Inland Industries Ltd. v. Minister of National Revenue, [1971] CTC 171, 71 DTC 5136

CATTANACH, J.:—In these appeals the appellant contends that the Minister improperly assessed it with respect to its 1965, 1966 and 1967 taxation years in that he disallowed deductions claimed by the appellant of payments in the amounts of $100,000, $50,000 and $52,650 to the trustees of a registered pension plan in those respective taxation years.

The pleadings indicate that in the 1965 taxation year the Minister also disallowed a deduction claimed by the appellant in the amount of $752.05 as interest paid on borrowed money, but that matter has been resolved between the parties and accordingly is not in issue.

The appellant is a joint stock company incorporated pursuant to the laws of the Province of British Columbia in 1949 and engaged in the business of distributor of Kenworth motor trucks. All of the issued and outstanding shares of the appellant were beneficially owned by Lloyd F. Parker from the inception of the Company to the date of trial.

In addition there are a number of “affiliated” companies, Inland Kenworth Sales (Penticton) Ltd., Inland Kenworth Sales (P.G.) Ltd., Inland Kenworth Sales (Kamloops) Ltd., and Parker Industrial Equipment Ltd. which are retailers of Kenworth trucks. The affiliated companies or retailers purchased all their inventory exclusively from the appellant. I believe that there is a further company, L.B.M. Securities, Ltd. which was a wholly owned subsidiary of the appellant.

Mr. Parker testified that the appellant acted as financier for the entire group of companies in that it discounted all conditional sales, chattel mortgages and like trade paper arising from transactions entered into between the affiliated companies, the retailers, and their customers. The appellant initially borrows money from the bank to cover its needs and those of the affiliated companies and lends the money needed by the affiliated companies to them. The appellant also deals with the bank in arranging lines of credit for itself and for the affiliated companies which lines of credit are supported by cross guarantees entered into by all companies with the bank.

Since the affiliated companies purchased all their inventory from the appellant it followed, and Mr. Parker so testified, that throughout the taxation years in question each affiliated company was indebted at all times to the appellant in substantial amounts.

When the appellant first began business it had between eight and ten employees. At the present time the appellant, its subsidiary and its affiliated companies now engage one hundred and seventy employees. In the taxation years under review the appellant’s gross sales were five to seven million dollars annually which have now increased to fifteen to seventeen million dollars.

Prior to 1965 the appellant had entered into a group annuity retirement plan with the Imperial Life Assurance Company in which Lloyd F. Parker was a beneficiary and into which the appellant had paid $96,998 on his behalf.

Lloyd F. Parker w as a member and beneficiary in another plan as an employee of Parker Motors Limited with The Standard Life Insurance Company. Mr. Parker terminated his employment with Parker Motors Limited at which time approximately $20,000 had been accumulated in this plan for his benefit.

The return on the Imperial Life plan was 4% on the contributions thereto and in the Standard Life plan the yield was 214%.

Mr. Lloyd F. Parker testified that he was dissatisfied with the pension plans then in effect for two reasons, (1) that the yield on the plans was too low and he felt that with another plan he could increase that yield substantially with a resultant increase in the amount of pension eventually payable and (2) that the plans were inadequate to attract and retain outstanding employees. He wanted a plan that would compel employees to look to the future and with benefits that would increase with the years of the employees’ participation in the plan and in which the benefits would not vest forthwith in the employee, the maximum benefit accruing after 15 years participation in the plan. As evidence of the effectiveness of the plan eventually decided upon in attracting and retaining good employees, he pointed to the success of the appellant in enticing the treasurer of a large and successful air line to leave that employment and accept employment with the appellant.

In 1960 and 1961 the appellant had attempted an incentive plan whereby the employees of the appellant were afforded the opportunity of purchasing participating preferred shares but that plan did not achieve the desired objective, whereas Mr. Parker testified that the pension plan eventually entered into did achieve the desired ends.

Mr. Parker discussed the possibility with the auditor of the appellant, Walter John Burian, a member of Young, Peers, Milner & Co., chartered accountants, who in turn discussed the matter with William M. Mercer Limited, a company engaged in the business of pension consultants. After prolonged discussions Mr. Parker was advised (1) that it would be possible to form a plan which would be registrable under the provisions of the Income Tax Act, (2) that the amounts in the Imperial Life and Standard Life plans could be ‘‘rolled over’’ to the new plan,

(3) that there would be no limitation on the type of investments into which the plan could enter,* [1] and (4) that there was a possibility of the past service benefits of Lloyd F. Parker being increased.

Mr. Parker was under the impression that the roll over ’ ’ of the benefits from the Imperial Life and Standard Life was the maximum he could obtain for past services and had not inquired about additional past service contributions. On being informed that there was a possibility of increased past service contributions he was not adverse thereto because it would result in an increase of his ultimate pension and he was made aware of the income tax efiects; that is, that the contribution made by the appellant would be deductible from its income.

Accordingly, on April 1, 1965 the appellant entered into a Pension Trust Agreement (Exhibit 3) with Walter John Burian and Gordon Nelson Parker (a brother of Lloyd F. Parker) as trustees to which was appended a pension plan (Exhibit 4).

