contributed $16,938.97 to the UN Joint Staff Pension Fund and Stephanie Herman contributed $17,741.07 into the same fund for the same period. The employer contributed to the UN Joint Staff Pension Fund twice the amount contributed by the employees (Exhibit A-3). The Provident Fund was somehow amalgamated with the UN Joint Staff Pension Fund, with the result that the returns to the appellant from both the Provident Fund and the UN Joint Staff Pension Fund were included in the same cheque. The evidence is that neither fund was registered and that both funds were the result of United Nations Secretariat initiative, and were unrelated to any comparable fund in the country of origin of any employee of the UN Secretariat.

Exhibit A-1, a final pay statement in respect of Stephanie Herman, was produced as evidence to establish, as I understand it, two points. First, that the amounts indicated under “Staff Assessment” are the equivalent of income tax paid by the employee to the United Nations. The amounts so collected from employees who are nationais of member countries of the United Nations are rebated from the amounts owing by the member countries for the administrative financing of the United Nations organization.

The second point is that the amounts of the UN employees’ contributions into the UN Joint Staff Pension Fund were not deducted from UN employees’ salaries and the “staff assessment” was made on their gross salary, including that portion of the salary which went towards the employees’ obligatory pension contribution. In other words, the UN employees’ contribution into the UN Joint Staff Pension Fund was already tax paid (Exhibit A-2, Annex I, section D, subsection D1).

The Minister, in assessing the appellants, included an amount of $7,717.99 in Lloyd Herman’s income for each of the years 1971 and 1972, and an amount of $5,464.71 in Stephanie Herman’s income for the 1971 taxation year. These amounts were received by the appellants respectively as a result of their contributions to the Provident Fund and the UN Joint Staff Pension Fund from 1945 to 1969.

Although the document, entitled “United States Income Tax on Benefits Received From the United Nations Joint Staff Pension Fund”, which was included by the appellant in his pleadings, has very doubtful probative value in Canadian tax law (since both appellants were resident in Canada at the time they received their returns from the UN Joint Staff Pension Fund), it is interesting to note that the basic principle in computing amounts of benefits received from pension funds in the US is very similar to the principlés of Canadian tax law in respect of benefits received from pension funds.

4. A basic principle in computing the amount of the benefit subject to tax is that the staff member’s own investment, or contribution, is to be excluded in accordance with formulas provided in the Internal Revenue Code and the Income Tax Regulations. The investment in the contract includes the staff member’s own 7 per cent contribution to the Pension Fund for the entire period of his pensionable employment. It also includes, in accordance with the special rule to be found in Section 72(f)(2) of the Internal Revenue Code and Regulation 1.72-8, such amounts contributed by the Organization as would have been exempt from taxation at the time they were made had they been paid directly to the staff member and not to the Joint Staff Pension Fund, Ie, the 14 per cent which it paid to the Fund. This special rule, however, does not apply to contributions made by the Organization after 31 December 1962 and applicable to service after that date which would have been exempt under the rules relating to a bona fide resident of a foreign country or to presence in a foreign country for seventeen months (Section 911(a) (1) and (2) of the Internal Revenue Code, see annex I). Thus, the staff member may, in calculating his investment in the contract, include not only his own 7 per cent contribution but also the 14 per cent contributed by the Organization if (1) such contribution related to a period of service before 1 January 1963 during which time the staff member’s salary was excludable on the basis of bona fide foreign residence or seventeen months’ presence in a foreign country, or (2) such contribution is made at any time with respect to a staff member who at the time of the contribution was exempt, as a non-United States citizen, from United States income tax on his salary under Section 4(b) of the International Organizations Immunities Act of 1945 (Section 893 of the present Internal Revenue Code and amended Section 116(h)(1) of the Internal Revenue Code of 1959, see annex I). Interest on or accretions with respect to either the staff member’s or the Organization’s contributions may not be included in calculating the investment.

Since there is no dispute as to the quantum of the contribution paid by each of the appellants into the UN Joint Staff Pension Fund, the issue to be determined is whether the amounts received by the appellants in the years pertinent to these appeals are taxable under Canadian tax law. It is clear from the evidence that the appeliants were resident in Canada in 1971 and 1972 and that their incomes are taxable pursuant to sections 2 and 3 of the Income Tax Act, RSC 1952, c 148, as amended.

