Produits LDG Products Inc v. Minister of National Revenue, [1973] CTC 273, 73 DTC 5222

Walsh, J:—This is an appeal from income tax assessments for appellant’s 1965, 1966 and 1967 taxation years dated December 10, 1968 whereby taxes were assessed in the amount of $24,557.94 for 1965, $39,463.10 for 1966, and $19,470.25 for the year 1967. The total increase in taxation payable over the. amounts declared and paid by appellant for the three years amounted to $47,636.43. This resulted from the disallowance in the 1965 taxation year of the sum of $45,540 claimed as a deduction as a payment to a pension fund for past services and $2,783.50 for current services, a similar disallowance for the 1966 taxation year of the sum of $45,540 paid to the pension fund as a past service contribution and the amount of $2,783.50 for current services, and a disallowance for the 1967 taxation year of the amount of $3,000 claimed simply as a payment to the directors’ pension fund. Appellant lodged a notice of objection to each of these assessments under the provisions of section 58 of the Income Tax Act in effect at that time and in due course on September 24, 1970 respondent advised appellant that it confirmed these assessments, Appellant then appealed directly to the Exchequer Court by proceedings entered December 22, 1970, which have only now been brought on for hearing.

Appellant’s pension plan was established on February 26, 1965, effective as of February 1, 1965 by an agreement in notarial form. Appellant sent a copy of this agreement to respondent for approval under the provisions of paragraph 139(1)(ahh) of the Act. At the same time, pursuant to the provisions of section 76 appellant forwarded an actuarial certificate to respondent, which certificate established on the basis of the presumptions on which it was calculated that appellant should deposit in the fund an amount of $210,860 as of February 1, 1965 by five annual payments of $45,540 for past service contributions. By letter dated April 14, 1965, signed by G M Taylor, Director, Legal Branch, on behalf of respondent, appellant was advised that the plan is “accepted for registration by the Minister of National Revenue as an employees’ superannuation or pension fund or plan and is effective as of February 1, 1965”. Subsequently, by letter dated February 3, 1966, Mr Taylor advised: “We are now in receipt of a reply from the Superintendent of Insurance who confirms that the past service liability was $210,860 as on 1st February, 1965. This amount may be claimed under section 76 of the Income Tax Act.” Appellant’s argument that this. binds the respondent and that these payments cannot later be disallowed has been rejected in a number of cases including Concorde Automobile Ltée v MNR, [1971] CTC 246; 71 DTC 5161; West Hill Redevelopment Company Limited v MNR, [1969] CTC 581; 69 DTC 5385; The Cattermole-Trethewey Contractors Ltd v MNR, [1970] CTC 619; 71 DTC 5010; and Susan Hosiery Limited v MNR, [1969] CTC 533; 69 DTC 5346. This argument was conclusively disposed of in the Supreme Court case of MNR v Inland Industries Limited, [1972] CTC 27; 72 DTC 6013, where at page 31 [6017] Mr Justice Pigeon, in rendering the unanimous judgment of the Court, stated:

However, it seems clear to me that the Minister cannot be bound by an approval given when the conditions prescribed by the law were not met.

Appellant further contends that the pension plan established by it was not a sham created with the view of obtaining income tax deductions but actually existed and after minor amendments to make it conform to legal requirements it was also approved on May 12, 1969 under the provisions of the Quebec Supplemental Pension Plans Act, SQ 13-14 Eliz II, c 25, and was registered under the provisions thereof. Appellant further argues that all the amounts paid by it or its employees to the plan have been vested irrevocably in the hands of the administrators who have acted exclusively on behalf of the pension plan and that their investment of the funds in preferred shares of appellant was a legal and safe investment and, as a matter of fact, these preferred shares were redeemed early in 1970.

Respondent for its part claims that the establishment of the pension fund was merely the first step in a series of transactions having the purpose of artificially reducing appellant’s income. It is contended that all amounts paid to the plan were immediately returned to appellant by purchase of its preferred shares, and the fact that the plan was approved under the provisions of the Quebec Supplemental Pension Plans Act does not change its character as a sham. Respondent submits that in order for a current service deduction to be made under the provisions of paragraph 11(1)(g) of the Act and for past service contributions under section 76 of the Act the plan must not only have been registered but the payments must also have been made irrevocably and that in the present case the trustees always acted merely as agents of appellant. Respondent contends moreover that even if the payments were irrevocably made they were of an artificial nature and if allowed would unduly or artificially reduce the income of appellant and should be disallowed by virtue of the provisions of subsection 137(1) of the Act.