Basically the plan covered executive and senior supervisory employees as defined by the appellant. The pensions were to be produced by accumulated contributions. There were two classes of members, Group A and Group B. Lloyd F. Parker was the only Group A member and the only member to whom past service contributions could be applicable. The appellant was obliged to contribute $1,500 per annum in respect of Lloyd K'. Parker, who was the only eligible Group À member as of the effective date of the plan, April 1, 1965, and $100 per annum for Group A and Group B members who joined the plan after the effective date but that contribution by the appellant was increased by a ^bonus’’ contribution. The past service benefits and contributions, which were applicable only to Lloyd F. Parker, were 70% of the average of his best six years salary or $40,000 per annum, whichever was the lesser, reduced by the pension produced by the appellant’s future service contributions and further reduced by any pension produced by any other pension plan to which the appellant had been a contributor. The total past service cost to the appellant was $202,650 (which is the amount here in dispute) to be paid by the appellant in a convenient manner with interest.

The amount of $202,650 was paid into the pension trust by the appellant by payments of the sums of $100,000, $50,000 and $52,650 in its 1965, 1966 and 1967 taxation years and which the appellant deducted in computing its income for those respective years and which deductions the Minister has disallowed.

The benefits due to an employee upon termination of employment were (1) with respect to the Group A member, 100% of the Member’s Contribution Account and the Company Contribution Account and vesting for each subsequent three years of participation to 100% of the Member’s Contingent Account payable in a lump sum refund or paid up pension and (2) with respect to Group B members, 100% vesting of the Member’s Contribution Account and 100% vesting of the Member’s Contingent Account upon completion of 5 years participation and graduated vesting commencing after 6 years participation and increasing by 10% per annum to 100% for the Member’s Company Contribution Account, the whole payable in a lump sum refund or paid up pension. In the event of a discontinuance of the plan the fund is to be distributed by the trustees in an equitable manner for the exclusive benefit of the members.

In addition to the foregoing summary of the salient features of the pension plan, it is expedient to make specific references to those sections of the Pension Trust Agreement (Exhibit 3) and the Pension Plan (Exhibit 4) which were the subject of comment by counsel in their respective arguments. I shall first refer to sections of the Pension Trust Agreement:

Section 1 provides for the establishment of the fund as follows :

The Company hereby establishes with the Trustees a trust consisting of such sums of money and such property acceptable to the Trustees as shall from time to time be paid or delivered to the Trustees in accordance with the provisions of the Plan, and the earnings and profits thereon. All such money and property, all investments made therewith and proceeds thereof and all earnings and profits thereon, less all payments and deductions which shall have been made by the Trustees, and authorized herein, shall from time to time constitute the Fund. The Fund shall be held by the Trustees in trust and dealt with in accordance with the provisions of this Pension Trust Agreement. At no time shall any part of the corpus or income of the Fund be used for or diverted to purposes other than for the exclusive benefit of such members, terminated members, retired members, their named beneficiaries or their estates, except as provided in Section 5 following.

Section 2 outlines the duties of the trustees as follows:

It shall be the duty of the Trustees as follows:

(a) to hold, to invest and re-invest the Fund,

(b) to pay moneys on the order of the Company to or on behalf of the members, terminated members, retired members and their estates or named beneficiaries, in accordance with the terms of the Plan, subject to the provisions of Section 9 herein.

Such orders need not specify the application to be made of moneys so ordered, and the Trustees shall not be responsible in any way respecting such application or for the administration of the Plan.

Section 3 provides for the powers of investment pursuant to the direction of the appellant, the first three lines of which read as follows:

Any moneys held by the Trustees which under these presents may or ought to be invested shall be invested and re-invested by the Trustees upon the direction of the Company as provided by Section 9 . . .

Section 4 outlines the powers and authorization of the trustees subject to the direction of the appellant. Subsection (e) permits of the employment of agent by the trustees.

Section 7 outlines the duties of the trustees to keep accounts and reads as follows:

The Trustees shall keep accurate and detailed accounts of all investments, receipts, disbursements and other transactions hereunder, and all accounts, books and records relating thereto shall be open to inspection and audit at all reasonable times by any person designated by the Company. Within the ninety (90) days immediately following the 31 March each year the Trustees shall file with the Company a written account setting forth all investments, receipts, disbursements and other transactions effected by them since the 1 April of the preceding year. Upon the expiration of ninety (90) days from the date of filing such annual or other account, the Trustees shall be forever released and discharged from all liability and accountability to anyone with respect to the propriety of their acts and transactions shown in such account, except with respect to any such acts or transactions as to which the Company shall within such ninety-day period file with the Trustees written objections and except for loss or diminution of the Fund resulting from wilful misconduct or lack of good faith of the Trustees.

Section 8 covers the discharge or removal of a trustee and reads as follows:

If a Trustee should wish to be discharged or become incapable of acting or should the Company wish to remove a Trustee then in each case the Company shall by written instrument, appoint a new trustee and upon such appointment the Trust Estate, and all the rights, powers, authorities and immunities vested in the replaced Trustee shall vest in the successor trustee.

Section 9 reads as follows:

Any action by the Trustees, pursuant to any of the provisions of this Pension Trust Agreement shall be certified over the signatures of both of the Trustees. Any action by the Company pursuant to any of the provisions of this Pension Trust Agreement shall be evidenced by the resolution of its Board of Directors certified to the Trustees over the signature of its Secretary under the Corporate seal, and the Trustees shall be fully protected in acting in accordance with such resolution so certified to them. Provided that the Trustees shall not be bound to act in accordance with any resolution or direction of the Company if the Trustees consider such resolution or direction to be contrary to the intent or provisions of this agreement or contrary to any laws of regulation from time to time in force.

Section 10 provides for the disposition of the fund in the event of its discontinuance.

Section 11 provides for the right of the appellant by its directors to amend the Pension Trust Agreement.

The sections of the Pension Plan to which specific mention was made are sections 4, 8, 9 (as amended), 10, 11, 12 and 15 which read as follows:

4. Each present full time executive as defined by the Company will be eligible to join the Plan on the effective date and be a Group A member.

