Goldberg Bros LTD v. Minister of National Revenue, [1972] CTC 1, 72 DTC 6045

Cattanach, J:—These are appeals by the appellant, a joint stock company incorporated pursuant to the laws of the Province of Manitoba, from its assessment to income tax by the Minister for its 1964, 1965 and 1966 taxation years ending November 30 in each such year.

The Minister, in assessing the appellant as he did, disallowed a deduction of $100,000 claimed by the appellant in computing its income for its 1965 taxation year as a special payment made by it to a pension plan in respect of the past services of certain employees and the Minister also disallowed a deduction of $50,000 claimed by the appellant as a special payment to the same pension plan in respect of past services by its same employees in its 1966 taxation year. The deduction of $100,000 by the appellant in computing its income for its 1965 taxation year resulted in a loss in the sum of $29,761.16 for that year of which sum the appellant applied $16,374.24 against its income for its 1964 taxation year. This the Minister disallowed.

As intimated above the Minister also disallowed a deduction in the amount of $50,000 claimed by the appellant with respect to its income in its 1966 taxation year as well as an amount of $12,786.92 being the balance of the loss of $29,761.16 which the appellant computed as its loss in its 1965 taxation year by reason of the deduction of $100,000 in that year and which balance in the amount of $12,786.92 the appellant sought to deduct in computing its income for its 1966 taxation year.

The appellant also sought to deduct the sum of $1,447.94 as interest paid by it during its 1965 taxation year on money borrowed for use in gaining or producing income from its business. The Minister disallowed this deduction of $1,447.94 since that amount was paid to the trustees of the pension plan on account of interest on the ground that no portion of the sum of $1,447.94 was paid pursuant to a legal obligation to pay interest on borrowed money used for the purpose of earning income from its business and accordingly that amount was not deductible pursuant to paragraph 11(1)(c) of the Income Tax Act in computing the appellant’s income. At the outset of the trial counsel for the appellant conceded that the object of the borrowing was to put funds in the hands of the trustees of the pension plan and accordingly abandoned the claim in respect of this amount.

In the result, therefore, the only matter in dispute is the deductibility, under subsection 76(1) of the Income Tax Act, of the payments totalling $100,000 by the appellant in its 1965 taxation year to the pension plan in respect of past services by certain of its employees and the payment of $50,000 for the same purpose in its 1966 taxation year.

The appellant carried on the business of manufacturing ladies’ cloaks and suits in the City of Winnipeg, Manitoba and was controlled by Benjamin Goldberg, Morris Goldberg, Abraham Goldberg and Jacob Goldberg who were its shareholders, officers and directors.

The appellant had a pension plan for the benefit of its employees in respect of their current and future services represented by a group annuity insurance policy with North American Life Assurance Company, the benefits under which the officers of the appellant felt were minimal and too expensive.

That plan was subsequently changed to one with The Manufacturers Life Insurance Company which in the opinion of the officers of the appellant provided greater benefits at less cost.

However the directors were not satisfied with the benefits so provided. To supplement those benefits the appellant on December 15, 1965 entered into a self-administered pension plan in respect of past services of its management staff the assets of which were to be held in a trust. The members of the plan were Benjamin, Morris and Abraham Goldberg who were respectively the president, vice-president and secretary of the appellant.

The pension plan and trust agreement together with a certificate of an actuary were attached to an application for registration and forwarded to the Department of National Revenue. The actuarial certificate stated that in the opinion of the actuary

. . . the assets of the trust fund of The Pension Plan for Management Staff of Goldberg Bros Ltd as at December 15, 1964 require to be augmented by the amount of $210,720 to ensure that all obligations of the fund in respect of past services may be discharged in full, . . .

The actuary then recommended that this amount, with interest, be deposited in the fund in a convenient manner.

By letter dated February 23, 1965 the Department of National Revenue advised the appellant that the plan had been accepted for registration under paragraph 139(1)(ahh) of the Income Tax Act with effect from December 15, 1964 and that advice had been requested from the Superintendent of Insurance in regard to special payments in respect of past services pursuant to subsection 76(1) of the Act.

By letter dated April 21, 1965 the Department informed the appellant that advice had been received from the Superintendent of Insurance which in effect confirmed the actuary’s estimate of the total deficit in the plan in respect of past service pensions in the amount of $210,720 on December 15, 1964 and further stated that special past service payments to the plan in respect of such deficit may be claimed as deductions in determining taxable income as provided under section 76 of the Income Tax Act.