For the purposes of convenience I will now set out the sections of the Act in question:

11. (1) Notwithstanding paragraphs (a), (b) and (h) of subsection (1) of section 12, the following amounts may be deducted in computing the income of a taxpayer for a taxation year:

(g) an amount paid by the taxpayer in the year or within 120 days from the end of the year to or under a registered pension fund or plan in respect of services rendered by employees of the taxpayer in the year, subject, however,

as follows:

(i) in any case where the amount so paid is the aggregate of amounts each of which is identifiable as a specified amount in respect of an individual employee of the taxpayer, the amount deductible under this paragraph in respect of any one such individual employee is the lesser of the amount so specified in respect of that employee or $1,500, and

(ii) in any other case, the amount deductible under this paragraph is the lesser of the amount so paid or an amount determined in prescribed manner, not exceeding, however, $1,500 multiplied by the number of employees of the taxpayer in respect of whom the amount so paid by the taxpayer was paid by him,

plus such amount as may be deducted as a special contribution under section 76.

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.

139. (1) In this Act,

(ahh) “registered pension fund or plan’’ means an employees’ superannuation or pension fund or plan accepted by the Minister for registration for the purposes of this Act in respect of its constitution and operations for the taxation year under consideration;

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.

It is now necessary to examine the plan in detail. Section III of the plan limits its application to “executives adjudged by the Board of Directors of the Company to be eligible for qualification”. Section V provides for a regular pension “equal to 70% of the member’s best average salary minus the regular pension provided by the group annuity policy number GA540N issued by the London Life Insurance Company”. Section VI provides basic contributions for current service of “a maximum of $1,500” to be made by both the member and the employer in each case less the regular contribution to the aforementioned group annuity policy with the London Life Insurance Company. Section IX provides inter alia that “the payments of benefits under the plan shall be a liability of the pension fund and not of the trustees or of the company”. Section IX(3) reads as follows:

IX (3) TRUSTEES:

The Plan shall be administered as to its membership and benefit provisions by the Trustees. The Trustees shall also administer and supervise the investment of the Pension Fund.

The Company shall, from time to time, appoint Trustees who will act for the Company in assuming the responsibilities mentioned above. Until further notice the Trustees of the Plan shall be those named in an Agreement dated February 26th 1965 — between the company and the Trustees.

(Italics mine.) Section X(4)(a) provides:

X (4) MODIFICATION OR DISCONTINUANCE OF THE PLAN:

(a) The Company expects and intends to maintain the Plan in force indefinitely, but necessarily reserves the right to change, suspend or terminate the Plan at any time;

It is provided, however, that in the event of any such change or termination no beneficiary may be deprived without his consent of his right to the benefits accrued to his credit up to the time of the change.

The notarial agreement entered into between appellant, designated as “Donor” and Maurice Germain, Dame Lucie Dube-Germain, and Claude Germain, designated as “Trustees” provided, inter alia, that the trustees should not be prohibited “from investing part or all of the Trust Fund in the common or preferred shares of the Donor.. . .”.

It further provided that in the event of the resignation, death, incapacity or inability or refusal to act of any trustee “he shall be replaced by written declaration to that effect by such person as may be designated by the Donor”. Paragraph 10 provided “The Donor may at any time replace any or all of the Trustees on giving one month’s notice to such Trustee, in which event the Donor shall be entitled to designate a new Trustee or Trustees to replace such person or persons”. The terms of this trust deed and of the pension plan were duly approved by by-law 32 of appellant.

Appellant already had a pension plan with London Life dating from 1956 providing a pension for all employees with two years of service and who had attained the age of 25 years in the case of males and 30 years in the case of females, requiring a minimum contribution of 5% by each of the employer and employee. The supplemental pension plan with which we are now concerned was limited to six key employees of the company, Maurice Germain, the president and founder, Lucie D Germain, his wife and a director of the company, Claude Germain, his brother and also a director, Georges Jolicoeur who had been with the company since 1951 and was personnel manager in 1965, later becoming a director in 1970, Bruno Lavigne, who had been with the company since 1948 as a sales representative but has never been a director, and Pierre Quesnel who had been with the company since 1953 and was sales manager at the time and became, in 1971, a director and vice-president in charge of sales.