Each future full time permanent executive as defined by the Company will be eligible to join the Plan and be a Group A member on a date set by the Company.

Other senior supervisory employees as defined by the Company will be eligible to join the Plan as Group B members on a date or dates set by the Company.

Full time executives and senior supervisory employees of Inland Kenworth Sales (Penticton) Ltd., Inland Kenworth Sales (P.G.) Ltd., Inland Kenworth Sales (Kamloops) Ltd. and Parker Industrial Equipment Ltd. will be eligible to join the Plan and be a Group A or a Group B member, whichever is appropriate, on a date or dates to be set by the Company.

8. Each member may make contributions voluntarily, up to the maximums allowed by the Income Tax Act as deductible contributions.

The Company will contribute an amount equal to $1,500 each year for each member who joins the Plan on the effective date and an amount equal to $100 each year for each other member.

In addition the Company hopes and expects to make additional contributions out of profits in respect of all members.

In addition the Company hopes and expects to make a past service contribution in respect of each member of the Plan who joins at the effective date. The maximum past service contribution which the Company may make is one which, on the basis of qualified actuarial advice, will provide an annual pension on the normal form at normal retirement date equal to the difference between

(a) 70% of a member’s average earnings during the six years his earnings were highest, and

(b) the amount of annual pension on the normal form at normal retirement date, on the basis of qualified actuarial advice, which all the contributions made by and on behalf of the member will provide, including contributions to any other registered pension plan to which the Company has made contributions.

9. (as amended) An account will be kept for each member to which will be credited all amounts credited by the member together with interest thereon credited at the rate of 5% per annum compounded annually. This account shall be known as the Member’s Contribution Account.

An account will be kept for each Group B member to which will be credited all amounts contributed by the Company together with interest thereon credited at the rate of 5% per annum compounded annually. An account will be kept for each Group A member to which will be credited all amounts contributed by the Company. These accounts shall be known as the Member’s Company Contribution Accounts.

An account will be kept for each member to which will be credited all amounts allocated in accordance with the last paragraph of this Section 9. This account shall be known as the Member’s Contingent Account.

As at 31st March each year, commencing with 1966, the gains and/or losses in the Trust Fund will be calculated by deducting the value of all Members’ Contribution Accounts, Members’ Company Contribution Accounts and Members’ Contingent Accounts from the then value of the Trust Fund. The difference shall be credited or debited, as the case may be, to the Members’ Contin- gent Accounts pro rata to the total balance in the Members’ Accounts immediately prior to the allocation.

10. Upon retirement a member will receive the monthly pension which may be purchased by the total amount to his credit in his Member’s Contribution Account, his Member’s Company Contribution Account and his Member’s Contingent Account from an insurance company licensed to do business in British Columbia or from the Canadian Government Annuities Branch.

11. If a member’s employment is terminated other than for reasons of death or retirement, the member may receive in a lump sum the amounts to his credit in his Member’s Contribution Account and the vested portion of his Member’s Company Contribution Account and Member’s Contingent Account or he may elect to receive the monthly pension which may be purchased by this amount from an insurance company licensed to do business in British Columbia or from the Canadian Government Annuities Branch.

The vested portion of his Member’s Company Contribution Account will be 100% for a Group A member and the following percentage based on years of participation in the Plan for a Group B member.

		Percentage of Company
Years of participation			Contribution Account
at date of termination			which is vested
Less than 6 years				NIL
6 years	.....			10%
7 years	...		....	20%
8 years	; ....			30 %
9 years	.	...	1	40%
10 years	'.			50%
11 years				60%
12 years				10%
13 years	...			80%
14 years	...	._.		90%
15 or more years				100%

The vested portion of his Member’s Contingent Account will be Nil prior to the completion of 5 years’ participation in the Plan and 100% thereafter for a Group B member and the following percentage based on years of participation in the Plan for a Group A member.

12. A member shall have the right to appoint a beneficiary and to alter or revoke his designation of beneficiary from time to time subject to any law governing the designation of beneficiaries but such appointment or change shall be valid only if made in the manner required and on the forms provided by the Company. In the event of a member’s death before retirement while in the service of the Company all benefits under the Plan will be payable to his named beneficiary or in the absence of such nomination, his estate. His named beneficiary or estate will receive an amount equal to the then value of his Accounts. If a member has a named beneficiary under the Plan the beneficiary may elect to receive the then value of the Accounts in the form of a lump sum payment, instalments over a period of years, or the monthly pension which may be purchased by this amount from an insurance company licensed to do business in British Columbia or from the Canadian Government Annuities Branch.

Years of participation		Percentage of Contingent
at date of termination		Account which is vested
Less than 5 years .	1	....	NIL
5 years but not 10 years	,		331/3%
10 years but not 15 years			4 Vo
15 years or more			100%

15. The Company expects to continue the Plan indefinitely but reserves the right to amend or discontinue the Plan should future conditions in the judgement of the Company warrant such action. Any amendment of the Plan shall not result in the release to the Company of any part of the Fund.

If it should ever be necessary to discontinue the Plan, all moneys in the Fund must be directed in an equitable manner for the exclusive benefit of the members and their beneficiaries and such discontinuance shall not result in the release to the Company of any part of the Fund.

The plan was submitted to the Department of National Revenue for registration in accordance with Section 76(1) of the Income Tax Act by William M. Mercer Limited with full disclosure of all details and specifically that the estimated cost of the past service contribution was in the amount of $202,650. The material was supported by an actuarial certificate that in the actuary’s opinion the assets of the pension plan ‘‘require to be augmented’’ by that amount ‘‘to ensure that all obligations of the fund in respect of past services may be discharged in full’’ (Exhibit 6).

