Pigeon, J (all concur):—This appeal is from a judgment of the Exchequer Court allowing an appeal from respondent’s 1965, 1966 and 1967 taxation years, reported [1971] CTC 171. The only item in dispute is a sum of $202,650 which respondent claims to be entitled to deduct under section 76 of the Income Tax Act as special payments made to the trustees of its pension fund in respect of the past services of its president, one Lloyd Parker, as follows:
| For 1965 | $100,000 |
| 1966 | 50,000 |
| 1967 | 52,650 |
| $202,650 |
The essential facts which are not really in dispute are as follows. Lloyd Parker is not only the president but also the beneficial owner of all the shares of the respondent company. His yearly salary was $48,000 and a retirement annuity policy had been obtained for him from an insurance company with a substantial payment by his company being made on account of past services. In 1965, the cash value of this policy was somewhat in excess of $100,000 and Parker felt that the money could be more profitably used if invested in his company’s truck selling business. He was advised that this could be done by “rolling over” the amount into a company pension plan with private trustees. He was told, and this is agreed to be true for the purposes of this case, that there was then “no federal law, administrative limitation or Departmental policy that restricted the right of pension plan trustees to invest funds under their control”. Parker considered that if such a trusteed pension plan could obtain a really high yield on its investments, the privilege of participating in it would help him attract and retain desirable executive personnel. With this in mind, a pension plan and pension trust agreement were prepared.
Provision was made for two classes of members, Group A and Group B, with eligibility to be defined by the Company. Lloyd Parker was the only Group A member and in the application for registration it was indicated that he was also to be at first the only participant. The provisions respecting employer contributions were as follows:
The Company will contribute an amount equal to $1,500 each year for each member who joins the Plan on the effective date and an amount equal to $100 each year for each member.
In addition the Company hopes and expects to make additional contributions out of profits in respect of all members.
In addition the Company hopes and expects to make a past service contribution in respect of each member of the Plan who joins at the effective date. The maximum past service contribution which the Company may make is one which, on the basis of qualified actuarial advice, will provide an annual pension on the normal form at normal retirement date equal to the difference between
(a) 70% of a member’s average earnings during the six years his earnings were highest, and
(b) the amount of annual pension on the normal form at normal retirement date, on the basis of qualified actuarial advice, which all the contributions made by and on behalf of the member will provide, including contributions to any other registered pension plan to which the Company has made contributions.
With respect to the amount of pension, the plan provides that it will be the monthly pension which may be purchased from an insurance company or the Government Annuities Branch by the total amount to the credit of the member at retirement. Full immediate vesting of the company contributions account is granted to Group A members (ie Parker), but for Group B members such vesting starts at 10% after six years of participation and reaches 100% only after fifteen years. The pension trust agreement provides that the moneys held by the trustees “shall be invested . . . upon the direction of the Company”.
On May 12, 1965 the pension plan and the pension trust agreement were sent to the Department of National Revenue together with an application for registration, a statement of the amount of Mr Parker’s salary and an actuarial certificate in the following terms:
I hereby certify that in my opinion the assets of the trust fund of the Inland Kenworth Sales Ltd Pension Plan as at April 1, 1965 require to be augmented by the amount of $202,650, in addition to the cash values to be transferred to the trust fund on the discontinuance of the existing Standard Life and Imperial Life pension policies, to ensure that all obligations of the fund in respect of past services may be discharged in full, and I recommend that this amount, with interest, be deposited in the fund in a convenient manner.
I confirm that based on the actuarial assumptions adopted, the annual pension benefit at normal retirement date will not exceed 70% of the average annual salary of the best six years or $40,000, whichever is the lesser.
This certificate was accompanied by a working paper indicating how the amount of $202,650 had been arrived at.
On June 23 a letter was sent to the company by the Department of National Revenue stating that the plan was accepted for registration, effective as of April 1, 1965. However, the letter added that with respect to the estimated past service costs, they were subject to confirmation by the Superintendent of Insurance.
On July 22, 1965 a memorandum was sent on behalf of the Superintendent of Insurance to the Department of National Revenue as follows:
Re: Pension Plan for Executive Employees of Inland Kenworth Sales Limited
We have examined the certificate relating to the actuarial liabilities under the above plan as at April 1, 1965, which states that the total deficit in respect of past service pensions was $202,650 on that date. This amount is in addition to the cash values of $12,509 and $103,925 which are to be transferred to the fund on the discontinuance of the existing Standard Life and Imperial Life pension policies. As the plan involves a private trust fund, this deficit is necessarily based on certain assumptions as to future experience. The deficit quoted is therefore an estimate of the cost of past service pensions and not the actual cost which can be known only afer all such pensions have been paid. We have examined the assumptions made by the actuary and we consider them to be reasonable in the circumstances.