The actuarial certificate was, of necessity, based on certain assumptions. The mean salary for the past six years before the fund was established was used as the “best average salary” provided for in the plan, no allowance being made for the effects of inflation. With respect to current service payments, the plan merely provided a contribution by employer and employee of a maximum of $1,500 each minus the contributions paid to the London Life Insurance Company. In making the calculations it was assumed that the necessary amounts would be contributed to the maximum of $3,000, which maximum applied only in the case of Mrs Germain who was not covered by the London Life policy although she had always been an employee of the company. The other current service contributions payable annually were $450 for Maurice Germain, $1,254 for Georges Jolicoeur $209 for Bruno Lavigne, $628 for Claude Germain and only $26 for Pierre Quesnel. With respect to past service contributions, these were necessary only for Maurice Germain for whom $142,220 had to be paid, and Mrs Germain for whom $68,640 was required. For the others the effect of their relatively low salaries and the pensions which would already be provided by the London Life policy, together with the period for which it could be actuarily estimated that current service contributions would be made, resulted in there being no need for past service contributions.

According to the trust deed the original trustees were Maurice Germain, his wife Lucie Dubé-Germain and Claude Germain who Mr Germain testified were all directors of the company. Subsequently the plan was amended to add Mr Valmont D’Auteuil, chartered accountant, and at that time the company’s auditor, as a trustee of the plan. A letter from Mr Taylor of the Legal Branch of the Department of National Revenue dated August 19, 1965 acknowledges a letter from the company of July 26, 1965 which enclosed an amendment of the plan to this effect. It was Mr D’Auteuil who signed cheques on behalf of the plan with Mr Maurice Germain. Subsequently the plan was again amended at a meeting on March 21, 1969, the amendments to take effect as of January 1, 1966, these amendments being necessitated by the Quebec Supplemental Pension Plans Act which had come into effect on July 15, 1965. At the same time Claude Germain was replaced as trustee by Michel Gilbert, the company’s solicitor. As the Quebec statute required the naming of administrators instead of trustees and the establishment of a retirement fund it was provided at the same meeting that Maurice Germain, his wife Lucie Dubé-Germain and Michel Gilbert would be administrators and members of the retirement committee. Nothing is stated about when Mr D’Auteuil retired as a trustee. It is also of interest to note that in the minutes of the said directors’ meeting of March 21, 1969, attended by Maurice Germain, Georges Jolicoeur and Mrs Lucie Dubé-Germain, it is stated they are all the directors of the company. This is contrary to Mr Maurice Germain’s evidence that Mr Jolicoeur became a director of the company only in 1970 and that Claude Germain was a director in 1965 and still is. In any event, the amended plan was duly approved by the Quebec Pension Board as already indicated.

It must be emphasized that we are dealing with the 1965, 1966 and 1967 taxation years of the company and evidence of what took place after that is only of interest in attempting to determine the intent of the parties and the manner in which the plan was administered. It should also be noted, although it may be of no great significance, that the company’s fiscal year ends on February 28, whereas the pension plan commenced on February 1, 1965 and hence its fiscal year ends on January 31. The first payment to the pension plan in the amount of $48,820 was made on February 26, 1965. Since the company’s contribution for past service was to have been in the amount of $45,540 and its share of the total current service contributions would amount to one-half of $5,567 or $2,783.50, it would seem that the total payment should have been $48,323.50. In any event, a further payment of $2,287 was made on April 2, 1965 making the total $51,107 which, including employees’ current service contributions, would be correct. Simultaneously, cheques were issued by the fund in favour of the company in the amounts of $48,820 on February 26 and $2,200 on April 2, and the shareholders’ ledger shows that preferred shares in the company were issued for these amounts although in both cases the issue dates are shown as February 28, 1965. Similarly, on February 28, 1966 cheques were issued for $45,540 and $5,567 respectively on behalf of the company in favour of the pension fund, which were deposited on April 4 and two cheques were issued the same day by the fund payable to the company for $45,540 and $5,560 respectively to purchase $52,700 worth of preferred shares for the pension fund, an additional cheque of $1,600 having been issued on April 1 by the pension fund to make up the difference. (The fund had received a third cheque from the company, possibly for dividends in the amount of $1,575.60, also dated February 28, 1966.) On February 28, 1967 the pension plan received a cheque from the company for current service contributions in the amount of $5,567 and on the same date issued a cheque to the company in the amount of $5,570 to purchase further preferred shares.

