Emmerson v. R., [1998] 1 CTC 2182

Sarchuk T.C.J.:

This is an appeal by Josée Emmerson (the Appellant) from an assessment of tax with respect to her 1994 taxation year. By this assessment, the Minister of National Revenue (the Minister) disallowed the Appellant’s deduction to the extent of $749 in computing her income for that taxation year of Registered Retirement Savings Plan (RRSP) contributions on the basis that her contributions exceeded the maximum amount permitted in that year. The sole issue is whether the RRSP deduction limit for the 1994 taxation year was properly reduced by a Pension Adjustment (PA) as calculated by the Minister in respect of the Appellant for the 1993 taxation year.

Facts:

On July 24, 1992, the Appellant commenced employment on a determinate basis with the Department of Supply and Services (the Employer). During the 1993 taxation year following the completion of six months of employment, the Appellant, by virtue of the provisions of the Public Service Superannuation Act! [1] was required to make contributions to the Public Service Superannuation Plan (the Plan). From that point until the expiry of her term on May 31, 1993, the Appellant contributed a total of $466.57. Following the expiry of her term, the entire amount contributed to the Plan was returned to her less a deduction for income tax: The T4 and the T4A forms issued in respect of the 1993 taxation year by the Employer reflected the fact that the Appellant had made such contributions to the Plan and that the entire amount thereof had been returned to her prior to the end of 1993.

Following the filing of the Appellant’s income tax return for 1993, Revenue Canada pursuant to subsection 8301(1) of the Income Tax Regulations (Regulations) calculated a PA in respect of the Appellant in the amount of $766 based upon the contributions made by the Appellant to the Plan. This PA had the effect of reducing the Appellant’s RRSP contribution limit for taxation year 1994 to $2,751 from $3,517.

At the time of filing her income tax return for the 1994 taxation year, the Appellant, among other things, deducted in computing her income for that year, $3,500 of RRSP contributions. The Minister assessed the Appellant’s income tax return for that year and reduced the said deduction for RRSP contributions to $2,751. That assessment resulted in additional tax payable for the Appellant of approximately $205.

Counsel for both parties provided the Court with concise statements of their respective positions, the relevant portions of which follow:

Appellant’s Submissions

General Background - Pension Adjustments

Pension adjustments are required to be calculated for those persons who are employed by an employer who participates in a Registered Pension Plan (“RPP”). The definition of pension adjustment in the Income Tax Act, while referring to the meaning assigned by regulation, clearly indicates that the PA of a taxpayer relates to a calendar year in respect of an employer. Through a complex formula, the PA represents an estimate, in respect of a particular calendar year, of the value of an individual’s

benefit accrual under [a defined benefit provision of a RPP] in respect of the year that can reasonably be considered to be attributable to the individual’s employment with the employer. (Subsection 248(1) of the Income Tax Act and subsections 8301(1), 8301(6) and 8302( 1 ) of the Income Tax Regulations)

As is apparent from those provisions of the Regulations governing the calculation of the PA, the focus and timing of this calculation is such that the PA is directly related to the actual value of pension benefits which have accrued to an individual in respect of a specific calendar year at the end of that year. (Subsection 248(1) of the Income Tax Act and subsections 8301(1), 8301(6), 8302(1), 8302(2), 8302(3) of the Regulations).

For general discussions of the calculation of the PA, see Osborn v. R., [1995] 2 C.T.C. 2215 (T.C.C.) and Kroff v. R., [1997] 2 C.T.C. 2298 (T.C.C.)

By identifying the value of the total pension actually accrued to the individual in respect of a particular year, and subtracting that value from the RRSP contribution limit for that individual, the calculation of a PA ensures that persons who participate in an RPP do not have a greater ability to contribute to their retirement savings than persons who do not participate in an RPP. In other words, the PA acts as a means by which participants in an RPP and other persons who can only contribute to an RRSP receive equal treatment in terms of the ability to contribute to pension plans and to deduct those contributions from otherwise taxable income.

The Present Case

In these circumstances, the essential position of the Appellant is that the calculation of the PA in respect of the 1993 calendar year was based upon a single alleged fact which is simply not born out by reality: that the Appellant had made a contribution to an RPP which resulted in a benefit entitlement reasonably considered to be attributable to her employment with DSS. In fact, at the end of the 1993 calendar year, the Appellant had no more entitlement to a benefit attributable to her employment with DSS than a person who was never employed by DSS.

