Cam Gard Supply Lid v. Ministe of National Revenue, [1973] CTC 111, 73 DTC 5133

Cattanach, J:—These are appeals from the Minister’s assessment of the appellant to income tax for its 1964, 1965, 1666 and 1967 taxation years.

The Minister, in assessing the appellant as he did, disallowed a payment of $303,414 made by the appellant on April 15, 1965 which payment the appellant had claimed as a deduction under section 76 of the Income Tax Act as a special payment made to the trustees of an executive pension plan in respect of past services of its president and secretary. The disallowance of the deduction so claimed by the appellant affected the assessments in the prior and two subsequent taxation years.

Prior to trial counsel for the parties agreed upon a statement of facts and upon the issues, which agreement is reproduced:

AGREED STATEMENT OF FACTS

1. (a) The Appellant was duly incorporated on the 26th day of July, AD 1956, under the laws of the Province of Manitoba.

(b) The Appellant has continuously carried on business in Manitoba as a distributor of radio and electronic equipment since the date of incorporation to the date hereof.

(c) The Appellant also carries on business throughout the various provinces of Canada and elsewhere.

2. The authorized capital of the Appellant consists of 50,000 common shares (no par value), the aggregate consideration not to exceed $50,000.00, and 3,000 5% non-cumulative, redeemable, preferred shares having a par value of $10.00 each.

3. At all relevant times, the shareholders of the Appellant consisted of, Cameron G Mann and Neal D Gardner, both of the City of Winnipeg, in the Province of Manitoba, and to the extent of 5,000 common shares each. Both Mann and Gardner also owned 700 and 300 preferred shares respectively.

4. At all relevant times, the President of the Appellant was Cameron G Mann, and the Secretary of the Appellant was Neal D Gardner.

5. On April 1, 1965, the Appellant enacted By-law No 13 authorizing the establishing by the Company of a Pension Plan for its President and Secretary to be funded by way of a Trust.

6. Pursuant to the foregoing By-law No 13, the Appellant entered into the Pension Plan and Trust Agreement dated April 1st, 1965. Both Cameron G Mann and Neal D Gardner became members of the Plan.

7. In accordance with the Pension Plan, William M Mercer Limited were engaged to calculate past service liability and calculated the same at $309,414.00.

8. On April 15, 1965, the Appellant paid to the Trustees of the Pension Plan the sum of $309,414.00.

9. On April 15, 1965, the following documentation was forwarded to the Respondent by William M Mercer Limited.

(a) Form T510 being the Application for Registration of Employees Pension Plan.

(b) The executed Trust Agreement and Pension Plan.

(c) A copy of By-law No 13 authorizing the Pension Plan and Trust.

(d) The employer’s statement by the Appellant.

(e) The Actuarial Certificate.

(f) The Actuarial working papers.

10. That on May 31, 1965, the Respondent (Registration Section, Legal Branch), in a letter to William M Mercer Limited advised that the Pension Plan had been accepted for registration under Section 139-1(ahh) of the Income Tax Act.

11. That also on May 31, 1965, the Respondent (Registration Section, Legal Branch), in a letter to the Company advised it of the registration of the Pension Plan effective April 1st, 1965, and that the employer’s contributions may be claimed as deductions under Section 11(1)(g) of the Income Tax Act.

12. That on July 26th, 1965, the Respondent advised the Appellant of the approval of the Superintendent of Insurance and that the Past Service Pension payment of $309,414.00 may be deducted from income pursuant to the provisions of Section 76 of the Income Tax Act.

13. (a) That in calculating income for its 1965 taxation year, the Appellant did deduct the said payment of $309,414.00.

(b) That on January 20, 1969, the Respondent re-assessed the Appellant denying the deduction in calculating income of the said payment of $309,414.00.

14. That subject to the question of obligation hereinafter referred to, it is agreed that the Actuary properly calculated the amount of the past service contribution for the purposes of the Act.

ISSUES

1. Upon the agreed assumption that the other requisites of Section 76-1 of the Income Tax Act have been satisfied, was the payment of $309,414.00 within the provisions of Section 76-1 insofar as the same relates to the obligations of the fund or plan to the employees?

2. Is the Respondent functus officio, and estopped from making the reassessment in question?

By-law No 13 referred to in paragraph 5 was produced and received as Exhibit A2. The pension plan and trust agreement referred to in paragraph 7 was received in evidence as Exhibit AS.

The application for registration of the employees pension plan referred to in paragraph 9(a) was produced as Exhibit Ad.