The Department accepted the plan for registration subject to the condition that the estimated cost for past services was subject to confirmation by the Superintendent of Insurance.

By letter dated July 27, 1965 the Department advised the appellant as follows:

. . . We are now in receipt of a reply from the Superintendent of Insurance who confirms that the total deficit in respect of past service pensions was $202,650 as at 1st April, 1965. This amount may be claimed under Section 76 of the Income Tax Act.

The investment policy dictated to the trustees by the appellant, as it was the appellant’s right to do under section 3 of the Pension Trust Agreement, was that the investments be in loans to the affiliated companies on promissory notes bearing interest at 9% and by discounting conditional sales contracts received by the affiliated companies from their customers. The yield on the conditional sale contracts reached 30%. In many instances the Pension Trust borrowed money from the bank to purchase conditional sales contracts. This device is known as “‘levering’’. The money is borrowed from the bank at a low rate of interest,

the conditional sales contracts were purchased with the borrowed money and yielded a high return so that in the result the fund realized a profit of 25% or thereabout.

In the normal course of business the conditional sales contracts came to the appellant. Two employees of the appellant in concert with employees of the bank would review the contracts and decide which would be bought by the Fund. The bank questioned the authority of the Fund to borrow money and that difficulty was resolved by the enactment of a borrowing by-law.

What happened to the moneys in the pension fund (except borrowed money) was briefly this. The appellant would put money into the Fund. The trustees would then lend the money to the affiliated companies on promissory notes or buy conditional sales agreements from them. The affiliated companies were invariably in debt to the appellant as their supplier so that the money made its way back forthwith to the appellant in discharge of the affiliated companies’ debts to it. This was characterized by counsel for the Minister as a ‘‘whirl around”.

The parties agreed upon a statement of facts, taking precise amounts at precise times, as illustrative of this flow of funds and the balances remaining. This agreed statement reads as follows :

1. On July 20, 1965 the Pension Trust received cheques aggregating $116,964.35 from the Imperial Life Assurance Co. and Standard Life Assurance Company representing a transfer of the funds standing to the vested credit of L. F. Parker in pension plans previously established with those insurance companies. The cheques were deposited the same day in accounts in the name of “Inland Pension Trust” in the Canadian Imperial Bank of Commerce in Penticton.

2. On the same day the Pension Trust wrote a cheque for $96,045.00 in favour of Inland Ken worth Sales (Prince George) Ltd., an affiliate of the Appellant, and received in exchange therefor that company’s 9% demand promissory note for $96,045.00. That left the balance in the Pension Trust account at $20,919.35.

3. On August 18, 1965 the Pension Trust received from Inland . Kenworth Sales Ltd. a cheque for $2,000.00 as a current contribution re J. M. Padgett, an employee of that company, which cheque was deposited the same day in the Pension Trust account.

4. On September 1, 1965 the Pension Trust received a cheque from the Appellant as a past service contribution re L. F. Parker in the amount of $25,000.00, which was deposited the same day.

5. On the same day, September 1, 1965, the Pension Trust wrote a cheque in favour of the Appellant in the amount of $47,900.00 and received in exchange therefor that company’s 9% demand promissory note for $47,900.00. That left the balance in the Pension Trust account of $6,017.54, which remained the balance in the account until December 30, 1965.

6. On December 31, 1965 the Pension Trust received cheques as follows:

(a)	Inland Kenworth					Sales
	(Prince		George)			Ltd.
	loan	repayment
	Principal							$96,045.00
	Interest							3,860.21	$99,905.21
(b)	Appellant			loan	repayment
	Principal							$47,900.00
	Interest							1,429.12	$49,329.12
(c)	Appellant, past				service			contribution	$75,000.00
(d)	Appellant,			current			contributions		$	6,000.00

7. On the same day, December 31, 1965, the Pension Trust wrote a cheque in favour of the Inland Kenworth Sales (Penticton) Ltd., an affiliate of the Appellant, and received in exchange therefor that company’s 9% demand promissory note for $102,000.00. That left the balance in the Pension Trust account, after bank charges of $33.09 at $134,218.78.

8. On January 6, 1966 the Pension Trust wrote a cheque for $123,600.00 in favour of Inland Kenworth Sales (Prince George) Ltd., and received in exchange therefor that company’s 9% demand promissory note for $123,600.00. That left the balance in the Pension Trust account at $10,618.78.

9. On January 6, 1966 the Pension Trust received $16,000.00 as a bank loan and on the same day wrote a cheque for $23,597.50 in favour of Inland Kenworth Sales (Kamloops) Ltd. and received in exchange therefor certain customers’ conditional sales contracts of equivalent value, leaving the balance in the Pension Trust account at $3,021.28.

10. On October 7, 1966 the balance in the Pension Trust account was $10,027.52.

11. On October 12, 1966 the Pension Trust received a cheque in the amount of $2,523.00 as a payment on conditional sales contracts held, received $260.00 from the Appellant as current contributions and $50,000.00 from the Appellant as a past service contribution, which amounts were deposited in the Pension Trust account on that date.

12. Also on October 12, 1966 the Pension Trust received cheques in the amount of $8,355.96 from Inland Kenworth Sales (Prince George) Ltd. and $87.53 from the Appellant, being interest on loans outstanding. Sundry receipt of $6.25 was also recorded on October 12, 1966, leaving the balance in the Pension Trust account at $76,126.40.

