Concorde Automobile Ltee v. Minister of National Revenue, [1971] CTC 246

WALSH, J.:—This is an appeal from income tax assessments dated April 28, 1969 for the taxation years 1964 and 1965 of the appellant. On or about September 1, 1964, appellant, a Quebec corporation, established a pension plan for its employees entering into an agreement for this with Emile Beaudry, Claude Guertin, Almanzor Laberge and Jacques Plamondon as trustees. Emile Beaudry was the principal shareholder and president of the company owning 63 of its common shares. Claude Guertin, the vice-president, owned 25 shares, and Jacques Plamondon, the secretary-treasurer, owned 2 shares. The remaining 10 shares were owned by Mrs. Beaudry and Mrs. Guertin. Almanzor Laberge was the company’s auditor and accountant and was not a shareholder nor a beneficiary under the pension plan, the benefits of which were limited to Beaudry, Guertin and Plamondon and not extended to any other employees of the company. The pension plan dated September 3, 1964 and trust agreement dated September 1, 1964, both of which were later amended by documents dated July 11, 1967, were transmitted to the respondent for examination and registration and by a letter dated November 13, 1964, respondent advised the appellant that ‘‘the plan, as so constituted, is accepted for registration by the Minister of National Revenue as an employees’ superannuation or pension fund or plan for the purposes of the Income Tax. Act and is effective as of 3rd September, 1964”. The amended plan and agreement were also submitted to respondent and found to be in conformity with the regulations as indicated in a letter to appellant’s solicitors dated June 28, 1968.

Pursuant to a certificate of Jean N. Lefebvre, a Fellow of the Society of Actuaries, dated October 8, 1964, the deficit of the pension fund in respect of past services of its members amounted to $94,813 and he recommended that this amount be paid in five equal annual instalments of $20,478 each. These payments evidently included interest on the outstanding balances. The calculation was based on providing future service pensions of 70% of the greater of the average earnings of each of the beneficiaries in the five years immediately preceding the effective date, or the average earnings in the six years immediately preceding retirement. The calculation was further made on the assumption that the salaries would continue until retirement at a level equal to the average of the last six years up to the effective date. Interest before retirement was assumed at the rate of 4% with no allowance for mortality or withdrawals as too few lives were involved. The employer and employee were each to contribute $1,500 per year for future service with normal retirement age being calculated at 60 for employees age 55 and under, and at 65 for employees between 55 and 65 years of age at the effective date, and the pension was payable on a last survivor basis to the beneficiary’s widow until her death or, if he left no widow surviving, to his heirs for 15 years. Mr. Beaudry, who was 60, would on the basis of these calculations receive an annual pension of $5,857 and the present value of the past service pension in his case amounted to $55,251. Mr. Guertin, who was 36, would receive a pension of $7,089 and no past service contributions were necessary in his case since, aS was explained in evidence, enough contributions would be made by him or on his behalf prior to retirement age to more than cover his pension. Mr. Plamondon, who was 46 years of age, and was at the time the highest. paid of the three, would receive a pension of $7,929 and the past service contributions that had to be made on his behalf would be $39,562 which, together with the $55,251 due on behalf of Mr. Beaudry, made the total of $94,813. This certificate was transmitted to respondent and by letter dated January 26, 1965, respondent advised appellant that the Superintendent of Insurance had confirmed that the total deficit in respect of past service pensions was $94,813 on September 1, 1964.

In each of the taxation years 1964 to 1967 inclusive appellant contributed to the pension plan an amount of $24,978 consisting of $4,500 for current services and $20,478 for past services. In the 1968 taxation year the company’s contribution was $14,877, of which $11,877 was for past services and $3,000 for current services, the contributions for that year having been reduced as a result of the death of Jacques Plamondon on October 13, 1968. His death was followed by the death of Emile Beaudry on January 5, 1969.

Supplementary letters patent dated December 17, 1964 authorized the creation of redeemable non-cumulative non-voting 5% preferred shares of a par value of $100 each and in the taxation year 1964 the trustees of the pension plan invested $23,400 in the preferred shares of appellant using for this purpose $3,000 of the current service contribution and $20,400 of the past service contribution of that year. Similarly, in 1965, an amount of $23,500 was invested in preferred shares of the company by using $3,000 of the current service contribution and $20,500 of the past service contribution for that year.

The trustees also invested $6,000 per annum in life insurance policies on the lives of each of the three beneficiaries, the premium in each ease being $2,000 with the amount of benefits and conditions of the policies varying. This resulted in a total investment of $28,000 during the five year period from 1964 to 1968 (only four years in the case of Plamondon who died before the fifth year’s premium was paid). In each case the trustees were named as beneficiaries. A significant difference, which will be discussed later, was made in the case of the policy on the life of Mr. Beaudry, which was merely to provide a pension for him in the amount of $129.78 a month commencing at the age of 70 and, in the event of his death before that date, the higher of an amount shown on a table forming part of the policy or the amount of the premiums paid was to be payable to the beneficiaries. In the case of Mr. Plamondon, the policy provided life insurance in the capital amount of $38,351 in the event of his death before age 70, with the pension rate at age 70 being $383.51. Mr. Guertin’s policy, although not produced, was said to have been similar in type to that provided in the case of Plamondon although the amounts would, of course, have differed. According to the witness Mare Charest, the company’s accountant and comptroller during the period in question, Beaudry’s life was not insurable which was why no life insurance was provided for in his policy. On the other hand, the witness Robert Faust, the company’s insurance agent and specialist in pension plans, testified that the policies differed because Beaudry, being the oldest of the three and the president and principal shareholder of the company, needed protection against the possible death of the others which would be very detrimental to the appellant’s business, whereas the converse was not true to the same extent as, if he died, they could carry on.