On December 31, 1964 the appellant paid $50,000 as a special payment in respect of past services into the trust.

On January 7, 1965 the pension trust loaned $50,000 to the appellant with interest at 7% on the security of a promissory note.

On January 9, 1965 the appellant paid a further $50,000 to the trust with respect to past services and on February 3, 1965 the pension trust loaned the appellant $50,000 with interest at 7% also secured by a promissory note. These two payments total $100,000 which constitutes the deduction claimed by the appellant in its 1965 taxation year and which was disallowed by the Minister.

In the meantime the appellant applied for supplementary letters patent increasing its authorized capital by the creation of 3,000 Class “A” preferred shares of the par value of $100 each. The supplementary letters patent issued under date of April 6, 1965.

On May 15, 1965 the pension trust authorized the conversion of the appellant’s indebtedness of $100,000 to it by way of loans, into 1,000 Class “A” preferred shares of the appellant. The 1,000 Class “A” preferred shares were issued to the pension trust on June 1, 1965.

On February 8, 1966, which was in the appellant’s 1966 taxation year, the appellant made a further payment to the pension trust in the amount of $50,000 with respect to past services of its three management personnel.

On February 9, 1966 the pension trust subscribed for 500 Class “A” preferred shares of the par value of $100 each of the appellant which the appellant issued to the pension trust on February 10, 1966.

On five dates during its 1966 taxation year the appellant redeemed Class “A” preferred shares to the amount of $23,000 or 230 preferred shares.

Subsequent to its 1966 taxation year the appellant redeemed a further 650 preferred shares and on April 25, 1968 the appellant issued a debenture in favour of the pension trust in lieu of the remaining preferred shares held by it.

The appellant paid dividends on the preferred shares held by the pension trust aggregating $17,780 and interest on the debenture in the amount of $5,496.

During the taxation years in question there was no prohibition that restricted the right of the pension plan trustee to invest funds under their control in any investment that they considered advisable.

Paragraph 7 of the trust agreement provides:

7. The Trustees shall not be responsible for the adequacy of the Trust Fund to meet and discharge pensions and other liabilities under the Fund.

This is the responsibility of the appellant.

Under the specific provisions of the pension plan each employee of the appellant may participate fn the plan if he is so designated by the appellant. The normal retirement date of an employee is on his sixtieth birthday, but that retirement might be deferred under prescribed conditions.

The annual pension payable to a participant is provided in paragraph 2.3 as follows.

2.3 Amount of Pension

The Annual Pension payable to a Participant shall be as follows:

(a) For service subsequent to the effective date of this Plan, each Participant will receive a Future Service Annual Pension equal to the annuity income which can be provided by contributions made by the Company in accordance with Section 2.4(a)(i).

(b) For service prior to the effective date of this Plan, the Company expects to purchase, subject to the funds for this purpose being available, a Past service Annual Pension for the President, Vice-President and Secretary- Treasurer provided these Employees become Participants at the effective date. Such Past Service Annual Pensions for each completed year and fraction thereof of service prior to the effective date shall be as follows, commencing from Normal Retirement Date:

President	—	$23.80 per month
Vice-President	—	27.85	per month
Secretary-Treasurer —		30.15 per month

(c) The total Annual Pension payable to a Participant from Normal Retirement Date under this Plan and any other registered pension plan shall not exceed $40,000 per annum.

In paragraph 2.4 the contributions by the appellant are as follows: 2.4 Contributions

(a) By the Company

(i) For a Participant’s service subsequent to the effective date of this Plan, the Company shall contribute in each calendar year $1500 on behalf of each Participant of the Plan, such contribution being inclusive of the amount being contributed by the Company on behalf of a Participant under another registered pension plan. Reference to $1500 shall be deemed to include any other maximum which may be permitted from time to time under the Income Tax Act.

(ii) For a Participant’s service prior to the effective date of this Plan, the Company may from time to time contribute, subject to the funds for this purpose being available, such amounts as may be required in accordance with the certification of a qualified Actuary, to purchase the Past Service Annual Pension mentioned in Section 2.3(b). . . .

The provisions applicable to contributions by the appellant with respect to past service payments are paragraphs 2.3(b) and 2.4(a)(ii), above.

The normal form of pension is provided in paragraph 2.5 to be a monthly amount of annuity income commencing in the participant’s normal retirement date.