It is not necessary to trace all the transactions between the company and the pension plan, which regularly received dividends from the company on the preferred shares already acquired and immediately reinvested them in further preferred shares so that it never at any time retained more than very nominal funds in its account.

It is of some interest to note that the first payments by the company to the pension fund took place before the letter of April 14, 1965, approving the plan for registration, but since it was accepted for registration as of February 1, 1965, this does not appear to be relevant.

Although the reassessments were only made on December 10, 1968, Mr Guy Loubier, who has been comptroller of the company since April 1967 and is familiar with its records before that date, believes that there were indications before the end of its 1966 year on February 28, 1967 that the deductions of contributions made to the plan might be disallowed, and that is why only the current service contributions amounting to $5,567 were made in the cheque of February 28, 1967.

In due course, when regulations made under the Quebec Supplemental Pension Plans Act prohibited investment of pension funds in preferred shares of the company, the preferred shares were all redeemed and the sum of $150,000 was deposited in the Bank of Montreal in a term deposit account on July 30, 1970 which bore 7% interest until September 30, then 6 /2% until December 31, 1970, then 57s% until March 31, 1971, 5% from then until April 1, 1972 and then 5 A% until April 2, 1973. The cumulative redeemable preferred shares of the company paid an interest rate of 6% and the dividends had always been paid.

The trustees of the pension plan never held any meetings as such and no formal statements were ever prepared although Mr Loubier testified that each year he prepared a working sheet as his predecessor had done showing the financial position of the fund as of February 28 each year. It is interesting to note that this is the termination date of the company’s fiscal year immediately prior to which the payments were always made and not that of the pension fund which terminates one month earlier. These unsigned statements were filed with the book of documents and the statement as of February 28, 1967 showed total assets of the fund as $117,290.60 which includes income for 1965-66 of $3,100.70 and for 1966-67 of $6,408.90. This consisted of investment in preferred shares of the company in the amount of $117,280 and only $10.60 in the bank. By February 28, 1972 this had grown to $166,763.97 of which $159,136.97 is shown as money in the bank, $2,060 as 206 preferred shares of the company and an amount of $5,567 as payment due. This latter amount had been carried forward each year since it appeared for the first time on the statement for February 28, 1969, but was not cumulated each year so that the indication is that only one further current service contribution was considered as due and unpaid.

Not only were the contributions by the company and by the employees always reinvested in preferred shares of the company as long as it was permissible to do so, but the individual employees who also had an interest in the pension plan voluntarily invested bonus money which they received in preferred shares, thereby indicating that they considered this a satisfactory investment of their own funds and impliedly that they did not object to the pension plan fund being invested in the same manner. The employees in question were not formally consulted about the investment of the pension funds in preferred shares of the company but it is quite evident from the evidence that had they been they would have agreed. With the exception of Maurice Germain and his wife, none of them appear to have had much say in how the financial administration of the company was handled even though they may have been considered part of the executive group. The only one of these employees who testified, Mr Jolicoeur, stated he knew what was done with the pension funds and was satisfied. The salary deductions were made only once a year, not each month as provided for in the plan. He was under the impression that he received a cheque for the amount of his pension deduction which he then turned over to the trustees of the plan, but this does not seem to be correct since these payments were made directly by the company to the plan. Mr Rochette, the company’s auditor, was under the impression that although the employees’ contributions to the plan were made by the company annually they were deducted from their pay but he was not sure of this. When the decision was made not to make any further past service contributions to the pension fund or even current service contributions for the years following 1967 as a result of the dispute which had arisen concerning the deductibility of same for tax purposes, Mr Loubier was under the impression that the members of the plan were advised of this decision. Mr Jolicoeur went so far as to state that he never considered that the company was obliged to continue to contribute.

