Pensions Newsletter – October 2018
October 18, 2018
Welcome to the 22nd issue of the Blakes Pensions Newsletter. This newsletter provides a summary of recent jurisprudential developments that affect pensions and benefits and is not intended to be legal advice.
For additional information or to discuss how any aspect of these developments may affect you, please contact a member of the Blakes Pensions, Benefits & Executive Compensation group.
IN THIS ISSUE
Mr. Terence Freitas retired as partner from Deloitte & Touche LLP (Firm) in 2007. The following year, Mr. Freitas was allocated income from the partnership as provided for in the partnership agreement. Mr. Freitas included this income in his 2008 tax return. He did not, however, make any Canadian Pension Plan (CPP) contributions.
Mr. Freitas was assessed as being liable for a CPP contribution in relation to such income after his retirement from the Firm. The assessment also included a deduction in computing his income for one-half of this amount payable and a non-refundable tax credit for the other half. Mr. Freitas submitted a T1 adjustment request form nearly four years later to request reassessment of the CPP contributions and the corresponding amounts for the deduction and non-refundable tax credit.
Upon reassessment, the Minister reversed the deductions for one-half of the CPP contribution payable and the non-refundable tax credit for the other half. However, since the reassessment was beyond the four-year limitation period, the Minister did not reverse the amount payable for the CPP contribution. As a result, Mr. Freitas was found to owe C$2,210.03.
Mr. Freitas objected to, and subsequently appealed this decision to the Tax Court of Canada (TCC). The TCC dismissed his appeal. Mr. Freitas subsequently appealed the decision to the Federal Court of Appeal (Court).
After confirming that the reassessment and objection processes were saved pursuant to subsection 152(8) of the Income Tax Act, the Court considered whether the income at issue could be considered self-employed earnings for the applicable tax year for the purposes of section 14 of the CPP. Specifically, in order for the income allocated to Mr. Freitas to be considered as his self-employed earnings, it would have to have been income from a business that was carried on by him.
The Court determined that, since Mr. Freitas had ceased to be a member of the Firm in 2007, his income from 2008 could not be considered to have been income from a business that was carried on by him. Therefore, the income that was allocated to Mr. Freitas by the Firm was not self-employed earnings for the purposes of section 14 of the CPP, as he was no longer a member of the partnership in 2008.
Accordingly, the Court allowed the appeal. It submitted the matter back to the Minister for reconsideration and reassessment on the basis that no CPP contribution was payable by Mr. Freitas in relation to the income at issue.
Mr. Grant Denluck applied to transfer the full commuted value of his pension plan. Mr. Denluck was advised that the transfer would be made in two instalments and that the second instalment would follow the first within five years. The first instalment was completed, but the second was cancelled due to ongoing solvency issues. Mr. Denluck claimed that the transfer of the full value was required pursuant to written and oral terms made by the trustees (Transfer Agreement). Mr. Denluck sought to certify a class action on behalf of all the members of the pension plan against the trustees for breach of contract. The application was allowed in part.
The court considered the requirements for certification of a class action. The court found that sections 25(2) and 25(7) of the Pension Benefits Standards Regulations and section 60(3) of the Pension Benefits Standards Act (PBSA) did not expressly prohibit making a deficiency payment if the pension plan did not have the required solvency ratio. Read together, the provisions simply required that trustees obtain consent from the Superintendent before proceeding with the payment. Therefore, it was not plain and obvious that the Transfer Agreement allowing for the deficiency payment was void for illegality or was contrary to public policy.
The court also found that Mr. Denluck pled the material facts required to set out a cause of action for breach of contract. Further, judicial review of the Superintendent’s decision was not appropriate because Mr. Dunluck was not claiming that the Superintendent acted unlawfully or without authority. The civil claim was a valid cause of action.
The court found that the Transfer Agreement did not raise issues common to the proposed class, because the terms of the Transfer Agreement were not set out in a standard agreement across parties. However, the alleged breach of trust did raise common issues that would advance the litigation. As per section 4(2)(d) of the Class Proceedings Act, the court concluded that a class proceeding would be the preferable procedure to resolve a claim of breach of trust and that Mr. Denluck was the appropriate representative.
Mr. Martin Charles Ward and Ms Ilze Lucis separated in May 2007. Among other things, the question arose about how to properly divide the parties’ respective pension entitlements. Mr. Ward began receiving income from his federal pension in July 2007 and Ms Lucis began receiving income from her teachers’ pension in May 2012.
The parties acknowledged that their failure to determine how to divide their pensions for several years led to several difficulties in calculating the proper division of these assets. The parties had each been effectively operating as if their pension was solely owned for years and had been paying taxes on the pension income based on their unique individual marginal rates. Mr. Ward acknowledged that he owed a net offsetting amount to Ms Lucis, but the quantum of that amount was in dispute. Neither party provided any actuarial evidence to assist in this analysis.
