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.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.