The employer’s statement by the appellant referred to in paragraph 9(d) was produced as Exhibit A5.

The Actuarial Certificate and working papers referred to in paragraphs 9(e) and (f) were introduced as Exhibits A6 and A7.

The letter from the Minister advising that the pension plan had been accepted for registration, mentioned in paragraph 10 is Exhibit A8.

The appellant was notified by the Minister that the plan had been accepted for registration effective April 1, 1965 and that special payments to the plan by the appellant in respect of past services of employees might be claimed as deductions under section 76 of the Act subject to receipt of advice from the superintendent of Insurance. The notification was by letter dated May 31, 1965 which letter was referred to in paragraph 11 and is produced as Exhibit A9.

The advice of the superintendent of Insurance was received and the appellant notified by letter dated July 28, 1965, referred to in paragraph 12 and produced as Exhibit A10.

If the first of the two questions posed in the stated issues, that is, (1) was the payment of $309,414 a special payment made to the plan to ensure that the resources of the plan were sufficient to discharge all obligations of the plan to the employees in full, within the meaning of subsection 76(1) of the Act, is answered in the affirmative then the appellant will succeed in its appeals.

However if this first question is answered in the negative but the second question posed, that is, (2) is the Minister functus officio and estopped from making the reassessments that he did, is answered in the affirmative, then too the appellant will succeed in its appeals.

For the Minister to be successful both questions must be answered in the negative.

The constating instruments creating this executive pension plan are entitled as a trust agreement and as the pension plan.

In Article XII, paragraph 5, of the trust agreement it is provided that the plan is incorporated in and deemed to be part of the trust agreement.

Therefore the two instruments are to be construed as one.

Article I of the trust provides that the company, the appellant herein, establishes with the trustees a trust fund comprised of such monies as are paid into it in accordance with the plan.

The trustees are to hold, invest, administer and distribute the monies in accordance with the trust agreement and the plan.

in Article Il, paragraph 7 of the trust agreement it is provided that the trustees shall not be responsible for the adequacy of the trust fund to meet and discharge pensions and other liabilities under the fund.

It follows from this provision and provisions in the plan, that the responsibility for the adequacy of the fund to meet and discharge pensions and other liabilities falls upon the company, the appellant.

The members of the plan are not required to make contributions. All contributions are made by the company.

Section IX, paragraph (b), of the plan reads as follows:

(b) Contributions by the Company

The Company shall contribute on behalf of each Member an amount equal to the maximum permitted under the Income Tax Act of Canada being $1,500.00 per year per Member as hereinafter set forth. The Company intends to contribute, subject to the funds for such purpose being available, such amounts as may be required in accordance with the certification of an Actuary to provide the Past Service Pensions mentioned in Section X (a} hereof.

Section X, paragraph (a), reads as follows:

(a) For Past Service

The Company expects to purchase, subject to the funds for such purposes being available, a Past Service Pension for each designated Executive, and more particularly, the President and the Secretary, who enter the Plan at the effective date. The Past Service Pension shall be related in each case to the Member’s completed years of service with the Company, prior to the effective date, and shall be a monthly amount of Past Service Pension, commencing at normal retirement age, for each completed year of prior service, as indicated below:

President	—	$180.90 per month
Secretary	—	$285.85 per month.

The issue raised in the first question posed for answer, that is, was the payment of $309,414 within the provisions of subsection 76(1) insofar as the same relates to the obligations of the fund or pian to the employees was the subject matter of consideration by the Supreme Court of Canada in MNR v Inland Industries Limited, [1972] CTC 27; 72 DTC 6013.

Section 76 is as follows:

76. (1) Where a taxpayer is an employer and has made a special payment in a taxation year on account of an employees’ superannuation or pension fund or plan in respect of past services of employees pursuant to a recommendation by a qualified actuary in whose opinion the resources of the fund or plan required to be augmented by an amount not less than the amount of the special payment to ensure that all the obligations of the fund or plan to the employees may be discharged in full and has made the payment so that it is irrevocably vested in or for the fund or plan and the payment has been approved by the Minister on the advice of the Superintendent of Insurance, there may be deducted in computing the income of the taxpayer for the taxation year the amount of the special payment.

(2) For greater certainty, and without restricting the generality of subsection (1), it is hereby declared that subsection (1) is applicable where the resources of a fund or plan required to be augmented by reason of an increase in the superannuation or pension benefits payable out of or under the fund or plan.