13. On October 13, 1966 the Pension Trust wrote a cheque for $63,000.00 in favour of Inland Kenworth Sales (Prince George) Ltd. and received in exchange therefor that company’s 9% demand promissory note for $63,000.00. That left the balance in the Pension Trust account at $13,126.40.

14. On February 22, 1967 the balance in the Pension Trust account was $5,741.19.

15. On February 23, 1967 the Pension Trust received a cheque from the Appellant as a past service contribution in the amount of $52,650.00.

16. On February 23, 1967 an amount of $798.00 was charged to the Pension Trust account and applied on the outstanding bank loan of the Pension Trust.

17. On the same day, February 23, 1967, the Pension Trust wrote a cheque in favour of Inland Kenworth Sales (Prince George) Ltd. in the amount of $52,650.00 and received in exchange therefor that company’s 9% demand promissory note in the amount of $52,650.00, leaving the balance in the Pension Trust account at $4,943.19.

18. On February 24, 1967 the Pension Trust received a cheque from the Appellant re Class B beneficiaries’ current contributions in the amount of $11,400.00. On the same day it received a payment on the conditional sales contracts purchased on January 6, 1966, in the amount of $1,170.00.

19. On the same day, February 24, 1967, amounts of $11,800.00 and $1,474.22 were applied on the Pension Trust’s outstanding bank loan, and a further $502.48 was charged to the Pension Trust account as bank loan interest.

20. Again on the same day, February 24, 1967, sundry costs of $11.77 were incurred and a bank loan of $15,500.00 was received. Again on the same day the Pension Trust wrote a cheque in the amount of $17,986.65 and received in exchange therefor certain conditional sales contracts of equivalent value, leaving the balance in the Pension Trust account at $1,238.04.

It is significant to note that at no time was there any possibility that the cheques would not be honoured by the bank and that there were always sufficient funds on deposit in the bank to meet those cheques without the necessity of the deposit of the covering cheques or that would not be covered by the existing lines of credit which were secured by ample resources.

This is evidenced by a letter from the bank to the appellant dated October 24, 1968 (Exhibit 102) which confirms that at the times the appellant drew cheques in payment of the past service contribution the bank would make the following amounts available :

Only on February 28, 1967 there does not appear to be a sufficient balance to cover the cheque for $52,650 but there was at that time a cross guarantee from L.B.M. Securities to more than cover that cheque.

There was no special arrangement made with the bank about the cheques of the appellant to the Fund with respect to past service contributions. It was expected that they would clear and they did clear in the normal manner. The appellant’s bank balance was never in a minus quantity. Against its line of credit with the bank the appellant gave the bank a number of notes signed in blank. The bank would fill in the notes if needed. This procedure saved the appellant the payment of interest on a loan.

The directors of the appellant, on December 30, 1965 passed a resolution (Exhibit 11) directing the trustees of the Pension Trust Fund that the investments on behalf of the Group A member and the Group B members should be strictly segregated. The investments on behalf of the Group A member would be interest bearing loans to the affiliated companies, payable on demand, with interest at 9% secured by a blanket assignment of agreements receivable. The investment on behalf of the Group B members was to be in the direct purchase of conditional sales contracts and chattel mortgages acceptable to the bank as security for repayment of bank loans.

Under section 4(e) of the Pension Trust Agreement the trustees appointed Marten and Sprinkling, employees of the appellant, as agents authorized to draw cheques payable to the affiliated companies. These were the persons who in conjunction with the bank selected the conditional sales contracts and chattel mortgages to be purchased by the Fund.

The body of a letter dated September 10, 1965 (Exhibit 91) indicates that Burian and G. N. Parker purported to resign as trustees. That document indicates its acceptance by Lloyd F. Parker. While the document is signed by Burian it was never signed by G. N. Parker.

The appellant then purported to appoint Llord F. Parker and Lea Marten as trustees, both of whom were employees of the appellant.

By letter dated November 18, 1965 Burian advised Lloyd F. Parker that the trustees should not be employees of the appellant.

Lloyd F. Parker and Lea Marten never acted as trustees. Gordon N. Parker never resigned às a trustee and the resignation of Burian was ignored and Burian continued to act as trustee.

As intimated before the issue is whether the appellant is entitled to deduct the total sum of $202,650 paid by it to the pension fund as contributions for past services in the amounts of $100,000, $50,000 and $52,650 in its 1965, 1966 and 1967 taxation years pursuant to Section 76(1) of the Income Tax Act.

Section 76(1) 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.

Counsel for the appellant contended that the appellant has brought itself precisely within all the requirements of Section 76(1) in that:

(1) The taxpayer is an employer ;

(2) The appellant made a spécial payment ;

(3) The special payment was made on account of a pension * plan;

(4) The special payment was made in respect of past services ;

(5) The special payment was made on the recommendation of a qualified actuary in whose opinion the plan required to be augmented by the special payment to ensure that all of the obligations of the fund may be discharged in full (see Exhibit 5) ;

(6) The payment was irrevocably vested in the fund in that section 1 of the Pension Fund Agreement so provides ;

and

(7) The payment was approved by the Minister on the advice of the Superintendent of Insurance.

On“ the basis of compliance with the foregoing requirements counsel for the appellant contended that appellant properly deducted the amounts in question in computing its income for the taxation years 1965, 1966 and 1967 and since Section 76(1) had been complied with Section 137(1) did not apply. He further contended that the deductions were not precluded by Section 137(1) of the Income Tax Act as disbursements that would “unduly or artificicially reduce’’ the appellant’s income.