The statement of the pension fund for the period from December 15, 1964 to December 31, 1965 shows that it received from appellant the sum of $20,478 for past service pension and $9,000 for current pension for a total of $29,478 on December 15, 1964. On the same date it paid $6,000 insurance premiums to the Exeelsior Life Insurance Company and on December 30, 1964 purchased 234 preferred shares of the company costing $23,400 making total disbursements of $29,400. Similarly, on December 30, 1965 it received a further payment from appellant of $29,478 for the past service and current pensions and it had, on November 8, 1965, paid $6,000 to the insurance company and on December 30 bought a further 235 preferred shares from appellant at a cost of $23,500 making total disbursements of $29,500. After the two years operations it had, therefore, a balance in the bank on December 31, 1965 of $56. It was explained in evidence that appellant, although only obligated under the plan to pay $1,500 on behalf of each of the three beneficiaries as current pension plan contributions, to be matched by equal payments by them, actually made their payments into the plan also, the extra $1,500 payment in each case being treated as a bonus on which they declared and paid personal income tax.

In 1966, the company made its regular payment to the fund and the insurance premiums were paid from same but as no preferred shares were purchased there was a balance of $23,534 in the fund’s bank account at the end of that year. A deposit certificate of the Bank of Montreal in the amount of $25,000 was purchased early in 1967, and again appellant made its usual contribution and the insurance premiums were paid leaving a balance in the bank on December 31, 1967 of $22,012. In 1968 for the first time some income was received by the fund, the amount of $1,369 being credited as the result of interest on the deposit certificate which was received on February 7. During the year a final payment was made by the company into the fund of $11,877 on account of past service pension and $6,000 current service pension, Mr. Plamondon having died, as already indicated on October 13 of that year. As a result, the insurance premiums payable were also reduced to $4,000. On February 7, the same date that the original deposit certificate for $25,000 became due, a new deposit certificate was purchased for $47,000, leaving a balance in the bank on December 31, 1968 of $15,258.

The 1969 statement indicates that the $47,000 bank deposit certificate purchased in 1968 matured on February 7 and interest on it in the amount of $2,812.27 was received. Various other bank deposit certificates were purchased from time to time during the year as funds became available in the bank account. Mr. Beaudry having died on January 5 there was only one insurance premium to pay in 1969 in the amount of $2,000 which was paid on November 13. As a result of the death of Mr. Plamondon on October 13, 1968, the sum of $39,206.80 was received on May 8, 1969, being the proceeds of the life insurance policy on his life tother with interest, and on May 13 a pension was purchased for his widow, Mrs. Plamondon, at a cost of $34,737.66. The sum of $2,000 was received from appellant as a contribution to the pension fund on the sole surviving beneficiary, Mr. Guertin (the statement of receipts and disbursements does not explain why this was not in the amount of $3,000 as it should have been to cover both the company’s and his required contribution). On December 30, 1969, appellant redeemed some of its preferred shares in the amount of $23,400 paying this amount to the fund. The net result of all these transactions left the fund with the sum of $24,330.21 in its bank account as of December 31, 1969.

While we are, of course, only concerned with the assessment of appellant for the years 1964 and 1965, details of the operation of the pension fund in subsequent years have been given as they are of some significance in assisting in a determination of whether the pension fund was a genuine fund operated by the trustees thereof independently of the appellant company in the interests of the beneficiaries of the fund with the payments made by appellant to the fund being irrevocably vested i It, which is an issue before the Court.

It should be noted that, although the statements of the fund for 1964 and 1965 correctly show receipts in each year from the company of $20,478 for past service pension and $9,000 for pension for the current year, the payments were not made in these amounts nor on the dates shown in the statements. Instead, $6,000 payments were made at the time that the insurance premiums for this amount became due, and in 1964 a cheque for $23,478 dated December 26 was issued by the company to the pension fund and deposited by it on December 31, the same day on which it issued a cheque for $23,400 to the company in payment of preferred shares. In 1965 the company issued its cheque for $23,478 dated September 1, 1965 but this was only deposited by the pension fund in its account on December 30, the same day on which it issued a cheque in the amount of $23,500 to the company for the second purchase of preferred shares. Respondent is apparently slightly in error therefore in referring throughout the reply to the notice of appeal to a cheque for $23,400 drawn by appellant on its bank account on December 30, 1965 as the photostat of the cheque (No. 29, Exhibit A-1 Book of Documents) shows that the correct amount was $23,478. In particular, respondent states in paragraph 13 of its reply to the notice of appeal that :

. . . there never was any intention on the part of the Appellant and the other parties to the transactions outlined in Part A hereof that the portion of the funds represented by the cheques in the amounts of $23,478.00 and $23,400.00 aforesaid comprising a special payment on account of a pension fund or plan in respect of past services would irrevocably vest in or for the pension fund or plan within the meaning of section 76 of the Income Tax Act.

and in paragraph 18:

In the alternative, if the payments were made by the Appellant to the trustees, which is not admitted but denied, then the Respondent submits that the transaction outlined in Part A hereof was one which throughout was tainted with an artificiality and that the Appellant is therefore precluded by subsection (1) of section 137 of the Income Tax Act from deducting pursuant to section 137 of the Income Tax Act any portion of the payments of $23,478 and $23,400.00 which it had made to the trustees.

It is evident that the second figure in each case should read $23,478 rather than $23,400. There is a further error, however, in referring to these payments of $23,478 as payments on account of past services as in each year the amount paid on account of past services was $20,478 with a further deduction claimed in the amount of $4,500 for the company’s share of the current service contributions to the three beneficiaries making a total in each year of $24,978 if both past and current service contributions are deductible. What respondent appears to be contesting is the deductibility of the two cheques issued at the end of 1964 and 1965 by the company in favour of the fund in view of the fact that the trustees of the fund then immediately purchased preferred shares of the company for approximately the same amounts, but these cheques issued by the company at that time represented neither past service contributions nor the total of past service contributions and its share of contributions for the current year but were rather cheques for a balancing amount after deducting from the $29,478, which it paid each year (which included $4,500 for the beneficiaries’ current service contribution for which the company could not claim a deduction under this section of the Act) the sum of $6,000 paid to the fund earlier in the year to enable it to pay the insurance premiums.