Subparagraph 6(1)(a)(iv) of the old Act stipulates that superannuation or pension benefits shall be included in computing the income of a taxpayer for a taxation year and paragraph 139(1)(ar) defines superannuation and pension benefits as follows:

(ar) “superannuation or pension benefit” includes any amount received out of or under a superannuation or pension fund or plan and without restricting the generality of the foregoing includes any payment made to a beneficiary under the fund or plan or to an employer or former employer of the beneficiary thereunder,

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

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

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

The question that arises here is whether tax-paid contributions into a so-called pension fund can give rise to taxable pension benefits?

It is of course true that in interpreting the Income Tax Act there can be no deviation from the clear meaning of a word used in the statute even though such an interpretation may give rise to an injustice in a specific set of circumstances. However, where a word in the statute is not defined and not clear, it is, I believe, an acceptable practice for the courts of the Tax Review Board to give the word a reasonable meaning.

Paragraph 139(1)(ahh) clearly defines what a registered retirement savings plan is. Paragraph 139(1)(ar) states what a superannuation or pension benefit is. Subparagraph 6(1)(a)(iv) stipulates that superannuation or pension benefits shall be included in computing the taxpayer’s income. However, to my knowledge, the Income Tax Act does not define what a pension or superannuation fund is.

I believe that it is generally accepted in Canada that a pension fund is a means of saving and investing moneys by contributing (usually in conjunction with an employer) into a fund which will provide a taxpayer with income on his retirement and where the contributions into the fund are deductible.

In my opinion, in the circumstances of this appeal, we are not dealing with the general Canadian concept of what a pension fund is.

Tax-paid amounts of money deposited into any account cannot, in my opinion, by the simple magic of calling the account a pension fund, give rise to taxable pension benefits any more than withdrawals from a savings account can give rise to pension benefits. In my view, the amount of tax-paid contributions made by the appellants into the UN Joint Staff Pension Fund according to the terms of that particular plan cannot be considered as part of the taxable pension benefits received by the appellants from the fund without imposing double taxation on the appellants.

The employer’s contributions into the fund, which resulted in increased monthly returns to the appellants when they ceased to be employees of the United Nations Secretariat, might well be considered taxable in their hands as “other income” but, in my opinion, we then are, in those circumstances, no longer dealing with the basic concept of what a pension plan really is.

I believe it is evident that paragraph 139(1)(ar) did not envisage that contributions paid into a pension fund by taxpayers would not have been deductible or would already have been taxed. I do not believe that it was the intention of the legislator, in drafting subparagraph 6(1)(a)(iv), to tax contributions paid by a taxpayer into a pension fund as well as taxing him on the benefits received by him from the fund. It seems to me that, by so interpreting and applying subparagraph 6(1)(a)(iv) in the circumstances of these appeals, the unacceptable practice of double taxation is automatically substituted for the purpose and the concept of a pension fund which is recognized in law and in fact to be a social and economic statutory tax benefit.

Fully realizing that there is no equity in tax law, I am not basing my decision on that ground. Rather, I have come to the conclusion that, having already paid tax on their contributions, the amounts received by the appellant were not, in the absence of a definition of a “pension plan” in the Income Tax Act, received out of or under a superannuation or pension fund or plan within the meaning and the intent of the Act, and that any amounts paid by the appellants into the United Nations Joint Staff Pension Fund and Provident Fund on which tax had already been withheld should not be included as part of the benefits received by them from a pension or superannuation fund, registered or not.

Under the circumstances of these appeals, the maximum portion of the benefits received by the appellants that could properly be taxed is that portion of the benefits received by the appellants in 1971 and 1972 which resulted directly from the employer's contribution to the fund.

For these reasons, the appeal is allowed in part, and the matter referred back to the Minister for reconsideration and reassessment so that he may, at the very least, take into account that all contributions made by each of the appellants into the UN Joint Staff Pension Fund from 1945 to 1969 on which income tax had already been paid and which are included in the amounts received from that Fund by the appellants in 1971 and 1972 are not taxable.

Appeal allowed in part.