The argument by counsel for the Minister, as I understood it, was as follows:

1. The trustees, Burian and G. N. Parker were not acting in their capacity as trustees of the employees pension plan at the material times in respect of the transactions in respect of the payment of $100,000, $50,000 and $52,650 but that Burian and Parker had dual roles (a) as trustees for the cestui que trust who were the Group B members and (b) as nominees or agents for the appellant in respect of the past service payments which were not intended to nor did they in fact become part of the res of the pension plan.

2. Assuming that the payments were made by the appellant to Burian and Parker not as agents, but in their capacity as trustees, then the moneys were not held by them on trust to use in the pension plan, but were held on trust for the use and benefit of Lloyd IF. Parker, a sole cestui que trust who was sui juris. The creation of a simple trust for the benefit of a single cestui que who is sui juris is not an employees’ pension plan within the meaning of Section 76.

3. The pension plan was a sham since the intention of the parties thereto was not to establish a pension plan, but a plan which resembled a pension plan and was in reality nothing more than an employees profit sharing plan.

4. There was sufficient “artificiality” in the transactions to taint the payments and so preclude the; payments being deductible in computing the appellant’s income. This argument is based on Section 137(1) of the Income Tax Act and is predicated upon the exchange of cheques between the appellant, the trustees and the affiliated companies.

5. Under the Pension Trust Agreement and plan annexed thereto (Exhibit 3, 4) there was no obligation on the appellant to make any payments on account of the single Group A member, Lloyd F. Parker, nor was Parker entitled to a fixed or ascertainable past service pension or benefit. Paragraph 8 of the plan states that the appel- lant ‘hopes and expects’’ to make the past service contribution on behalf of Lloyd F. Parker. It was, therefore, contended that the certificate of the actuary was a nullity because the condition precedent to the opinion of the actuary, the obligation to pay a benefit to the employee upon retirement, was lacking.

The first and second submissions by counsel for the Minister must be predicated upon the assumption that there were in fact two separate and distinct trusts, one for the benefit of the Group B members and one for the Group A member, or in the ease of his first submission that there was one trust for the Group B members and an agency for the Group A member.

As on the basis of this assumption he relies upon Exhibit 11, which is a resolution of the board of directors of the appellant directing the trustees to strictly segregate the investments, those on behalf of the Group A member to be in loans to the affiliated companies on promissory notes and those on behalf of the Group B members in the conditional sales contracts and chattel mortgages of the affiliated companies.

Such assumption is not warranted by the evidence.

The minute is directed to the segregation of the investments rather than to the segregation of the trust fund. The Pension Trust Agreement (Exhibit 3) remains the governing instrument and contemplates one trust fund and that instrument is not supplanted by a minute of the board of directors of the appellant directing a segregation of the investments only which was within its jurisdiction to direct.

It is true that the intention was that there should be a segregation of investments and that intention was substantially carried out as far as practicable, although as two witnesses testified there were some ‘‘fuzzy edges’’. However this does not result in the creation of two new trusts.

On the other hand the evidence is that the trust fund was not divided. There was but one bank account, the investment segregation was not recorded in the financial records of the trust and there was but one set of financial statements prepared in each year for the fund.

Both Burian and Lloyd F. Parker referred to the promissory notes as Parker’s property” or as Parker’s equity in the fund’’ and to the Group A assets’’ and the Group B assets”’ but I do not think that such loose usage of terminology can be construed as terminating the trust created by the Pension Trust Agreement (Exhibit 3) and creating two new trusts in its stead.

Under paragraph 9 of the pension: plan (Exhibit 4) as amended by Exhibit 13 (which merely raised the interest from 3% to 5%) three accounts were to be kept. for each member, whether Group B or Group A, (1) a Member’s Contribution Account, which is the amounts contributed by the member with interest thereon at 5%, (2) a Member’s Company Contribution account which comprised the amounts contributed by the appellant, on which interest was payable at 5% and (3) a Member’s Contingent Account, to which would be credited all eains (or debit all losses). These were to be distributed on a pro rata basis according to the member’s equity 111 the fund.

What was done in fact was that 5% was calculated and credited to all members, both A and B, on all contributions vested in a member, that is on the contributions of the member and the appellant.

Then an additional 1% was credited to Parker’s account which amounted to 9%, the interest on the promissory notes, the investment on behalf of the Group A member.

Then the balance was allocated pro rata to the Group B members. If the balance after crediting 5% across the board were allocated pro rata then Parker would get the greater proportion based on the amount standing to his credit. Parker forewent his share in the balance after 9% so that in effect he was making a gift of that to which he would have been entitled to the Group B members.

This was a departure from what was laid down in paragraph 9 of the pension plan (Exhibit 4) but I can see no impediment to Parker consenting to this especially where it is to his detriment and to the benefit of the Group B members.

The amounts standing to the credit. of each member: were readily ascertainable at any time.

It seems to me that the test as to w hether the segregation of investments constituted the creation of two trusts would be to assume tha all conditional sales contracts purchased became valueless. A Group B. beneficiary on retirement shes for his pension. It would be untenable that the trustees could raise as a defence to such a. claim that the part of the fund invested in the promissory notes was not available for the claim.

Accordingly I conclude: that the evidence does not establish the existence of two separate trusts.