Mr Loubier testified that Messrs Jolicoeur and Quesnel both considered it a privilege to be allowed to use their bonus money to buy preferred shares in the company and Mr Maurice Germain testified to the same effect. While I consider it an exaggeration to refer to the right to buy preferred shares in the company stock as a privilege, it is nevertheless fair to say that considering the interest rates pre- vailing in 1965 and 1966 a 6% cumulative preferred stock in a company which was prosperous and paid its dividends regularly was not a bad investment. It seems evident that the senior employees considered themselves part of the company team and were quite prepared to leave everything to the president and founder Mr Germain and the company administrators in whom they had confidence. They made no objection when the company stopped making payments to the pension plan. Since the plan could be suspended or terminated by the company at any time any such objections would have been unavailing in any event.

Appellant concedes that a long line of jurisprudence has refused to allow deductions for tax purposes of contributions made to supplemental pension fund plans somewhat similar to its plan, but contends that these decisions can be distinguished on the facts of the present case. There is no doubt that certain distinctions can be made but the question to be decided is whether such differences would have altered the decisions reached in the judgments in question.

In the first place appellant contends that, unlike some of the other cases, it did not need to have the money contributed to the pension plan immediately reinvested in the company. The business of the company was prosperous, showing net profits before taxes for the year ended February 29, 1964 of $70,804.63, for the year ended February 28, 1965 of $38,446.35, for the year ended February 28, 1966 of $75,709.25 and for the year ended February 28, 1967 of $71,050.62. It had a line of credit of $350,000. Mr Rochette, the company’s auditor, produced figures indicating that at the time the payments were made to the fund the company could always have made same without exceeding its line of credit. While there is some question as to whether the use of this credit is not limited to the commercial requirements of the company and that it could not, therefore, be used to make payments to a pension fund plan, Mr Loubier, the company’s comptroller, disputed this stating that the company was not required to show the bank how it used its line of credit. Respondent pointed out that when the company issued its cheques for the pension plan payments it did not have sufficient money in the bank to cover them and relied on the Supreme Court case of MNR v Cox Estate, [1971] CTC 227; 71 DTC 5150, as authority that the exchanges of cheques between the company and the pension fund did not really constitute a payment by either. I would doubt whether it would be applicable to the present situation, however, as in rendering judgment Judson, J said at page 229 [5151]:

The simultaneous exchange of cheques, where neither would be honoured due to insufficient funds were it not for the offsetting entry of the other cheque, can only be viewed as a single transaction.

I do not think in the present case that the company’s cheque would not have been honoured, because of its good credit position.

Mr Loubier pointed out that actually it would have been to the company’s advantage to have borrowed this money from the bank to make the payments into the pension fund plan as in this event it could have charged the interest as an expense, whereas when the money was invested in its preferred shares it had to pay the dividends on same out of its after-tax revenue. Despite this, Mr Maurice Germain testified very categorically that he had been advised that the past service contributions were deductible under section 76 of the Act and that otherwise the plan would not have been put into effect as it would have been too onerous for the company. At the same time he insisted that the company’s only motive in establishing the plan was to provide extra protection by way of pension for the employees covered. Mr Loubier also admitted that although he could not speak for the company, it is his own personal opinion that it would not make further payments to the pension fund unless it was assured of their deductibility.

The fact that the pension plan could have been established by the company even if the sums paid to it had not been immediately reinvested in preferred shares of the company merely indicates that the company had the capacity to establish such a plan without necessarily establishing that the plan established complies with all the requirements of section 76 of the Act so as to make the past service contributions paid into it deductible. Neither does the fact that the dividends on the preferred shares were always regularly paid in the present case, unlike for example the case of Concorde Automobile Ltée v MNR (supra) where the dividends were not so paid. While this led to an inference in that case that the trustees were not acting independently and in the interests of the fund in making the investment they did, unlike the present case, where, whether they were acting independently or not, the fund was not prejudiced by the investment made, it is not the conduct of the trustees which is the real issue but rather the nature of the pension plan itself. In the Concorde Automobile case judgment was based on the application of subsection 137(1)* [1] of the Income Tax Act. This judgment read in part at pages 267-68 [5174]:

. . . I therefore believe it is necessary in any given case to attempt to determine from the facts of that case whether the company was merely incidentally gaining a tax advantage as a result of setting up a bona fide pension plan, or whether it would not have considered setting up this pension plan but for the tax advantage to be gained as a result thereof, and in the latter event, Section 137(1) would be applied.