Mr Justice Pigeon in delivering the unanimous decision of the Court found it neither necessary or desirable to express an opinion on any other of the many objections raised by the Minister to the validity of the pension plan there in question except the decisive one that the deduction claimed was not allowable because there were no “obligations” of the fund or plan to the employee that required any special payment to ensure that they might be discharged in full. He said at page 31 [6016]:

That there was no “obligation” of the pension fund to Mr Parker that “required” the special payments is readily apparent from the terms of the Plan. The only obligations to a member were to use in the prescribed manner the funds that became available. . . .

Later he said at page 32 [6017] :

. . . , the terms of the plan were perfectly clear to the effect that no obligation towards Mr Parker would arise in respect of those sums unless and until the company chose to, and actually did, make the contemplated payments into the fund.

Mr Parker, who is referred to by Mr Justice Pigeon in the above quoted extracts, was the president of the company and the sole beneficiary under the plan eligible for a pension for past services.

I was called upon to consider plans similar to the plan in the Inland Industries case (supra) in Western Smallware & Stationery Co Ltd v MNR, [1972] CTC 7; 72 DTC 6036, and Goldberg Bros Ltd v MNR, [1972] CTC 1; 72 DTC 6045. I found that the plans there under review were not distinguishable from those in the Inland Industries case (supra) and for the reasons given by the Supreme Court in that case I disallowed the deductions claimed because there was no obligation of the fund or plan to the employees that required any special payment to ensure that they might be discharged in full. In each of the cases above mentioned there were provisions in the trust agreements that the responsibility of the trustees was to purchase pensions only to the extent that funds were made available to them by the companies which had set up the self-administered pension plans.

Counsel for the appellant in argument urged that the plan now under review and circumstances in respect thereto are distinguishable from those in the Inland Industries case (supra).

He emphasized that it was the “obligations of the fund or plan to the employees” that was the vital criterion in considering whether the resources of the fund or plan were adequate to meet those obligations and that the obligations of the company to the fund or plan were immaterial.

He also sought to distinguish the present plan from the plans in the former cases by pointing out that in the present plan a specific scale of benefits was provided for in section X, paragraph (a) of the plan which I have quoted above.

In the plans in the three former cases, the plan did not provide a specific amount of pension but only set a limit'to the total pension.

In support of his submission that the obligations of the fund or plan were certain and accordingly constituted obligations of the fund or plan to the employees of the company he referred to the language of Mr Justice Pigeon in the Inland Industries case (supra) at page 32 [6017] where he said:

. . . It is apparent that the situation intended to be met by the special payments provided for is that which arises when a pension plan specifies a scale of benefits payable.

There were two further points urged as distinguishing the facts in the present appeal from the former cases.

The first was that in two of the other three cases above mentioned there were a number of payments in different taxation years by way of instalments whereas in the present instance there was a lump sum payment and secondly in the present appeal the lump sum payment was made before registration of the plan and before the application for registration of the plan, but upon receipt of advice from an actuary as to the amount required to provide the pensions contemplated, whereas in the three other cases payments were not made until the plans had been registered.

In all plans under consideration in the Inland Industries case (supra), the Western Smallware case (supra) and the Goldberg Bros case (supra) there were specific provisions to the effect that the obligations of the trustees were to purchase pensions to the extent that funds in the plans permitted. There is no such provision in the present plan.

While in section X of the plan, entitled “Amount of Retirement Income”, paragraph (a), entitled “For Past Service”, specifies a pension of $180.90 per month for the president and a pension of $285.85 per month for the secretary commencing at their respective retirement ages and computed on the basis of completed years of prior service, the purchase of those pensions by the company is subject to the initial words of section X(a) that the company so expects to purchase pensions in those amounts ‘‘subject to the funds for such purpose being available”.

In section IX of the plan, paragraph (b), it is stated that the company “intends to contribute, subject to the funds for such purpose being available” an amount sufficient to provide monthly pensions of $180.90 and $285.85 for its president and secretary respectively as an actuary certifies is required. That amount was computed by an actuary to be $309,414.

It is apparent from the foregoing provisions that there is no obligation upon the appellant to make the contribution to the trust funds in the amount sufficient to purchase the pensions in the amounts specified for past services of its president and secretary. At the most it is merely an expression of an “intention to contribute” and an “expectation” to purchase past service pensions and in each instance subject to funds being available for those purposes.

It is equally evident from paragraph 7 of Article II of the trust agreement that it is the sole responsibility of the company to contribute the funds to the plan or fund. The responsibility of the trustees is to administer the funds contributed in accordance with the plan.

Article I of the trust provides that the company shall establish the trust fund comprised of the monies that are paid into the fund in accordance with the plan.