The situation is further confused by the fact that the assessments appealed from add back deductions made by the company to the pension fund of $23,400 in 1969 and $23,500 in 1965, these being the exact amounts used by the trustees of the fund to purchase preferred shares of the company in each of those years, and not the exact amounts of past service or past plus current service contributions made by the company to the fund.

Section 139(1) (ahh) of the Income Tax Act defines what is meant by a registered pension fund or plan as follows:

(ahh) “registered pension fund or plan” means an employees’ superannuation or pension fund or plan accepted by the Minister for registration for the purposes of this Act in respect of its constitution and operations for the taxation year under consideration ;

Section 11(1) (g) provides for the deduction in computing the income of a taxpayer for a taxation year of amounts paid by the taxpayer in the year or within one hundred and twenty days from the end of the year to a registered pension fund or plan in respect of services rendered by employees in the year to a. maximum of $1,500 for each employee, plus any amount deducted as a special contribution under Section 76.

Section 76(1) deals with such special contribution which is required to ensure that all the obligations of the fund or plan to the employees may be discharged in full. It reads 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.

Section 137(1) deals with artificial transactions and reads as follows :

137. (1) In computing income for the purposes of this Act, no deduction may be made in respect of a disbursement or expense made or incurred in respect of a transaction or operation that, if allowed, would unduly or artificially reduce the income.

At the time the fund was established in September 1964 the Quebec Companies Employees Pension Act, R.S.Q. 1964, ce. 277, was in effect but according to the evidence of both the witnesses called by appellant, the company paid no attention to this and, in fact, there seems to be some question as to whether its advisors realized it existed. This Act provided, inter alia, that a company might by by-law establish a contributory pension system for its employees, which by-law should only come into force after it had been approved by the Superintendent of Insurance who, before approving same, must ascertain that the majority of the employees concerned agreed to participate. It further provided that any surplus over a reserve sufficient to pay the pension due and current needs should be invested in accordance with the provisions of Section 154 of the Insurance Act, R.S.Q. 1964, ¢. 295 (broadly speaking, trustee securities, although investment is permitted in shares of any solvent company incorporated by Canada or any of its provinces which has carried on business for at least five years and is still doing business therein, but only to the extent that investment in such shares shall not exceed one- fifth of the paid up capital of the company issuing same, which would have precluded under this statute investment in the shares of the company which only had $10,000 paid up capital at the time of the first investment and $33,400 paid up capital after the purchase by the fund of the first 234 preferred shares). Section 9 of that Act provided that as soon as the contributions are paid into such fund by the employees and the company, ownership thereof is no longer vested in the latter. Provision was also made for annual reports to the Superintendent of Insurance of Quebec.

The said Quebec Companies Employees Pension Act was repealed and replaced by the Supplemental Pension Plans Act, S.Q. 15-14 Eliz. II, c. 25, which was assented to on July 15, 1965. This Act required the plans existing at the time of its coming into force to comply with its standards from January 1, 1966. Employers were required to file with the Quebee Pension Board before October 1, 1965 a copy of any existing plan and a return in a prescribed form and trustees of such plans were also required to file a return in a prescribed form before that date. Provision was made for the Board to register plans complying with the standards and existing plans had to be registered as of January 1, 1966. By Section 21, the registration of an existing plan precluded any recourse based on non-compliance with the Companies Employees Pension Act.

Regulations under this Act were approved by Order in Council Number 2463, December 22, 1965 published in the Quebec Official Gazette on January 8, 1966. By Section 6.12 of these regulations, not more than 10% of the total assets of a plan shall be lent to any one person or invested in any one corporation.

The fact that the plan did not comply with the provisions of the Companies Employees Pension Act when it was commenced does not affect the acceptance of it by the Minister for registration under the provisions of Section 139(1) (ahh) of the Income Tax Act. The necessity of complying with the requirements of the Supplemental Pension Plans Act, however, explains the changes made in the constitution of the plan in July 1967 which led to the eventual registration of it which was approved by letter of the Quebec Pension Board dated December 4, 1967. The same amended plan and trust agreement were also found to be in accord with the regulations under the Income Tax Act and the registration of same was continued as indicated by a letter on behalf of the Minister dated June 28, 1968. The requirements of the Quebec Supplemental Pension Plans Act and. regulations, with which the company and the trustees were obliged to comply although they had ignored the provisions of the previous Companies Employees Pension Act, explains why no further preferred shares of the company were purchased by the fund after 1965 and why the preferred shares already purchased were in due course redeemed by the company.

Mare Charest, the accountant and comptroller of the company during the period from 1964 to 1969, testified that it had been in business selling and repairing automobiles since 1939 as a General Motors Chevrolet-Cadillac dealer. Emile Beaudry, the president, founded the company, Jacques Plamondon, secretarytreasurer, had been with the company for 23 years at the time of his death, and the third beneficiary of the plan, Claude Guertin, the vice-president, had been with the company since 1947. Before setting up the plan they had been consulting with Robert Faust who was secretary of their group insurers for about two years. The witness was one of the executors of the late Mr. Beaudry and in connection with the Plamondon estate he assisted the widow, Mrs. Plamondon. With her consent he produced a copy of the estate tax return made in connection with this estate which showed an amount of $54,218 accumulated in the pension plan for the credit of the deceased, of which $38,351 consisted of the proceeds of the insurance policy on his life, of which the trustees of the pension plan were beneficiaries. A consent to transfer this was requested together with a separate consent to transfer the balance of $15,867 due. According to a document filed as Exhibit R-1, the calculation of the amount to which the deceased’s estate was entitled on his death before reaching pensionable age was made by adding the past service contributions made on his behalf in the amount of $8,601 for each of the four years 1964 to 1967 inclusive to the current service contributions made by the employer and by him in the amount of $3,000 for each year making a total of $46,404 from which the four insurance premiums amounting to $2,000 each, paid on his behalf, were deducted to arrive at a figure of $38,404 as of the end of 1967. (Similar calculations were made for Messrs. Beaudry and Guertin which indicated total credits in the fund for the three beneficiaries at that date of $93,912.) The fund received $38,555.50 from the proceeds of the life insurance policy on Plamondon’s life including dividends as a result of his death on October 13, 1968 and these proceeds were attributed to him in the proportion of $38,404—$93,912 resulting in an additional sum of $15,765.34 being credited to his account. A further $559.78 was credited as his share of interest on the Guaranteed Deposit Certificate resulting in a total sum of $54,729.12 being shown as being due to his estate. (While there is some discrepancy between this figure and that of $54,218 shown in his estate tax return, this is probably accounted for by the computation of interest and is not significant for the purposes of the present proceedings. )