The evidence of Mr Germain in the present case to the effect that the plan would have been too onerous for the company had the payments for past service contributions not been deductible under section 76, and the fact that as soon as it appeared that there might be difficulty in having the Minister accept these deductions, all further payments for past service^ contributions were stopped and even the current service contributions were only continued for one year, certainly invites a similar conclusion despite the fact that in the present case, unlike the Concorde Automobile case, it does not appear to have been an essential part of the plan that the moneys paid into the pension fund be reinvested in preferred shares of the company.

Appellant also argued that the present case can be distinguished from the cases of Cattermole-Trethewey (supra), Concorde Automobile (supra) and Goldberg Bros Ltd v MNR, [1972] CTC 1; 72 DTC 6045, in that the beneficiaries of the plan were not limited to those controlling the enterprise. While it is true that there were six employees in the present plan, it was clearly established primarily for the benefit of Mr Maurice Germain and his wife Lucie D Germain. She had not been included in the company’s London Life Pension Plan, as Mr Germain was under the impression that a medical examination might have been required at the time it was established, which might have caused some difficulty as she was not in good health at the time. In any event the entire past service contribution to be paid was for the benefit of Mr Germain and Mrs Germain in the amount of $142,220 for him and $68,640 for Mrs Germain. In her case the current service contribution was also the maximum of $3,000 a year from her and the company jointly while for four other beneficiaries the joint contribution merely ranged between $26 and $1,254 per annum, comparatively trivial amounts. I do not believe that a valid distinction can be made for this reason therefore.

The main issue is whether the fund or plan incurred a firm obligation to the employees and whether the payment made by the company was irrevocably vested in it within the meaning of subsection 76(1) of the Act. Here again the appellant is in a somewhat stronger position than in some of the other cases such as the leading Supreme Court case of MNR v Inland Industries Limited (supra) in which the plan merely provided that the company would contribute an amount equal to $1,500 each year for each member joining the plan on the effective date and an amount equal to $100 each year for each member and stated: “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.” It went on to provide that the maximum pension would be the difference between 70% of the member’s average earnings during his six highest earning years and the pension otherwise provided by the company. In rendering the judgment of the Court, Pigeon, J stated at page 32 [6017]:

The existence of such an obligation is a statutory condition of the right to the deduction and in its absence, there is no right to deduct a special payment. It cannot be said that because the intention of making, at some future time, payments in the amount now claimed was disclosed to the department in the application for registration of the plan, an obligation to make the payments was created. On the contrary, the terms of the plan were perfectly clear to the effect that no obligation towards Mr. Parker would arise in respect of those sums unless and until the company chose to, and actually did, make the contemplated payments into the fund.

Similarly, in the Cattermole-Trethewey case (supra) the plan merely indicated that the employer “hopes and expects” to make adequate annual contributions. In the present case, however, a specific amount of pension was provided (70% of the member’s best average salary). To ensure this not only was the past service contribution necessary in the cases of Maurice Germain and Mrs Germain, but current service contributions for all six beneficiaries. When we come to contributions we find that for current service contributions the employer and member will each contribute “a maximum of $1,500 per year” minus the contributions to the London Life annuity. While the sum of $1,500 is the maximum amount which is deductible annually by virtue of paragraph 11(1)(g) of the Act, it is to be noted that the plan does not provide that the employer (or for that matter the member) shall provide such annual contributions up to this maximum as the actuary has determined to be necessary to provide the difference between the London Life pension and the 70% of “member’s best average salary’. No minimum annual contribution being required, the employer could have contributed $1 per year in which case presumably the assets of the fund would have been insufficient to provide for the stipulated pension on retirement of the members. With respect to the past service contributions, the plan provided that the company “shall” contribute the amounts which on the advice of the actuary are estimated to be necessary to provide the benefits of the plan with respect to service prior to its effective date. Actually, the company made two such contributions in accordance with the actuary’s certificate and defaulted thereafter so that the plan would not have had sufficient assets to provide for the members’ retirement pensions in the amount specified. While the company retained the right to change, suspend or terminate the plan at any time, there is no evidence of any formal resolution to do so. Instead, the company merely stopped making payments when it found that the deductibility of same for tax purposes was in dispute. Whether or not under these circumstances the trustees of the plan could sue the company for arrears Of payment is not an issue before me, and in any event this appears to be academic since the trustees are substantially the same persons as the directors of the company and are certainly not in a position to act independently of it. Even though the unfortunate wording of Section IX(3) of the original plan to the effect that “the company shall from time to time appoint Trustees who will act for the company in assuming the responsibilities mentioned above” was changed as a result of the amendment made in 1969 to comply with the provisions of the Quebec Supplemental Pension Plans Act, there is no question that in practice the trustees who were appointed by the company, and the majority of whom were the principal beneficiaries of the plan, were under the company’s control. It is not necessary to go as far as accepting respondent’s argument that they were agents of the company, to conclude that in practice it is hard to conceive of them suing the company for any obligations incurred by the company to the plan which were not fulfilled.