Rather than dividing the pensions under the applicable legislation from the date the parties began cohabitating to the date of separation, the court chose to calculate the offsetting pension amount owed as part of an overall division of all matrimonial property. Each party proposed a different methodology for calculating the amount that was owed in this context and the differences between the approaches were largely based on: (i) the tax rate to be used; (ii) the percentage of Ms Lucis’s pension to be divided; and (iii) whether pre-judgment interest should be awarded.
Justice L. Jesudason addressed each of these issues in his decision. First, he determined that applying the average marginal tax rate was the most equitable solution in this case. Second, he elected to apply the pro rata method of valuing Ms. Lucis’s pension (which treats increases in value as consistent over time) as opposed to the value-added method (which treats increase in value as accelerating over time), based on guidance from the Supreme Court of Canada in Best v. Best,  2 SCR 868 and the facts of the dispute. The pro rata method entitled Mr. Ward to 85 per cent of Ms Lucis’s pension, equal to the proportion of time the parties were cohabitating in relation to the time Ms Lucis was earning pension entitlement. Third, Justice Jesudason rejected any claim for pre-judgment interest on pension income since such awards are generally permitted in claims “for the recovery of debt or damages” and this matter concerned a claim for a matrimonial asset.
The net offsetting amount that Mr. Ward owed to Ms Lucis for pension division was calculated on these bases.
The plaintiffs had been recently granted summary judgement in a wrongful dismissal lawsuit and awarded 26 months’ notice. The plaintiffs were, however, unable to agree on the quantum of damages with Imperial Oil Limited (Imperial). The most contentious issue at play between the parties was the treatment of the plaintiffs’ pensions.
The plaintiffs argued that their damages should include an amount reflecting the contributions Imperial would have made to their pensions during the 26-month notice period. Imperial disagreed and argued that, since the pensions were part of a defined benefit plan, they suffered no pension losses because of the termination of their employment and that any damages awarded should include a deduction for the increase in the value of the pensions that resulted from the termination of their employment.
The court rejected Imperial’s argument. Specifically, the court indicated that none of the authority cited by Imperial stood for the proposition that an increase in the commuted value of a pension should be deducted from damages in a wrongful dismissal lawsuit.
However, rejecting Imperial’s argument did not mean that the plaintiffs’ should be entitled to payment of the pension contributions Imperial would have made during the notice period. The court reiterated that the general standard for calculating pension loss is the commuted value methodology. The court found that, because the plaintiffs had not suffered any pension loss, awarding amounts that Imperial would have contributed to their pension during the notice period would put the plaintiffs in a better position than if their employment had not been terminated. Since such a position would run contrary to accepted damages principles, the court rejected the plaintiffs’ claim for such pension contributions.
However, the plaintiffs were ultimately awarded amounts for Imperial’s contributions to an employee savings plan and for lost benefits.
Mr. Emy Bonnici, a part-time employee of Loblaw Companies Limited (Loblaws), sought reconsideration from decisions of the Ontario Labour Relations Board (Board).
Specifically, Mr. Bonnici had previously brought an unsuccessful application to the Board alleging that the United Food and Commercial Workers (UFCW) had breached its duty of fair representation towards him. He alleged that the UFCW failed in representing him in respect of his attempts to be enrolled in Loblaws’ pension plan. The relevant collective agreement stated that the pension plan was mandatory for full-time employees, but “eligible” part-time employees “may elect” to enrol. Eligible part-time employees were enrolled only if they filled in and returned the enrolment forms to Loblaws.
The Board dismissed Mr. Bonnici’s application reconsideration of his claim against UFCW. The Board determined that UFCW had assisted the employee in collecting the required pension plan information and the employee had elected not to enroll in the plan because of his age and inability for plan members to buy back service.
The Board also rejected the applicant’s interpretation of the word “eligible” in the collective agreement to mean that part-time employees were automatically enrolled in the plan once eligible. The Board agreed with the UFCW’s interpretation that enrolment was optional, noting that later use of the phrase “may elect” in the collective agreement demonstrated that eligible part-time employees had the option to enrol, but enrolment was not mandatory or automatic.
Mr. Martin Proulx was entitled to a lump sum payment from Nortel Networks Limited’s (Nortel) pension plan. However, Nortel became insolvent and the pension money was frozen until the wind up was completed in December 2016. Mr. Proulx obtained employment with the federal public service and was given the option to pay a sum of money into a Public Service Superannuation Plan (PSSP). Mr. Proulx emailed a request to buy back his Nortel pension for the PSSP but was advised that he was not permitted to do so until he was able to surrender his Nortel pension entitlement. In November 2016, Mr. Proulx again requested to buy back his Nortel pension. He was informed that the cost of buying back his pension had increased substantially.