While the Appellant made an initial contribution to the employer’s Plan in the 1993 calendar year, that contribution was returned to her prior to the end of the 1993 calendar year such that, at the end of the 1993 calendar year, the Appellant had made no contributions to an RRP. It must necessarily follow that there were no benefit entitlements for the Appellant which were attributable to her employment with DSS. This is particularly the case where DSS issued both a T4 and a T4A in respect of the 1993 calendar year which, read together, represented a clear acknowledgement that no contributions had been made by the Appellant to the Plan and that, accordingly, no benefits could have accrued to her.

In this regard, the Appellant’s circumstances are not unlike those which prevailed in Berkeley v. R.. In that case, Berkeley had been on leave of absence from employment with Federal Government and resigned on March 31, 1992. Although Berkeley was a member of the same Superannuation Plan, no contributions were made to the plan during 1992. In the view of Lamarre Proulx T.C.J., it was very clear that no contributions had been made by the Appellant and that, given the meaning of the term “accrual”, it followed that no portion of a pension benefit was earned by or had accrued to the Appellant.

Berkeley v. R., [1995] 2 C.T.C. 2955 (T.C.C.).

Similarly, in the present case, at the time of the calculation of the PA, it cannot be said that any portion of a pension benefit had been earned by or accrued to the Appellant because all contributions had been returned to her. As in Berkeley, the essential fact supporting the calculation of the PA is absent.

Moreover, unlike the circumstances which prevailed in Osborn and Kroff, as at the time of calculation of the PA, no contributions had been credited to the Appellant in respect of her RPP. In addition, the Appellant emphasized that this is not a case where, for example, her employment terminated in 1994 and she received a return of all of her contributions made in that year and in 1993. In those circumstances, the PA would have been calculated on the basis of contributions which had in fact been made in the 1993 calendar year particularly given the deeming provisions contained in the Regulations. This is not the case here, where the employer was clearly aware that no contributions on her behalf existed in the Plan as at the end of 1993. In these circumstances, the PA should have been nil.

To conclude, the Appellant emphasizes the legislative objective behind the calculation of a PA. The obvious purpose of a PA is to ensure that persons like the Appellant do not have a greater ability to claim deductions from taxable income by virtue of being able to contribute to both an RPP and an RRSP. It is without question that, in the present case, the Appellant received no such extra entitlement. In fact, the exact opposite has occurred: by virtue of the calculation of a PA on the basis of a fictional contribution to an RPP, the Appellant’s maximum RRSP contribution limit has been artificially reduced with the result that the intent of these provisions is compromised and, furthermore, the Appellant is left with a higher tax burden.

Respondent’s Submissions

It is the Respondent’s submission that whether or not a benefit entitlement actually accrues to the Appellant is irrelevant for determining the Appellant’s PA amount because Regulations deem it to have accrued for the purpose of determining the normalized pension amount in subsection 8302(3). Further, there is presently no express provision in the Act or Regulations providing for a reversal of the PA from a multi-employer plan when the contributions have been returned.

Subsection 8302(3) sets out a series of assumptions to be made when calculating the normalized pension amount. Simplified, it reads as follows: “the normalized pension of an individual ... is the amount ... of lifetime retirement benefits that would be payable ... if ... (c) all benefits to which the individual is entitled under the provision were fully vested.” Therefore, when calculating the normalized pension regard must be had to the amount of benefits that would be payable if the benefits were vested.

The hypothetical assumption set out in the paragraph is even clearer in the French version of the provision, which provides that “la pension normalisée prévue pour un particulier ... correspond aux prestations viagères ... qui lui seraient payables ... si les hypothèses suivantes étaient admises”.

In Osborn v. R. (June 2, 1995), Doc. 94-2092(IT)I (T.C.C.) [now reported at [1995] 2 C.T.C. 2215 (T.C.C.)] (copy attached to the Submissions of the Appellant, the Court refers to this language as follows:

The Respondent is of the view that Reg. 8302(3) sets out a series of hypothetical events that are assumed to be true in determining the Appellant’s “normalized pension.” It does not matter if the taxpayer has a vested interest or not.