The fact that the payments already made to the plan are irrevocably vested in it and belong to the members and cannot be returned to the company is a common feature of all pension plans, but this is not sufficient to find that the company has made payments irrevocably vested in the plan sufficient “to ensure that all the obligations of the fund or plan to the employees may be discharged in full” within the meaning of section 76 of the Act. Further light on this can be found in two recent and as yet unreported judgments. In the case of Mittler Bros of Quebec Ltd v MNR, [1973] CTC 182; 73 DTC 5158, a judgment of the Associate Chief Justice, payments made on account of past service contributions were invested partly in preferred shares of the company and partly in a loan to the company, which preferred shares were redeemed and the loan eventually repaid. While in that case it is true that the plan used the words “may make” with respect to past service contributions and provided for a pension of “up to” 70% of the average of the employee’s best six years of salary and therefore, as in the case of the Inland Industries judgment (supra) provided no specific amount of pension, the remarks of the learned Associate Chief Justice in his reasons for judgment at page 186 [5161] might well be applied to the present case. He states:

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 towards the employees in respect of past services is a statutory condition of the right of the deductions and in the absence of such an obligation there was no right to deduct any special payments.

In the present case, while the plan may have incurred specific obligations towards the members with respect to the amount of the pension to be paid, the fact that no specific amount was provided for current service contributions, but merely a maximum, and that the plan could be suspended or terminated at any time by the company, together with the evident inability or unwillingness of the trustees to oblige the company to fulfil its obligations under the plan all indicate that the plan would be unable to fulfil its obligations to the members unless the company chose to continue to make its necessary contributions to the plan. The said judgment expresses the same view on page 186 [5161] where it is stated:

Indeed no obligation towards 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 contemplated payments into the fund . . .

It is significant to note that Section IX(1) of the plan provides that “The payments of benefits under the Plan shall be a liability of the Pension Fund and not of the Trustees or the Company”.

In the case of Cam Gard Supply Ltd v MNR, [1973] CTC 111; 73 DTC 5133, a judgment of Cattanach, J, in which, as in the present case, the amount of pension to be paid was specified unlike the situation in the Inland Industries case (Supra) and in which, moreover, a lump sum payment of the entire past service contribution had been made to the plan before it was even registered, on the advice of the actuary as to the amount required, the appeal was nevertheless dismissed because in reference to the proposed payments into the plan the words “the company intends to contribute subject to the funds for such purposes being available” were used. At page 118 [5138] the judgment states:

Since there is no obligation under the Plan on the Company to contribute it follows that there is no trust created unless the funds are contributed. If no funds are contributed by the Company it follows that the fund or plan is under no obligation to the employees.

The same judgment also criticizes the actuarial certificate which might also well be criticized in the present case. It was based on information given by the employer as to the average salaries of the employees for the six last years before the adoption of the plan which showed the following:

We find, however, in Section X(1) under the heading “Earnings” the following:

For the purpose of determining the amounts of contributions and pension benefits under the Plan, earnings shall mean salary, wages, sales commissions, payments under an incentive plan and other remunerations for services as determined by the Company under its normal practices but excluding special payments or indemnities or reimbursement for expenses.