Mr. Proulx wrote to the Pension Director (Director) to validate his 2011 election so he could buy back his pension at the 2011 amount. The Director refused his request. Mr. Proulx applied for judicial review of the Director’s decision on the basis that the Director erred in his interpretation of the applicable legislation and did not have jurisdiction to refuse Mr. Proulx’s election.
The court dismissed Proulx’s application for judicial review. The court reviewed the Director’s decision based on the standard of reasonableness. Justice Brown considered the five preconditions to satisfy as per paragraph 8(5)(a) of the Public Service Superannuation Act (Act) to validate an invalid election. The court held that Mr. Proulx’s application failed at every precondition because Mr. Proulx had not made an “election” in 2011. In 2011, Mr. Proulx had not used the statutory form required by the Act. Rather, he had asked to be dispensed from the Act and had given no evidence that he was ready to purchase the buy-back. Therefore, Mr. Proulx was only capable of making an election when his Nortel pension was released in 2016.
On the question of whether the Director had jurisdiction over Mr. Proulx’s election, the court noted that this issue was never raised before the Director. Therefore, it was too late to add the question of jurisdiction on judicial review.
The Office of the Superintendent of Financial Institutions of Canada (OSFI) revised its previous position that employees hired by a band council to perform the duties of a special constable or a police officer on a reserve are employed in a federal undertaking. As a result, the pension plan benefiting these employees would no longer be registered under the Pension Benefits Standards Act (PBSA), as it had since 1981, and would instead have to be transferred to the appropriate provincial authority. An application for judicial review was brought in response to this decision.
The court held that the fact that a member of an Indigenous police force has the status of “peace officer” under the Police Act does not affect the nature of the employee-employer relationship. The employer is still the band council and the federal character of governance activities of band council remains unchanged. Given that there were no business activities or other activities that may fall under provincial jurisdiction pursuant to the functional test, the court concluded that OSFI erred in its decision and that the PBSA still applied to the pension plan, and set aside the decision to transfer registration.
Devon Canada Corporation (Devon) was formed as a result of several amalgamations. Numac Energy Inc. (Numac) and Anderson Exploration Limited (Anderson) were two corporations that participated in some of the amalgamations to form Devon.
Numac was computing its income for the taxation year ended on February 11, 2001. In doing so, Numac deducted the payments it made to its option holders who had elected to surrender their unexercised options in exchange for a cash payment calculated by reference to the difference between the takeover-bid price of a Numac share and the exercise price of the particular option (Surrender Payments). Anderson was computing its income for the taxation year ended on October 14, 2001. In doing so, Anderson deducted the Surrender Payments paid by it to its option holders who had elected to surrender their unexercised options to Anderson in exchange for a cash payment calculated by reference to the difference between the takeover-bid price of an Anderson share and the exercise price of the particular option. The Minister reassessed Devon (as successor to both Numac and Anderson) to disallow these deductions.
The court held that Numac and Anderson did not acquire the options that were sold or surrendered by Numac and Anderson optionees. Instead, those options were automatically extinguished at the moment of the surrender or sale transaction. The Surrender Payments were consideration for the termination, cancellation, or extinguishment of the options, but were not the cost of the options. As a result, the court concluded that the Surrender Payments were incurred by Numac and Anderson in respect of their businesses, on account of capital, for the purpose of gaining or producing income from those businesses, and did not come within any of the exceptions or exclusions set out in the statutory definition of “eligible capital expenditure.” The Surrender Payments were, therefore, eligible capital expenditures and deductible.
Under several identical executive employment agreements, the plaintiffs were entitled to sell their shares back to their employer if they were dismissed without cause. The plaintiffs argued that on a plain reading of the employment agreements the price to be paid for those shares was the price at which they were acquired. The defendants disagreed with that interpretation, arguing that the price to be paid was instead the current market value of the shares as determined by the Board of Directors, at the time of termination. In response to the defendants’ assertion, the plaintiffs argued that the Board of Directors did not act in good faith in determining the price.
The court held that the plaintiffs’ interpretation of the contract was incorrect and that the operative date for the valuation of the shares was the date that the entitlement of the plaintiffs to sell their shares and the corresponding obligation on the defendants arose. If the bargain was that the plaintiffs would have their initial investment returned on termination, the court concluded that the contract would have instead stated that the company was obligated to repurchase the shares at the known historical price notwithstanding their current market value. With respect to the actual valuation of the shares, Justice Neufeld declined to grant judgment, citing a need for expert evidence.
With respect to the plaintiffs’ assertion that the Board of Directors did not act in good faith, the court held that the limited review process undertaken by the Board of Directors in determining the appropriate share price resulted in a failure to consider and incorporate all available information. The court held that this brought the Board of Directors’ decision outside the bounds of reasonableness and the protection of the business judgment rule. Although there was no dishonesty involved, the court held that the decision was not made in good faith.
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