Although the witness as one of the executors of Emile Beaudry signed his estate tax return when he died early in 1969, he omitted, according to his evidence by oversight, to include the amount due to this estate from the pension plan and in the assessment of this estate by the Minister the sum of $98,467.66 was added. This amount was calculated as appears from Exhibit R-1 in the same manner as the calculation was made in the case Of Mr. Plamondon and Beaudry was credited with his pro rata proportion of the insurance received by the fund when Plamondon died which amounted in his case to $21,147.69. In the case of Mr. Beaudry there were additional past service and current service contributions for 1968 added less the 1968 insurance premium, but in his case no life insurance became payable on his death in place of which, in accordance with the terms of the policy, five premiums of $2,000 per annum paid by the fund on his behalf plus interest on same were reimbursed to the fund, making a total of $10,317.11 of which the Beaudry estate was credited with $9,574.28 being the pro rata proportion after this was shared with Claude Guertin, the sole surviving beneficiary of the fund, who had a much smaller credit in same at the time of Mr. Beaudry’s death, since in his case it will be recalled no past service contributions had been made, but only the current service payments for five years.

The witness testified that in 1969 the fund used $34,737.66 of the amount due to the Plamondon estate to purchase a single payment annuity for Mrs. Plamondon but the balance due her has not yet been paid in view of the dispute with the Minister over the 1964 and 1965 assessments of the company which came to light when the notices of re-assessment dated April 28, 1969 were received. Mrs. Plamondon agreed to this procedure. In the case of Mrs. Beaudry, however, an annuity has been bought for her with most of the proceeds due by the fund to the Beaudry estate, although about $12,000 is left over. (The purchase of this annuity and the exact balance left does not appear from any of the documents filed as exhibits. )

On cross-examination, Mr. Charest attempted to maintain that investment of the fund in preferred shares of the company was a good one, stating that the trustees were not interested in the fact that no income was received from this investment even though the profits of the company would have permitted the payment of a dividend. When no dividend was received for two years, no notice was given to the preferred shareholders nor were they called upon to vote, despite the provisions to this effect in the supplementary letters patent approving by-law No. 20 of the company authorizing the creation of 2,000 preferred shares. He conceded that the only way the pension fund could have got back its investment in the preferred shares was if the company decided to redeem them. Since the directors of the company were the same persons as the trustees of the pension fund (with the exception of Mr. Laberge, the auditor, who does not appear to have played an active part) he did not consider that this presented any problem. He admitted that the trustees of the fund did not account to the company annually for their administration as required by clause 6 of the trust agreement nor did they notify the beneficiaries that they had become participating members of the plan as required by clause 2, stating that these requirements were unnecessary as they were the same people.

Appellant’s second witness, Robert Faust, testified that he has worked in group insurance for ten years and advised many clients, and that appellant had been a client of his since 1957 or 1958. He had discussed a pension plan with the officers for some time in general terms. Because of arrangements that the company had with certain creditors, they could not pay a dividend and he pointed out to Mr. Beaudry, the president and founder of the company, that he should make some provision for his old age and retirement. The ideal would have been a pension plan to cover all employees but this was too costly so they decided to limit it to the officers of the company only. Beaudry had had little education and wanted to keep as much money in the company as possible which accounts for the investment of all the available assets of the fund in 1964 and 1965 in preferred shares. The clause in the trust agreement permitting the trustees to invest in common or preferred shares of the employer and to maintain life insurance on the life of any shareholder of the employer or on the life of the employees, payable to the trustees of the fund, is legal and appears in many pension plans with which he has had experience. He stated that the life insurance proceeds received by the plan following the death of Plamondon constituted a capital profit for it and, after deducting the premiums paid, were divided in the same proportion as the investment of each of the beneficiaries in the plan. Before advising Mr. Beaudry on the pension plan, he had checked with lawyers and with representatives of the Minister.