In The. Catter mole-Trethewey Contractors Ltd, v, M. N. R., [197 0] C.T.C. 619, Sheppard, D.J. considered two pension plane set up, one for each of the two directors of the appellant. Under these plans, the company was to pay $1,500 in respect of each year of the future’ services by the member and ‘‘hopes and expects’’ to contribute additional sums for each member for past services. The company paid $127,679, with respect to the past services of each employee. That amount was immediately lent back to the company by the trustee. He said this at page 623:

The principal: argument under Section 76 (i) is that there was no “employees’ superannuation or pension fund or plan” within that section. It was contended that under a conventional plan, the employer is bound to make contributions and hence it was not sufficient for this appellant, as employer, to state that it “hopes and expects” to make adequate annual contributions. Further, that the proposed benefits by way of pension should be stated and that there should be some obligation for payment of this pension. It was further contended that the section was not complied with in that under Saunders v. Vautier (1841), Cr. & Ph. 240, and as more clearly set out in Wharton v. Mas ter man, [1895] A. C. 186, there being only one cestui que trust in each plan and. no gift over so that the respective cestui que trust (Cattermole or Trethewey) had the entire beneficial interest and could demand that the res be handed over to him at any time.

Hence, as the alleged plans were binding upon no one except the trustee, and upon the trustee only, to the amount of the fund from time to time actually paid to the trustee, the respondent contends there was no “employees’ superannuation or pension fund or plan” within Section 76(1).

On the assumption that there were two separate trusts, the foregoing argument raised before Mr. Justice Sheppard is identical to the second submission made to me by counsel for the appellant [sic]. For convenience I repeat that submission here. It was that the payments made to the trustees in their capacity as trustees were not held on trust to use in the pension plan, but on trust for the use and benefit of a sole cestui que trust who was sui juris and there being only one cestui que trust and no gift over the cestui que trust (here Lloyd F. Parker) had the entire beneficial interest and could demand the res at any time.

In dealing with that submission, and the submission that there was no pension plan within Section 76(1) since there was no obligation on the employer to make payments, Mr, Justice Sheppard said this at pages 623 and 624;

On the other hand, whatever is to be required in the “fund or plan” is that which Parliament has declared required by Section 76(1) and those requirements are:

1. That an employer has made special payment within the stated time;

2. On account of an employees’ superannuation or pension fund or plan with employees (that implies there is such a fund or plan for the benefit of the employees) ;

3.‘ 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”. The test is here subjective equally as in Liversidge v. Anderson, [1942] A.C. 206, and not objective as in The Registrar of Restrictive Trading Agreements v. W. A. Smith & Son Limited, [1969] 1 W.L.R. 1460 (C.A.) at page 1468. Section 76(1) requires that payment be made pursuant to a recommendation by a qualified actuary whose opinion, that is of the actuary, is as to the matters specified. The section does not require the employer or its officers before paying to check the opinion of the actuary, to see if the actuary had reasonable grounds for the opinion.

4. That the employer (here the appellant) has made the payment so that it is “irrevocably vested in or for the fund or plan”. That appears to have been complied with in that the monies paid to the trustee are permanently held in trust for the plan subject, of course, to the directions for investment.

5. That the plan or fund is to be “approved by the Minister on the advice of the Superintendent. of. Insurance”. That has been done.

Apparently, any check that is to be made on the opinion of the actuary is to be made by the Department or by the Superintendent of Insurance but not by the employer, here the appellant. Therefore, Section 76(1) has been complied with by the appellant as employer.

As to Section 76(1) which may permit a deduction of the employer’s contributions for past service and to Section 11(1) (g) which: provides for the deduction of the employer’s contribution and 11(1) (c) which provides for the deduction of the payments of interest pursuant to a legal obligation to pay interest, these will depend upon the compliance with Section 137(1).

On the facts of the case before him, Mr. Justice Sheppard went on to conclude that the plans were entered into for the primary object that disbursements ‘ would unduly or artificially” reduce the income of the taxpayer and dismissed the appeal.

However he did hold that the plans were valid within Section 76(1).

The plan in the present instance is very similar to that before Mr. Justice Sheppard with the difference that the plan before me was not limited to a single beneficiary, but included Group B members as well as the single Group A member and for the reasons outlined above I find to have been a single trust not two separate trusts.

That being so, it follows that the trustees were acting in that capacity and not as agents or nominees of the Group A beneficiary, Lloyd F. Parker.

In further support of his contention that Burian and G. N. Parker were acting as agents for the appellant rather than as trustees under the Pension Plan Agreement, counsel for the Minister relied on their resignations and the appointment of Lloyd F. Parker and Lea Marten in their stead. His proposition was that since Lloyd F. Parker and Lea Marten were the trustees, then the acts of Burian and G. N. Parker could not have been in their capacity as trustees but as agents.

However Gordon Parker never resigned as a trustee, nor were Lloyd F. Parker and Lea Marten appointed as trustees, nor did they accept that office. Burian did submit a resignation as trustee which appears to have been accepted by the appellant. Burian’s resignation was never acted upon and Burian continued to act as a trustee. Lloyd F. Parker and Lea Marten never acted as trustees. At the most it might have been that for a short period of time when no action by the trustees was required, Gordon Parker was the sole trustee and if Burian’s resignation was effective he shortly thereafter became a constructive trustee by acting in that capacity with respect to the trust property.

Before me, however, counsel for the appellant [sic] contended because there was no obligation to make any payments on account of the single Group A member the actuary could not certify the amount required to meet the obligation which was non-existent, it being merely a ‘‘hopes and expects’’ provision and that, therefore, the certificate of the actuary was a nullity for which reason Section 76(1) was not complied with.

As I read the decision of Mr. Justice Sheppard, it is to the effect that Section 76(1) makes the actuarial certificate the test of which is needed to satisfy the pension obligations and that concludes the matter.

In addition to the language quoted above he also said at page 627 :

There was no obligation on the company to make any contributions, butions, in. that under Section 9 of the Supplementary Pension Plan, the appellant “hopes and expect” to contribute. . . . This provision would, of course, not prevent the appellant escaping the corporate income tax on all contributions it made to the plan, as such contributions would again be deducted from its: income for the year of the contribution.

