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Mittler Bros. of Quebec Ltd. (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Noël A.C.J.—Montreal, P.Q., February 6; Ottawa, February 28, 1973.
Income tax—Pension plan—Deductibility of contribution for past service—No obligation to make contribution under plan—Deduction not allowed—Income Tax Act, s. 76(1), 139(1)(ahh).
A pension plan established by appellant for its employees was duly registered in 1964 under section 139(1)(ahh) of the Income Tax Act and the estimate of past service liabilities approved at $228,410. In 1965 and 1966 appellant con tributed $100,000 toward this liability, of which $60,000 was used to purchase preferred shares in appellant company and $40,000 was loaned to appellant. The preferred shares were redeemed in 1968 and the loan of $40,000 was repaid in 1967. The pension plan contained no provision obligating appellant company to pay its employees a specific amount of pension and no obligation to employees that required payments toward past services.
Held, affirming an assessment to income tax, appellant was not entitled to deduct the $100,000 paid for past service in 1965 and 1966. The existence of an obligation toward employees for past services is a statutory condition of the right to the deduction under section 76(1) of the Income Tax Act.
M.N.R. v. Inland Industries Ltd. 72 DTC 6013, followed.
INCOME tax appeal. COUNSEL:
Maurice Régnier for appellant.
A. P. Gauthier and Alban Garon for respondent.
SOLICITORS:
Stikeman, Elliott, Tamaki & Co., Montreal, for appellant.
Deputy Attorney General of Canada for respondent.
NOËL A.C.J.—This is an appeal from income tax assessments dated June 10, 1969 whereby amounts of $60,000 and $40,000 deducted respectively for the years 1965 and 1966 as contributions to a pension plan were disallowed and added to the revenue of the appellant.
The appellant, a company incorporated under the laws of Quebec on December 17, 1962 established a pension plan for its employees to take effect on December 1, 1964.
For the purposes of carrying out the terms and conditions of the pension plan, the appellant entered into a trust agreement with Alexander Leslie Mittler, Julius Pfeiffer and Thomas J. Karass.
On December 11, 1964 the pension plan and the trust agreement were transmitted to the Minister for examination and registration and, pursuant to a letter dated January 18, 1965, the Minister advised the appellant that the plan "has been registered as an employee's pension plan under section 139(1)(ahh) of the Income Tax Act." By letter dated May 7, 1965, the respond ent advised the appellant that the Superinten dent of Insurance had confirmed the estimate of the appellant's actuary of the past service liabili ties in the amount of $228,410.
On October 1, 1965 and December 27, 1966, the appellant contributed, as already mentioned, an amount of $60,000 and $40,000 respectively in part liquidation of the past service liabilities.
The contribution of $60,000 was utilized to acquire 60,000 Class "A" preferred shares of the par value of $1 each in the capital stock of the appellant and the contribution of $40,000 was loaned to the appellant.
The 60,000 Class "A" preferred shares were redeemed pursuant to a resolution of the Board of Directors of April 2, 1968 and the loan of $40,000 was repaid by the appellant to the trustees on August 31 and September 22, 1967.
The appellant claims that the assessments are unfounded in fact and in law, that the pension plan was bona fide and was registered under the Act and that the deduction in respect of the
contributions invested in preferred shares of the appellant did not unduly or artificially reduce the income of the appellant.
The respondent admits that a document enti tled "Pension Plan" was signed by Theodore Tibor Mittler on December 9, 1964, that another document entitled "Trust Agreement" was signed by Theodore Tibor Mittler and Alexan- der Leslie Mittler, Julius Pfeiffer and Paul Riox, that these two documents were sent to him and that by letter dated January 18, 1965 he advised the appellant that the plan had been registered under the Act. He also admits that by letter dated May 7, 1965 he advised the appellant that the Superintendent of Insurance confirmed the calculations of the deficit as set forth in the certificate of the appellant's actuary in the amount of $228,410 adding, however, that the actuarial certificate wherein it is mentioned that the assets of the pension fund will need to be $228,410 to ensure that all obligations of the fund may be discharged in full is a nullity because it was based on a misunderstanding of the rights and obligations created under the plan.
In so far as the payments of the contributions are concerned the respondent says that there was here a mere exchange of cheques between the appellant and the "Trustees" or the alleged "Pension Plan".
Although the respondent attacked the plan for a number of reasons they can, I believe, be restricted to the following:
(a) The actuarial certificate is invalid as it is based on a misconception of the facts and of the rights and obligations resulting from the document entitled "Pension Plan".
(b) The appellant never made and has never been obliged to make any payment for past services rendered by its employees and, in any event, never made, nor ever intended to make any special payment irrevocably vested in or for a pension fund or plan.
(c) On October 1, 1965, the appellant appar ently issued a cheque in the amount of $60,000 to the order of the Royal Bank of
Canada (Mittler Bros. of Quebec Limited Pension Trust) which amount was immediate ly returned to the appellant under the form of an apparent buying of Class "A" preferred shares.
(d) On December 17, 1966 the appellant apparently issued a cheque in the amount of $40,000 to the order of the executive pension plan of Mittler Bros. Limited, which amount was immediately apparently loaned back to the appellant.