On cross-examination he stated that pension funds ordinarily earn 4% compound interest so that even if only half the fund were invested in deposit certificates at 8% (actually, the deposit certificate eventually purchased in this case earned 7% %) the fund would earn an average of 4% even if the other half were invested in preferred shares and received no dividends. He conceded that it was useful to have the money re-invested in the company in preferred shares as this increased the liquidity of the company since it did not have to pay any interest as it would have if it had made equivalent borrowings from its bankers, and it would also benefit by the deduction from taxable income of the amounts paid into the fund. He conceded that if the proceeds of life insurance policies on the lives of the bene- ficiaries who died before attaining pensionable age were distributed in part to their estates, it was possible that the fund might not prove sufficient to pay the pension benefits to the surviving beneficiaries. Clause 6 of the amended plan also added additional benefits but this was also accepted for registration by the Minister. He conceded that the original plan before the amendment might not have permitted payment to the estate of a deceased beneficiary of its share of the life insurance that the fund had taken out on his life. The clause dealing with death prior to retirement age in the original plan provided for the payment of ‘‘all the amounts to the deceased member’s credit in the fund’’ and went on to say these amounts will include the contributions effectively paid by the employer at the time of death in addition to the member’s own contributions’’. He conceded that in making the calculation for the purpose of the Plamondon and Beaudry estates of the amounts to the credit of each member as of the end of 1968 (Exhibit R-1) the effect of the amended plan on contributions since January 1, 1966 was not taken into consideration but he held that the amendment only established a minimum. By including a share of the proceeds of the imsurance received, the estates of the deceased members were credited with more than the minimum. He admitted that if the insurance benefit had been retained in the plan and not distributed to members, it might have had the effect of diminishing future contributions (or perhaps increasing benefits) but he did not agree that these proceeds belonged to the plan and that a proportionate share should not have been credited to each member’s account. He pointed out that if the plan gets in a deficit position, the deficit must be made up by the company and that an actuary’s certificate is required each two years. He explained that a reserve had been set up in the case of the Plamondon estate because of the possibility of the Minister’s reassessment being upheld on the ground that the payments made by the company had not actually been contributed to the plan, although he does not agree with this. At the same time, however, he conceded that the fiscal problems of the company should not affect what the trustees of the plan must pay.

Appellant attributes great significance to the fact that the plan was accepted for registration by virtue of Section 139(1) (ahh) and that the past service payment had ‘‘been approved by the Minister on the advice of the Superintendent of Insurance’? within the meaning of Section 76(1) of the Act. It should be pointed out, however, that Section 139(1) (ahh) refers to a plan “accepted by the Minister for registration for the purposes of this Act in respect of its constitution and operations for the taxation year under consideration’’ (italics mine). The approval of the amount of the past service payment under Section 76(1) merely means that the Superintendent of Insurance accepted the figures of the actuary who calculated the amount of this payment. The fact that a plan has been accepted for registration does not estop the Minister from later, cancelling the registration (although this was not done in this case) or from subsequently claiming that payments into the plan were not irrevocably vested in it as required by Section 76(1), or that it has been artificially set up for the primary purpose of obtaining a deduction which, if allowed, would unduly or artificially reduce the income of the employer so as to bring Section 137(1) into play. This argument was dealt with in the case of West Hill Redevelopment Company Limited v. M.N.R., [1969] 2 Ex. C.R. 441; [1969] C.'T.C. 581, in which, in dealing with the contention that by reason of the registration and approval of the amount of the payment by the Minister he is precluded from contesting the deduction of that payment in computing appellant’s income, Mr. Justice Kerr said, at pages 452-53 [592] :

. . . In that respect my view is that if by reason of its true character the payment was not one that could be deducted pursuant to the Act it was proper for the Minister, when he became aware that such was the case, to withdraw the registration and approval which he had previously given at a time when he was not aware of the true character of the payment and of the transaction of which it was a part.

In this connection see also the judgment of Sheppard, J. in the case of The Cattermole-Trethewey Contractors Ltd. v. M.N.R., [1970] C.T.C. 619, in which, despite the registration of a pension plan and approval of the amount of special payment pursuant to Section 76(1) by the Minister, the deduction was disallowed ; and Susan Hosiery Ltd. v. M.N.R., [1969] 2 Ex. C.R. 408; [1969] C.T.C. 533.

The difficulty in this case arises from the fact that the same individuals are acting in various different qualities. Messrs. Beaudry, Guertin and Plamondon between them owned 90 of the 100 issued common shares of the company with Mrs. Beaudry and Mrs. Guertin owning the other 10 shares. They were also the directors and officers of the company, the only three beneficiaries under the pension plan and, with the addition of the company’s auditor, Mr. Laberge, they were the trustees of the plan and, as such, named as the beneficiaries of the insurance policies .While this is not contrary to any of the provisions of the Income Tax Act, it raises the possibility that in their operation of the fund as trustees they might well be governed in their conduct by the interests of the company or of the beneficiaries rather than of the fund itself. The trust agreement itself provided that trustees could invest ‘‘part or all of the fund in the common and preferred shares of the employer’’. Clause 6 required the trustees to keep accounting records open to inspection at all reasonable times by any person designated by the employer. Accounting statements had to be filed with the employer annually or within 90 days after the removal or resignation of a trustee, and the trustees are discharged from liability except for loss or diminution of the fund resulting from wilful misconduct or lack of good faith within 90 days of filing such statement ‘‘except with respect to any such acts or transactions as to which the employer shail within such 90 day period file with the Trustees written objections’’. Clause 8 provided ‘‘the employer may replace any or all of the Trustees on giving one month’s notice to the Trustees’’. In the plan itself there is a clause to the effect that ‘‘the employer reserves the right to modify or discontinue the pension plan should future conditions in the judgment of the employer warrant such action’’ but the trust agreement makes this plan part thereof and this clause therefore must be read in conjunction with clause 12 of the trust agreement which, in dealing with amendment of the agreement by the employer, provides that ‘‘no such amendment which affects the rights, duties or responsibilities of the Trustees may be made without their consent, which consent should not be unreasonably withheld, and provided further that no such amendment shall authorize or permit any part of the fund to be used for or diverted to purposes other than those provided for under the terms of the plan’’. Clause 1 also provides that ‘‘the fund shall be held by the Trustees in trust and be dealt with in accordance with the provisions of the agreement. At no time shall any part of the fund be used for or diverted to purposes other than those pursuant to the terms of the plan’’. It is evident that the company maintained a considerable degree of control over the operation of the fund by the trustees and that even had they been independent individuals and not the directors and officers of the company, the right to replace them at will would have maintained this control. This is not to say, however, that the fund was not vested in the trustees for it could not be diverted to uses other than those foreseen in the plan. Since the plan foresaw the possibility of investment in the shares of the company, however, it would appear that the company was in a position to insist on this investment.