A list of salaries paid, including commissions and special bonuses, from January 1, 1965 to December 31, 1972 shows that in each of these years Maurice Germain received payments varying between a maximum of $45,863.33 in 1966 and a minimum of $30,731 in 1968, Georges Jolicoeur received payments graduating from $9,060 to $16,166.10, Bruno Lavigne received payments varying between a maximum of $12,131.42 in 1966 and a low of $6,770.65 in 1968, Claude Germain received payments varying between a high of $16,181.10 in 1972 and a low of $10,289 in 1969, Pierre Quesnel received payments graduating from $6,782 in 1965 to $16,181.10 in 1972, and Lucie Germain received payments varying between a high of $12,000 in 1969 and 1970 and a low of $10,500 in 1971. It is true that these payments include bonuses which are not included in calculating the contributions but we are told that most of the employees were in the habit of investing their bonuses in the stock of the company. Despite this we find that Georges Jolicoeur bought only $1,200 worth in 1965, $1,900 worth in 1967 and another $1,900 worth in 1968, Pierre Quesnel bought $450 worth in 1965, $1,400 worth in 1967 and $1,900 worth in 1968. Bruno Lavigne bought no shares after 1965 when he bought $650 worth, and Claude Germain bought none after 1965: when he bought $1,600 worth. It would certainly not appear that the bonuses paid were sufficient to account for the very substantial discrepancies between the payments actually received and the salary information furnished by the company to the actuary as a basis of his determination of the amount of past service contributions required. In fairness it must be pointed out that the figures provided were allegedly based on an average of six years prior to February 1965, so they may have been accurate if the salaries and commissions paid prior to 1965 were very substantially lower than those paid in the year 1965 and each of the following years. It is apparent, however, that to provide the pension contemplated, very substantially higher contributions would have had to be made both for past and current service contributions, and the actuarial certificate amended to provide for this. The actuary, Mr Bissonnette, testified that new certificates should have been provided in December 1968 and December 1971 as required by the Quebec Supplemental Pension Plans Act and regulations. This was never done and Mr Loubier testified that he wrote Quebec explaining that this was because of the litigation.

Appellant argued that the contributions called for were duly made in 1965 and 1966 and that the fact that they were later suspended cannot have a retroactive effect so as to indicate that the plan in those years should not be considered as a bona fide pension plan. While this may be true, what subsequently transpired is relevant in determining the motivation of the company in establishing the plan, and it certainly indicates that the company’s attitude was that if the payments were not to be deductible, it would not continue to make them, and the trustees’ attitude that they would not or could not force the company to make the necessary payments to enable them to fulfil the obligations incurred under the plan to the members to provide a retirement pension of 70% of their best average salaries less the sums received under the London Life plan.

I therefore conclude, in view of the uncertainty of the plan with respect to current service contributions which merely provide a maximum rather than a fixed amount, the doubtful accuracy of the information on which the actuarial certificate as to past service contributions was calculated, and the fact that payments to the fund were stopped even before full payment of the amounts so calculated for past service contributions had been made, that appellant “did not insure that all the obligations of the fund or plan to the employees would be discharged in full, and has made payment” within the meaning of subsection 76(1) of the Act. The deductions of the payments so made in appellant’s 1965 and 1966 taxation years is therefore disallowed. I would also disallow the contributions made for current service under the provisions of paragraph 11 (1 )(g) of the Act for the years 1965, 1966 and 1967.

While this would be sufficient to dispose of the appeal before me I also find that even if the said payments were found to have been made to a validly constituted pension fund duly constituted in conformity with subsection 76(1) and paragraphs 11(1)(g) and 139(1)(ahh) of the Act, the deductions should nevertheless be disallowed under the provisions of subsection 137(1) of the Act as having been made in respect of a transaction that would unduly or artificially reduce appellant’s income. While the intention of establishing the supplemental pension plan may perhaps have been as Mr Maurice Germain de- dared to provide additional pension for senior executives and longterm employees and to retain their interest in the company, it is evident that this was not nearly as important in the company’s view as the taxation advantages resulting from the establishment of such a fund. Whether or not the amounts so paid were reinvested in preferred shares of the company, which may not have been necessary in this case, the company nevertheless gained a 50% tax advantage by the deduction of these amounts from its taxable income, and when it found that it might not be able to do so it immediately stopped further payments. Payments each year into the fund of $26 in the case of Quesnel, $209 in the case of Lavigne, $628 in the case of Claude Germain, and $1,254 in the case of Georges Jolicoeur with the employee himself having to pay half of this amount, would hardly be sufficient inducement to retain these employees in the service of the company if they were not already clearly interested in it, having been with it for many years and gradually having worked up to positions of senior responsibility. The conduct of the company and of the administrators of the fund indicates that the primary objective was a reduction of taxation which would have been otherwise payable by the company, the other reasons for establishing the fund being of secondary importance.

Appellant’s appeal is therefore dismissed, with costs.