Since there is no obligation under the plan on the company to contribute it follows that there is no trust created unless the funds are contributed. If no funds are contributed by the company it follows that the fund or plan is under no obligation to the employees.

Accordingly, in my view, the fact that the present plan does not contain a provision that the obligation of the trustees is to purchase pensions to the extent that funds in the plan will permit does not constitute a distinction from the three former cases where the plans included a provision to that effect.

I fail to follow how the fact that only one payment was made rather than several can in any way have a bearing upon the question of the deductibility of the payment or payments.

Further I fail to follow how the fact that only one special payment was made is in any way material.

Subsection 76(1) requires that there shall be a recommendation by a qualified actuary that in his opinion the resources of the fund or plan are required to be augmented by an amount not less than the amount of the special payment “to ensure that all obligations of the fund or plan to the employees may be discharged in full”. The existence of such an obligation on the part of the fund or plan to the employees is a condition precedent to the right of the appellant to claim the amount paid into the plan as a deduction.

The pertinent portion of Actuarial Certificate (Exhibit A6) reads as follows:

I hereby certify that in my opinion the assets of the trust fund of The Pension Plan for Executives of Cam-Gard Supply Limited as at April 1, 1965 require to be augmented by the amount of $309,414 to ensure that all obligations of the fund in respect of past services may be discharged in full, and I recommend that this amount, with interest, be deposited in the fund in a convenient manner.

At the foot the following computation appears:

This certificate is, in my view, an expression of an opinion of the actuary of the amount required to make up the quantum of the desired pensions based upon his actuarial computations, but it cannot be decisive of the existence of any obligation of the plan to the employees in respect of past service.

The payment was made into the fund on April 15, 1965 after the actuarial certificate had been received. The certificate indicates that as at April 1, 1965 an amount of $309,414 was required to be paid into the fund “to ensure that all obligations of the fund in respect of past services may be discharged in full’. As at April 1, 1965 no payment into the fund by the appellant with respect to past services of its employees was made, nor was there an obligation on the appellant to do so. That being so there was no obligation on the part of the fund or plan to the employees. Accordingly the actuary lacked jurisdiction to express an opinion as to the amount the resources of the fund or plan required to be augmented. Subsequent to the payment there would be no need to augment the resources of the fund.

The existence of an obligation of the fund or plan to the employees in respect of past services is a statutory condition precedent to the right of the appellant to claim the amount paid to the plan as a deduction.

For the reasons above expressed I have concluded that no such Obligation existed.

It follows that the first question is answered in the negative.

Having answered the first question posed in the agreed statement of facts and issues in the negative, I am obliged to consider the second question posed, that is, was the Minister functus officio and estopped from making the assessment in question.

The pension plan was submitted to the Minister and accepted by him for registration.

By paragraph 139(1 )(ahh) a registered pension plan means one that has been accepted by the Minister for registration for the purposes of the Income Tax Act in respect of its constitution and operations for the taxation year under consideration.

The appellant contends that the Minister by having accepted the plan for registration has exhausted his office and that, therefore, he is precluded from disallowing the deductions claimed by the appellant.

This same argument was raised before me in Western Smallware & Stationery Co Ltd v MNR (supra). I expressed the view that this argument was tantamount to invoking the doctrine of estoppel and concluded that where a particular formality is required by statute, no estoppel will cure the defect.

Mr Justice Pigeon said in the Inland Industries case (Supra) at page 31 [6017]:

. . . However, it seems clear to me that the Minister cannot be bound by an approval given when the conditions prescribed by the law were not met.

Paragraph 139(1)(ahh) is the definition of a registered pension plan or fund but registration thereunder by the Minister cannot bring a plan so registered within subsection 76(1) if the provisions of subsection 76(1) have not been met.

To preclude the Minister from contending and establishing that there was no obligation of the plan to the employees would avoid a statutory condition precedent to the right of the appellant to claim the amount paid to the plan as a deduction, and this, in turn, would render the provisions of subsection 76(1) of the Act nugatory. As Mr Justice Pigeon stated in the quotation immediately above no approval given can bind the Minister when a statutory requirement has not been met.

For the foregoing reasons I adhere to the view I expressed in the Western Smallware case (supra) that this argument is not available to the appellant.

I, therefore, also answer the second question, in the negative, that is to say the Minister is not functus officio and he is not estopped from assessing the appellant as he did.

Since I have concluded previously that the Minister has properly assessed the appellant and also answered the first question posed in the negative it follows that the appeals are dismissed with costs.