Appellant’s counsel argued that even though this did in effect leave the fund with no other assets other than the preferred shares with which to discharge its liabilities in 1964 and 1965 (and in fact there is every reason to believe that this would have continued in subsequent years but for the Quebec Supplemental Pension Plans Act and regulations made thereunder which prevented this investment following 1965) this presented no difficulty since the trustees, acting in their capacity as directors of the company, could always oblige the company to redeem the preferred shares when funds were required. Moreover, no pensions would become payable for five years, when Mr. Beaudry would have reached the age of 65.

While it is true that some protection was provided for the liability of the fund in the event of death of one or more of the beneficiaries before his or their pension matured by way of the life insurance policies, but in the case of Beaudry, since there was no insurance on his life, his estate could only have been reimbursed the sums due by the redemption of the preferred shares, and in the case of Plamondon the amount of the insurance alone would only have been sufficient if he had died within the first four years of the establishment of the fund (as he did) and then only if no portion of the proceeds of the insurance on his life had been attributed to his estate. If the fund had continued to invest in preferred shares of the company, it would certainly have had to rely on a redemption of these shares to meet its liabilities. It is difficult to accept the argument that the liquidity of the fund was assured because the trustees, acting in their capacity as directors of the company, could always require it to redeem sufficient of its preferred shares to provide the fund with the necessary cash requirements in order to carry out the plan. If they have to act in another capacity in order to maintain the liquidity of the fund then they are not ensuring its liquidity in their capacity as trustees. Moreover, although according to the evidence the company was quite prosperous at the time, there was certainly no assurance that it would have had sufficient funds available at any given time to redeem its preferred shares. Nor could the trustees, acting as such, insist. on this redemption. There is no requirement in the plan or trust agreement requiring the company to make up any deficit in the fund and this only results from the provisions of the Supplemental Pension Plans Act, Section 43 and Regulation 5.04 to 5.06.

Although considerable evidence was adduced with respect to the investment of part of the funds of the pension plan in insurance policies to provide annuities at age 70 and, in the cases of Plamondon and Guertin, life insurance in the meanwhile, and with respect to the eventual crediting by the trustees of the proceeds of the policies on the deaths of Beaudry and Plamondon to the three beneficiaries of the pension plan instead of retaining the proceeds in the plan, I do not consider it necessary for the decision of this case to reach a conclusion as to whether this was a proper appropriation of these funds or not. In the first place, although respondent’s counsel attacked in argument the entire validity and legal existence of the pension plan, it is evident that the attack should be limited to the amount of the payments made by the company into the plan which were immediately used for the purchase of preferred shares of the company. This is not only clear from the pleadings themselves, as previously stated, but also from the assessments appealed from which merely disallowed the contribution of $23,400 in 1964 and $23,500 in 1965, these being the amounts used in those years to purchase preferred shares of the company. Furthermore, the Minister in assessing estate tax on both the Plamondon and Beaudry estates included the portion of the insurance policies which were credited to these estates by the trustees of the plan, and also collected personal income tax from the beneficiaries on the amounts paid into the plan by the company each year on their behalf as their share of annual contributions for which they were liable, these being treated as bonuses given to them by the company, and it would be inconsistent to claim now that the proceeds of the insurance policies should not have been distributed as they were, or that the plan was not legally constituted and did not have a proper existence.

I cannot accept respondent’s counsel’s argument that the trust agreement dated September 1, 1964 is not a valid document because it was not in notarial form and does not comply in all respects with the provisions of the Quebec Civil Code relating to trusts. Neither can I accept his argument that the past service contribution made by the company into the fund was in the nature of a gift and hence should have been in notarial form under Quebec law. All the beneficiaries had had long service with the company and these payments could certainly be justified on business considerations having regard to their service (compare Chesley Arthur Crosbie Estate v. M.N.R., [1966] C.T.C. 648, an estate tax case). Nor can it be claimed, as respondent’s counsel argued, that the contract was one of mandate. While in some respects the terms of the pension plan and trust agreement can be brought within the provisions of certain of the articles of the Quebec Civil Code relating to mandate, in other respects the trust agreement clearly does not resemble such a contract. It is not necessary to make a tidy classification of the agreement under some section or sections of the Quebec Civil Code in order for contributions to the plan to be accepted as deductible under the provisions of the Income Tax Act. It is sufficient that there was a pension plan created by the company and accepted for registration by the Minister under the provisions of the Income Tax Act and a contract called a trust agreement entered into between the company and the trustees of the plan setting out the manner in which it was to be operated.

With respect to the irrevocability of the payments made by the company into the plan, I do not attach too much significance to the wording of clause 3(d) of the trust agreement which provides for the trustees ‘‘to carry out their responsibility under this Trust Agreement and exercise all powers as if they were the owners of the fund’’ (italics mine). This is a paragraph within a clause dealing with the rights of the trustees to exercise voting rights, sell or otherwise dispose of property held by the fund and execute all documents of transfer that might be necessary and, as I interpret it, paragraph (d) merely gives them the right to exercise all such powers in the same manner as owners of property and should not be interpreted, as respondent’s counsel contended, as indicating that the company retained ownership of the fund rather than the trustees. In any event, the trustees are only owners in the sense of having possession of the assets of the fund for administration according to the terms of the trust. Neither do I interpret the clause entitled “The Employer’s Intent’’ on page 4 of the pension plan and reading as follows:

The Employer reserves the right to modify or discontinue the pension plan should future conditions, in the judgment of the Employer warrant such action.

as indicating that the payments already made into the fund are not irrevocable in their nature. This applies only to future payments into the fund and this is made clear by clause 12 of the trust agreement which, in dealing with the employer’s right to amend the trust agreement, concludes :

. . . provided further that no such amendment shall authorize or permit any part of the Fund to be used for or diverted to purposes other than those provided for under the terms of the Plan.

Moreover, clause 11 reads :

In event of the termination of the Plan as provided therein, the Trustees shall dispose of the Fund in accordance with the terms of the Plan.