In paragraph 3.3 it is provided:

3.3 Benefit Payments and Liability

(a) The amounts of annuity income payable hereunder shall only be paid to the extent that they are provided for by the assets held under the Trust Fund, and no liability or obligation to make any contributions thereto other than as set out herein shall be imposed upon the Company, the officer, directors or shareholders of the Company.

(b) All annuities payable to a Participant or to a Beneficiary shall be purchased from the Government Annuities Branch and/or insurance company licensed to transact business in Manitoba by means of a lump sum payment from the Trust Fund when such an annuity becomes payable.

The foregoing provisions are substantially the same in content as the provisions of the trust agreements and pension plans in Western Smallware & Stationery Co, Ltd v MNR (p. 7), the reasons for judgment in which case are being filed concurrently herewith and with the provisions in the trust agreement and pension plan in MNR v Inland Industries Limited judgment in which case was pronounced by the Supreme Court of Canada on December 20, 1971 ([1972] CTC 27). The decision in MNR v Inland Industries Limited was delivered subsequent to the argument of the present appeals.

Counsel for the Minister advanced several grounds for dismissing the appeals.

It was contended that the exchange of cheques between the appellant and the pension plan trustees on account of past services and the loans to the appellant which were later converted into preferred shares of the appellant was merely machinery to make it appear that the preferred shares had a market value equivalent to the face value of the cheques and therefore did not constitute special payments under subsection 76(1) of the Income Tax Act and if such were not so then the preferred shares did not have that value; that the payments did not irrevocably vest in the trust because at the most the trustees were merely acting as mandatories, agents or trustees of the appellant and that the trust remained under the effective control and direction of the appellant; and that the deductions sought by the appellant were prohibited by subsection 137(1) of the Income Tax Act as unduly or artificially reducing its income.

It was also contended on behalf of the Minister that the validity of the actuary’s certificate was dependent upon there being at law an absolute obligation on the appellant, pursuant to the plan, to make payments to the trustees in respect of past services and if no such Obligation existed the actuary was without jurisdiction to form an opinion as to the amounts by which the trust required to be augmented.

It was further contended that under the pension plan the appellant was authorized, but not obligated, to make payments for past service pensions and since the participants were entitled to no greater pensions than those that might be purchased with funds available in the trust it follows that the plan required no augmentation to ensure that the obligations of the plan might be discharged in full.

On behalf of the appellant it was contended that the payments made by the appellant were real in substance and irrevocably vested in the plan and that subsection 137(1) of the Income Tax Act did not apply in the circumstances of these appeals. It was further contended that once the plan had been approved by the Minister under subsection 76(1) of the Act, that approval, and supporting material thereto, cannot be attacked.

The arguments advanced by the Minister were basically the same as made in MNR v Inland Industries Limited (infra) and in Western Small ware & Stationery Co, Ltd v MNR (supra).

Speaking for the Supreme Court of Canada Mr Justice Pigeon in MNR v Inland Industries Limited said at page 30:

. . . but I do not find it necessary or desirable to express an opinion on any other than the following point which is, in my view, decisive of the case. This is that the deduction claimed was not allowable because there were no “obligations” of the fund or plan to Mr Lloyd Parker that required any special payment to ensure that they might be discharged in full, as section 76 of the Income Tax Act expressly requires:

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 Lloyd Parker referred to in the sixth line of the above quotation was the sole Class “A” member of the plan there under consideration.

For the reasons expressed by Mr Justice Pigeon it is clear that there was no obligation of the pension fund to the employees that required it to be augmented by special payments in accordance with the terms of the plan.

It is equally clear, bearing in mind that the terms of the plan here in question are to the same effect as those in the plan in MNR v Inland Industries Limited (supra), that there is no obligation under the present plan on the part of the appellant to make any contribution to the pension plan for the purchase of pensions for past services of the members. At the most it was an expectation to do so subject to funds being available.

The obligation of the trustees of the pension plan is only to purchase pensions to the extent that the funds in the plan permit. The fact that the actuary expressed the opinion in his certificate that the resources of the pension plan required to be augmented by the amount he specified to ensure that all obligations of the plan to the employees would be discharged in full, is not conclusive of the existence of those obligations. Neither the actuarial certificate nor the registration of the pension plan by the Minister binds the Minister when the conditions prescribed by subsection 76(1) of the Income Tax Act have not been fulfilled.

For these reasons, which are the same reasons I expressed in greater detail in Western Smallware & Stationery Co, Ltd v MNR (bp. 7) which are being filed concurrently herewith, the appeals are dismissed with costs.