In further support of his contention that no trust subsisted, counsel for the Minister also pointed out that the pension plan agreement was drafted so that the trustees were stripped of all discretion which normally accompany a trust in that the investment to be made were dictated to them by the appellant. It was admitted by ‘the Minister that numerous pension plans containing provisions similar to those in the present pension plan in which. past service contributions had also been approved and the pension plan accepted for registration by him. Here too, the pension plan was accepted for registration with full knowledge of these provisions.

In addition counsel for the respondent pointed to numerous incidences where the trustees did not follow the procedural requirements outlined in the Pension Trust. Agreement such. as providing the appellant with an account setting forth all investments, receipts and disbursements, although financial statements were prepared, they did not obtain a resolution of the appellant’s: board: of directors giving authority to make loans or purchase securities, they did rely: on the’ blanket direction of the board and the trustees delegated the selection of conditional sales contracts to be purchased to employees of the appellant’s credit department and officials of the bank. This, I should think, is not so much a delegation of discretion as to the selection of investments, which was subject to the direction of the appellant in any event, but rather a delegation of the selection of the most acceptable contracts in the class and amounted to a convenience in administration. Further this method of selection was done at the suggestion of the appellant.

111 my view these breaches were minimal and in fact constituted business short-cuts. While the trustees might be held accountable therefor, they do not affect the validity of the trust, nor would they terminate it. The rights of the beneficiaries under the pension plan remained unimpaired.

For the foregoing reasons I find that the pension plan was a plan within the meaning of Section 76(1). It was next contended that the plan was a sham and was in reality a profit- sharing plan. In support of this contention counsel points to the undertaking by the appellant to contribute only $100 a year for each Group B member. (See paragraph 8, Exhibit 4.)

Paragraph 8 also provides that the appellant ‘‘hopes and expects to make additional contributions out of profits in respect of all members’’.

A reference to Exhibit 124 indicates that there were thirty Group B members and in only two instances was the appellant’s contribution the minimum of $100 over a period of six years. In all other instances the appellant’s contributions were much higher, nine such contributions being $1,500.

These additional amounts were predicated upon the effective effort put into the appellant and were decided by the appellant based on certain criteria.

There was also a ‘‘Bonanza’’ plan whereby employees on the basis of performance could take a trip at the appellant’s expense or, at their choice, have the cost to a maximum of $1,500 contributed to the pension plan.

This, said counsel for the Minister, is the very essence of a profit-sharing plan.

In the result all contributions from the employer must be paid from profits. There is nothing to prevent a pension plan having some aspects of “profit-sharing”. There are elements of profit-sharing in the appellant’s contributions, but the intent remains to provide pensions to employees based on the employees ’ contributions, the appellant’s contribution and the increments to the trust fund. Further, the Department accepted the plan for registration with the full knowledge that additional contributions could be made by the appellant.

A ‘‘sham’’ has been defined by Lord Diplock in Snook v. London & West Riding Investments Ltd., [1967] 1 All E.R. 518. He said at page 528 :

. . . I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the “sham” which are intended by them to give appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intended to create. . . .

Here, however, the legal rights intended to be created were created in fact in accordance with the executed documents. Substantial pension credits have been built up, investments made, obligations and other contractual relationships have been created and acted upon. It was disclosed in evidence that the pension plan has been in existence for six years and that benefits have been paid to retired employees in accordance with their rights thereunder.

It follows, therefore, the pension plan was not a sham in that it was something other than it was intended to be.

For the same reasons I do not think that the payments made by the appellant were made to ‘‘unduly or artificially” reduce the appellant’s income within the meaning of Section 137(1).

Section 137(1) 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.

After reviewing Shulman v. M.N.R., [1961] Ex. C.R. 410; [1961] C.T.C. 385, and Susan Hosiery Limited v. M.N.R., [1969] Ex. C.R. 408; [1969] C.T.C. 533, Sheppard, D.J. said in The Cattermole case (supra), at page 625:

. . . Therefore, whether a disbursement was an expense within Section 137(1) depends upon:

(a) The primary object of the transaction being to reduce the income unduly or artificially, and it is not necessary that it be the exclusive object;

(b) Any artificiality may taint an expenditure;

(c) There must be, in order to come within the Section 137(1), a “disbursement or expense by the employer”. The section apparently does not apply to a transaction where there has been no disbursement or no expense.

Here the purpose sought to be achieved by Lloyd F. Parker was to create a pension plan that would produce a much higher yield than the previous plans and would also serve to attract and retain highly qualified employees. Parker was familiar with investments in conditional sales agreements from his past experience and was well aware that high returns would be obtained. The pension benefits did not become available to the employees until after six years in the appellant’s employ and reached a maximum at fifteen years employment. Obviously the plan did accomplish those two purposes. When the plan was first discussed Parker was advised that the maximum past service contributions that could be made by the appellant on his behalf was the ‘‘roll over’’ of the previously existing plans. Later he was agreeably surprised to learn that those contributions could be greater and naturally he was not adverse thereto and he was well aware of the tax advantage to the appellant that would result.

However, Parker testified that even if the unexpected increase in past service contributions on his behalf and the tax advantage to the appellant were not available, the pension plan would have been adopted. I accept that testimony.

Therefore, the pension plan was entered into by the appellant in pursuit of a genuine business advantage. The fact that a substantial tax reduction would be effected was incidental thereto and therefore was not the primary purpose.

In view of the conclusion that I have reached, it is not necessary for me to consider the submission made by counsel for the appellant that if the pension plan fell within Section 76(1) then Section 137(1) would not apply.

The appeals are allowed with costs.