Respondent’s counsel also argued that the actuary’s certificate was null since the plan contained too many imponderables, as the employer could terminate it at any time or could modify it, and in dealing with the past service contributions the plan states that the members ‘‘may be credited with past service contributions of the Employer’’ (italics mine). This same section goes on to say, however,

The Employer’s past service contributions for all eligible members will be in accordance with the provisions of the Income Tax Act.

The actuary’s certificate set out the amount of these contributions for Beaudry and Plamondon, and concluded that none were necessary for Guertin as in view of his age the current service contributions made on his behalf would be sufficient to provide for his pension. These payments were approved by the Minister on the advice of the Superintendent of Insurance, and while, if there were a modification of the plan this would affect the figures, this does not affect the validity of the certificate which was based on the provisions of the original plan, and I cannot read into the Act any provision which it does not contain to the effect that, in order for payments into the plan to be considered as irrevocably vested in it, the plan must contain no provisions for possible future discontinuation or modification by the employer.

Having disposed of these arguments which I cannot accept, we now come to the key issue of whether the plan was an artificial and fictitious one created for the primary purpose of permitting the company to deduct from its taxable income the amount of past service and current service payments made by it into the plan on behalf of the beneficiaries thereof so as to ‘‘unduly or artificially reduce the income’’ of the company within the meaning of Section 137(1) of the Act.

While there has been some previous jurisprudence refusing to permit the deduction under circumstances somewhat similar to the present case, such jurisprudence must be carefully examined, since to some extent these previous decisions must be distinguished on their facts. In the case of West Hill Redevelopment Company Limited v. M.N.R. (supra) the company made application under Section 139(1) (ahh) of the Income Tax Act for registration of a pension plan and under Section 76(1) for approval of a lump sum contribution for past service. While the applications were pending, the company paid the current service and past service contributions into the plan, such payments being made conditional on registration of it and approval of the lump sum contribution which was subsequently given. Immediately following the payment of the lump sum contribution into the plan, however, and even before this approval was received, the plan was terminated and the funds paid to the two beneficiaries who were the controlling shareholders and also directors of the company, and they then paid an equivalent amount to the deferred profit-sharing plan of the company, of which they were trustees, and in this quality they then invested the money in the company’s preferred shares. The Minister subsequently withdrew the registration and approval previously given and disallowed the deduction. The headnote of the judgment of this case ([1969] 2 Ex. C.R. 441) reads:

While the company’s by-laws and agreements and its two plans purported to create legal rights and obligations and to establish a pension plan and deferred profit sharing plan, the surrounding circumstances and the course followed show that it did not intend to establish and did not establish real and true plans of that character. There was no intention that the pension plan would operate long enough to make annuity or periodical payments, which was requisite having regard to the meaning of “pension” in secs. 11(1) (g), 76(1) and 139(1) (ahh). The plans as submitted by the company were simulates. Moreover, deduction of the payments would artificially reduce the company’s income and so violate s. 137.

Dominion Taxicab Ass’n v. M.N.R. (1954) S.C.R. 82; Atlantic Sugar Refineries Ltd. v. M.N.R. (1949) S.C.R. 706, referred to.

The Minister on becoming aware that the payments in their true character were not deductible was entitled to withdraw the registration and approval previously given.

In the case of Susan Hosiery Ltd. v. M.N.R. (supra) the company set up a pension plan for its directors and officers which was accepted for registration and the amount of the actuarial deficit for past service was approved. The company then borrowed sufficient funds from the bank to pay the trustee the sum required to complete the past service payments, then immediately caused the plan to be terminated with the pension funds in the plan being paid out to the four officers who thereupon loaned the funds to the company which repaid the bank loan. The beneficiaries paid personal income tax on the pension funds distributed to them but it was never intended by the company, its officers or the trustees of the plan to implement a bona fide pension plan with legal rights and obligations that the parties would act upon. The headnote of the judgment rendered by Gibson, J. ([1969] 2 Ex. C.R. 408) states:

. . . in computing its income for 1964 and 1965 the company was not entitled under secs. 11(1) (g) and 76 of the Income Tax Act to deduct the $238,000 contributed to the pension plan. Appellant’s purported employees’ pension plan was a masquerade. The roundrobin of payments on April 26, 1965, did not establish a pension plan, any relationship of trustee and cestui que trust, or any other legal or equitable rights or obligations in any of the parties, and none of the parties intended at any material time that there should be any.

In the case of The Cattermole-Trethewey Contractors Ltd. v. M.N.R. (supra) two plans were set up for the benefit of the two controlling shareholders of the company. The trustee was a trust company but under the agreement it was required to invest in securities directed by the Retirement Committee which, under the provisions of the pension plans, was to be appointed by the board of directors of the company. The plans were approved by the Minister on the advice of the Superintendent of Insurance as well as the past service contributions under Section 76(1) and in due course the company paid a cheque to the trustee in the amount of its contribution, the Retirement Committee then directed the trust company to invest the money by lending it back to the appellant, and the company then gave the trustee promissory notes in return. It was held that the plans entered into for the benefit of Cattermole and Trethewey were entered into for the primary object that the disbursements would unduly or artificially reduce the income of the appellant by permitting it to escape paying its corporate income taxes on the amounts so contributed. In reaching this conclusion, the learned judge was no doubt influenced to a considerable extent by a letter from the company’s chartered accountant to the company prior to the setting up of the plans which began: ‘‘Further to our discussions as to ways of minimizing current income taxes . . . ” and pointed out that the company could pay $150,000 into a pension plan which would be allowable as a deduction for income tax purposes and result in tax savings of about $75,000 and suggested that the trustees, who might be Messrs. Cattermole and Trethewey themselves, could then invest the $150,000 in preference shares of the company, the net effect of which would be that the company would have $75,000 more than it would have had if the pension payment had not been made.