Upon a closer inspection of the provision of the Respondent’s argument has more merit. The words “that would be payable” and “if’ are indicative of a hypothetical i.e. this is a deeming provision for the purpose of calculating the benefit accrual for the year under Reg. 8302(2)(a). There is no ambiguity. In a simplified version this provision says: For the purposes of Reg. 8302(2)(a) “normalized pension” means the amount that would be payable if all benefits were fully vested.

The French version of Reg. 8302(3) supports the above analysis. It is worded differently but is more obvious: it asks the reader to accept a series of hypothetical facts including one that the benefits are fully vested. The French wording states that normalized pension is the amount that would be payable “si les hypothèses suivantes étaient admises” (= if the following hypotheses are “admitted”).

See also the Court’s decision in Kroff v. R. (December 27, 1996), Doc. 95- 406(IT)I (T.C.C.) [now reported at [1997] 2 C.T.C. 2298 (T.C.C.)] (copy attached to the Submissions of the Appellant).

Thus, the normalized pension amount is determined without regard to whether the individual’s benefit entitlement actually vested or, in other words, regardless of whether the individual actually had a right to a pension under the relevant provision. This in turn results in a benefit accrual, which in turn results in a benefit entitlement, which in turn results in a pension credit which ultimately results in a PA amount. These provisions flow by operation of law from the determination of the normalized pension amount.

The decision in Berkeley v. R. (February 15, 1995), Doc. 94-812(IT)I (T.C.C.) [now reported at [1995] 2 C.T.C. 2955 (T.C.C.)] (copy attached to the Submissions of the Appellant) may be distinguished on the basis that in that instance no contributions were made to the Plan.

Finally, in the February 1997 Budget, the government has announced that it will reinstate the Pension Adjustment Reversal (PAR) mechanism applicable to years after 1996 which will correct the situation where an individual’s PA exceeds the actual value of the benefits to which the individual is entitled.

Conclusion:

The issue before this Court is whether the Appellant’s RRSP deduction limit should be reduced by the pension adjustment benefits as calculated by the Minister. The Respondent’s position is that whether a benefit entitlement actually accrued to this Appellant is irrelevant for determining her PA amount because the Regulations deem it to have accrued for the purpose of determining the normalized pension amount in Regulation 8302(3). I am unable to accept that proposition in this case.

The facts are not in dispute. Contributions were made by the Appellant commencing on approximately January 24, 1993 and continued until the termination of her employment on May 31, 1993. The entire amount of her contributions was returned to her in that year less a deduction for income tax and that fact was reflected in the T4 and T4A forms issued by her Employer. Thus by the end of 1993, the Appellant was not employed by DSS, was not required to contribute and had no entitlement to a benefit vested or not, under the Plan.

The Respondent’s position flows from the operation of Regulation 8302(3) to the effect that in “calculating the normalized pension, regard must be had to the amount of benefits that would be payable if the benefits were vested”. However, it is clear (if anything in these Regulations can be said to be clear) that the benefits referred to are those “to which the individual is entitled”. It would appear logical that any such entitlement under a: pension plan is contingent upon contributions being in the Plan to the credit of the individual. A deemed vesting converts a possible entitlement to a benefit into a right to such benefit for the purposes of the Regulations in issue. I am satisfied that the deeming provision in Regulation 8302(3) was intended to apply to cases where a person has made contributions which were still included in the Plan but where the person had no vested right to any benefits arising from the Plan. This was the situation in Osborn v. R. [2] and Kroff v. R. [3]

In my view, the PA relates to a specific calendar year and represents an estimate of the value of a benefit accrual under a defined benefit provision of a registered pension plan “that can reasonably be considered to be attributable to the individual’s employment with the employer”. [4] When calculating the benefit accrual, one must first determine “the individual’s normalized pension under the provision at the end of the year that can reasonably be considered to have accrued in respect of the year”. [5] Since the Appellant was no longer employed and no contributions existed in the pension plan on her behalf, it cannot be said that there was any benefit accrual which could reasonably be considered to be attributable to her employment in respect of that year.

I have concluded therefore that the Appellant had no benefit entitlement which could be deemed vested under the Regulations and which would then form the basis for calculation of the PA. The appeal is allowed, with costs.

Appeal allowed.