(e) By the making of the said loan, the so- called "Trustees" of the alleged "Pension Plan" could not have been acting as "Trus- tees" of an employees' pension plan, but must have, in fact, been acting as mandatories of the appellant since the loan clearly contra venes Article 2 of the alleged "Trust Agreement".
(f) The "Trustees" of the alleged "Pension Plan" always acted, in fact and in law, as the appellant's mandatories and the appellant was the only one responsible for the administra tion of the "Pension Plan" and the only one entitled to make decisions with respect to the interpretation and the application of the alleged "Pension Plan".
In order for a taxpayer to make a deduction pursuant to a pension—plan under the Act the following conditions of section 76(1)' of the Act must be met:
(a) The taxpayer must make a special pay ment to a "pension plan" or fund;
(b) The special payment must be made to ensure that all the obligations of the fund or plan to the employees may be discharged in full;
(c) The payment must be one which has irrevocably vested in the fund or plan;
(d) The payment must be made pursuant to the recommendation of a qualified actuary.
The respondent contends that there never was any intention on the part of the appellant that the funds represented by the cheques in the amount of $60,000 and $40,000 would form part of the pension fund nor that they would irrevocably vest in or for a pension fund or plan
and that they have in fact never been irrevoc ably vested in or for a pension fund or plan. The respondent also says that at no time was the appellant obligated by the terms of the plan to make a special payment in respect of the mem bers of the plan and at no time were the "Trus- tees" of this plan obligated to pay a pension or any retirement or other benefit.
As an alternative respondent says that if pay ments were made to a pension fund or plan the transactions are tainted with artificiality and the appellant is, therefore, precluded by section 137(1) 2 of the Act from deducting pursuant to section 76 of the Act the payment of $60,000 and $40,000.
The only two officers who participated in this executive plan were Theodore T. Mittler, secre- tary-treasurer of the appellant, and Mrs. Eliz- abeth Mittler, its president. The proposed total pension of T. T. Mittler was $20,000 per annum and that of Mrs. Mittler was $14,000 per annum. It is of some interest to note that Mrs. Elizabeth Mittler sold her interest in the Compa ny in December 1966, resigned as an officer and ceased to be an employee thereof.
I am of the view that the situation here is the same as that found in M.N.R. v. Inland Indus tries Ltd. 72 DTC 6013, where Pigeon J. held that the respondent company was not entitled to deduct the past service contributions made to the pension plan. The learned judge indeed stated that as there were "no obligations" of the fund or plan to the member that required any special payment to ensure that they might be discharged in full, as section 76(1) of the Act expressly requires, the deduction of the contri bution payment could not be allowed.
The provisions of the plan with respect to employer contributions for past services are as follows:
The employer may make contributions for the past serv ices of any employee participating in the plan who has completed one or several years of continuous service.
The amount of pension to which a member is entitled is covered by the following clause:
At the retirement of an employee at normal retirement age, the Trustees will provide the employee with an annual pension of up to 70% of the average of the employee's best six years salary but in no event an annual pension of more than $40,000. Such pension shall be paid to such employee until his death and shall be provided at the discretion of the Trustees, either directly from the fund or by the purchase of an annuity from the Government of Canada or from an institution authorized to sell annuities in Canada.
It is to be noted here also as in the Inland Industries Ltd. (supra) case that the plan does not provide a specific amount of pension but only sets a maximum limit to that total pension.
It also appears from the above quoted clauses of the plan that there is no obligation to the members of the plan that required special payments.
There is, indeed, no obligation of the fund or plan to the members that calls for any special payment to ensure that they might be dis charged in full as section 76(1) of the Act expressly requires.
Here also the only obligations to a member were to use in the prescribed manner the funds paid into the plan and no obligation had been created, either on the fund or on the Company to furnish the members with the benefits which were intended to be provided by the special payments.
It seems clear to me that the existence of an obligation of the Company's pension plan toward the employees in respect of past serv ices is a statutory condition of the right of the deductions and in the absence of such an obliga tion there was no right to deduct any special payments.
The terms of the plan indicate clearly that there is no obligation on the part of the compa ny to make special payments for past services as the language used is,
The employer may make contributions for the past serv ices of any employee ... .
Indeed no obligation toward the members could arise under the plan in respect of special payments made unless and until the company chose to and actually did make the contemplat ed payments into the fund and I may add that even once made the obligations of the fund toward the employees could be a pension that could be anything from 1 % of the average of the employee's best six years salary up to 70% thereof, but in no event never more than $40,000. It therefore follows that there was no obligation of the pension fund to the members that required payment of the special payments the appellant wishes to deduct.
As the above defect of the plan is sufficient to determine this appeal I will refrain from dealing with any of the other attacks made on the plan or on the trust document or consider the alleged artificiality of the payments so made. The payments were, it is true, supported by an actuary's report and the plan was accept ed and registered by the Minister. The appellant cannot however gain any benefit from this as no approval given can bind the Minister when a statutory requirement has not been met. The actuary on the other hand could not, in the present case, express a valid opinion as to the amount by which the resources of the fund or plan required to be augmented as he could do so only with respect to existing obligations of the fund in respect of past services and as we have seen there were at the time no such obligations.
The appeal is dismissed with costs.
' 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 recom mendation 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.
z 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.
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