In the present case the pension plan was carried on for some years, in due course being amended to comply with the requirements of the Supplemental Pension Plans Act, which amendments were also submitted to the Minister and after examination of same by him the registration of the plan was continued. There is nothing, therefore, to suggest that the pension plan was a sham set up with the intention of being immediately wound up, or that it was never intended that it should be used to provide a pension for the beneficiaries of the plan. To this extent, it can certainly be distinguished from the West Hill Redevelopment Company and Susan Hosiery cases (supra). Moreover, as I have previously indicated, I do not believe that the Minister has, on the basis of the assessments made in the present case or the pleadings in same, attacked the validity of the plan itself.

The fact that I find the plan to be a legal and bona fide pension plan, however, and not one set up as a sham for the sole purpose of enabling the company to benefit from certain tax deductions does not necessarily mean that the provisions of Section 137(1) of the Income Tax Act should not be applied in this case if some of the payments made into the plan “unduly or artificially reduce the income’’. As Kerr, J. said in West Hill Redevelopment Company Limited v. M.N.R. (supra) at page 455 [594] :

Coming now to consideration of the question of the character of the transaction or arrangements by which the payments in question were made, it is well settled that in considering whether a particular transaction brings a party within the terms of the Income Tax Act its substance rather than its form is to be regarded, and also that the intention with which a transaction is entered into is an important matter under the Act and the whole sum of the relevant circumstances must be taken into account (Dominion Taxicab Ass’n v. M.N.R., [1954] S.C.R. 82; [1954] C.T.C. 54; Atlantic Sugar Refineries v. M.N.R., [1949] S.C.R. 706; [1949] C.T.C. 196). Consequently I must endeavour as best I can to ascertain the real character and substance of the transaction or arrangements by which the payments in question were made and in doing so I must consider individually and collectively the agreements that were entered into and the surrounding circumstances and the course that was followed.

See also Isaac Shulman v. M.N.R., [1961] Ex. C.R. 410; [1961] C.T.C. 385, where Ritchie, D.J. said at page 425 [400] :

. . . In considering the application of Section 137(1) to any deduction from income, however, regard must be had to the nature of the transaction in respect of which the deduction has been made. Any artificiality arising in the course of a transaction may taint an expenditure relating to it and preclude the expenditure from being deductible in computing taxable income.

It is necessary to make a fine distinction in the present case. It is evident that in any bona fide pension plan the employer does gain as a consequence thereof tax benefits by virtue of the deductions which it is permitted to make under Sections 76(1) and 11(1) (g) of the Act and is no doubt aware of this when the plan is established, but this does not mean that these deductions should be considered to ‘‘unduly or artificially reduce the income’’ of the company within the meaning of Section 137 (1). This section is a general one, however, under the heading “Tax Evasion’’ and I therefore believe it is necessary in any given case to attempt to determine from the facts of that case whether the company was merely incidentally gaining a tax advantage as the result of setting up a bona fide pension plan, or whether it would not have considered setting up this pension plan but for the tax advantage to be gained as a result thereof, and in the latter event, Section 137(1) would be applied. Now in the present case, while there is no clear indication that the tax advantage was the sole purpose for setting up the plan as in the West Hill Redevolpment Company, Susan Hosiery and The Cattermole-Trethewey Contractors cases (supra), I am forced to the conclusion on the evidence before me that the company would never have set up the plan had it not been assured of getting back at least the greater part of the money contributed thereto by virtue of the re-investment of these funds in the preferred shares of the company. The evidence indicated that when, in discussions concerning the proposed plan with Mr. Beaudry, the controlling shareholder of the company, it was pointed out to him that some provision had to be made for his eventual retirement, he indicated that he wanted to keep the money in the company, and that it was then explained that this could be done by re-investment in preferred shares. On cross-examination the witness Faust admitted that it. was useful for the company to have the money re-invested in it as this would increase its liquidity as no interest payments would have to be made on equivalent borrowings from the bank and the company would also benefit from a tax deduction on the amounts paid into the fund. I am satisfied that this was the controlling factor which convinced Mr. Beaudry to set up the plan, and that even though it was intended to set up a bona fide pension plan to provide for his retirement and those of the other beneficiaries, this plan would never have been established but for the principal selling point of keeping the money in the company by the re-investment of the amounts paid into the plan in its preferred shares, and the tax advantages to be gained by the company by establishing such a plan.

There is no doubt in my mind that, while the trustees of the plan were not mandataries of the company in the sense of the articles on mandate in the Quebec Civil Code, they were in effect at all times under the control of the company. Not only were they (with one exception which does not appear to have affected the situation) the directors of the company, but the company could replace them as trustees at any time. It is clear that at all times it was intended to re-invest all available funds of the plan, over and above what was required for the payment of the insurance premiums, in preferred shares of the company and that the trustees, acting in this quality, were in no way concerned by the fact that the company was paying no dividend on these preferred shares nor did they insist on exercising their rights to vote given them by the by-law creating these preferred shares when no dividends had been paid for two years. They were ignorant of, or in any event ignored, the provisions of the Quebec Companies Employees Pension Act in effect at the time which required them to invest the surplus funds in accordance with the provisions of Section 154 of the Quebec Insurance Act, which would have prevented the investment in the shares of the company to an extent of more than one-fifth of its paid up capital. It appears to me that an essential, although of course unexpressed, condition of the establishment of the entire plan was Mr. Beaudry’s understanding that the money would be reinvested back into the company in the form of preferred shares.

I therefore find that, to the extent of the sums re-invested. in the preferred shares of the company, the payments made to the pension plan constituted a disbursement or expense which unduly or artificially reduced the income of the company within the meaning of Section 137(1) of the Income Tax Act. The assessments dated April 28, 1969 for the taxation years 1964 and 1965, disallowing the deduction of $23,400 in 1964 and $23,500 in 1965 are therefore maintained and appellant’s appeal is dismissed, with costs.