The plan does not provide a specific amount of pension but only sets a maximum limit to the total pension of the lesser of 70% of the average of the member’s best six years’ earnings or $40,000 which was the pension valued. We therefore advise that the fund requires to be augmented by an amount not less than the amount quoted above to ensure that the maximum possible benefits under the plan may be provided.
We should point out that pensions under this plan are guaranteed for 15 years which is a longer guarantee than generally encountered with the result that a unit of pension under this plan has a greater value than is usual.
On July 27, 1965 a letter was sent by the Department of National Revenue to the company in the following terms:
Further to our letter of 23rd June, 1965 in connection with the past service costs to the above referenced pension plan.
We are now in receipt of a reply from the Superintendent of Insurance who confirms that the total deficit in respect of past service pensions was $202,650 as at 1st April, 1965. This amount may be claimed under section 76 of the Income Tax Act.
On November 18, 1965 one of the company’s auditors, who was also a trustee of the pension plan, wrote to Parker:
. . .. although a good percentage of the pension plans being approved are of the “executive” type, the plan must be one that does resemble a genuine employees’ pension plan. That is to say that any investments to be made by the plan. must be for the benefit of the plan and not for the benefit of the company. As such, any loans which may be made by the plan to the company. involved, must be properly secured. In fact, the opinion was that it should be in the form of a debenture or a mortgage which is properly registered against the company. The mortgage instrument, of course, would provide for repayment, interest, and maturity date. It should be noted, that although there are no income tax regulations presently governing the type of investments, the Income Tax Department is closely scrutinizing all transactions between pension plans and respective companies. Non-arm's-length transactions such as loans from pension funds to companies are closely inspected and if not found to be entirely in order, or to be in accordance with prudent investments by the pension plan, may be entirely disallowed.
On December 30, 1965 a resolution was adopted by the board of directors of the company in these terms:
It was agreed that the Trustees be instructed that the investments of the Group A members and Group B members of the Pension Fund be strictly segregated. Investments on behalf of the Group A members of the Pension Trust Fund will take the form of interest-bearing loans to the following companies:
Inland Ken worth Sales Ltd
Inland Kenworth Sales (PG) Ltd
Inland Kenworth Sales (Penticton) Ltd
Inland Kenworth Sales (Kamloops) Ltd
LBM Securities Ltd
These loans are to carry interest at a minimum rate of 9% and are to be payable on demand. Collateral security is to be requested from the respective companies to cover these advances and this security is to take the form of a blanket assignments of agreements receivable.
The investment on behalf of the Group B members of the Plan will be in the form of direct purchase of Conditional Sales Contracts and Chattel Mortgages, and any other negotiable instruments which are acceptable to a Canadian Chartered Bank as security for repayment of bank loans. ...
The respondent is the first company named in this resolution due to a subsequent change of name, the others are affiliates. As the latter were always indebted to the respondent when loans were made to them by the trustees, the making of the payments to the pension fund in respect of Parker’s past services never resulted in any change in the company’s cash position. A cheque was drawn to the order of the trustees, they in turn drew one or more cheques to one or more affiliates and the latter gave cheques to the respondent. Because the company had an adequate credit line with its bank, there was no need for special arrangements to avoid momentary overdrafts.
On July 23, 1969, some time after the last payment had been made on the sum of $202,650, what the company’s auditor had warned against did happen, reassessments were issued disallowing the deductions.
The company chose to appeal to the Exchequer Court. In the Minister’s reply to the notice of appeal, many reasons for his decision were given. These were all considered and rejected in the court below. Those grounds were all raised again in this Court, but I do not find it necessary or desirable to express an opinion on any other than the following point which is, in my view, decisive of the case. This is that the deduction claimed was not allowable because there were no “obligations” of the fund or plan to Mr Lloyd Parker that required any special payment to ensure that they might be discharged in full, as section 76 of the Income Tax Act expressly requires:
76.(1) Where a taxpayer is an employer and has made a special payment in a taxation year on account of an employees’ superannuation or pension fund or plan in respect of past services of employees pursuant to a recommendation by a qualified actuary in whose opinion the resources of the fund or plan required to be augmented by an amount not less than the amount of the special payment to ensure that all the obligations of the fund or plan to the employees may be discharged in full and has made the payment so that it is irrevocably vested in or for the fund or plan and the payment has been approved by the Minister on the advice of the Superintendent -of Insurance, there may be deducted in computing the income of the taxpayer for the taxation year the amount of the special payment.
(2) For greater certainty, and without restricting the generality of subsection (1), it is hereby declared that subsection (1) is applicable where the resources of a fund or plan required to be augmented by reason of an increase in the superannuation or pension benefits payable out of or under the fund or plan.
That there was no “obligation” of the pension fund to Mr Parker that “required” the special payments is readily apparent from the terms of the plan. The only obligations to a member were to use in the prescribed manner the funds that became available. In fact, it was not contended at the hearing that an obligation had been created, either on the fund or on the company to provide to Mr Parker the benefits which were intended to be provided by the special payments.
The contention was that “obligation” was to be taken to mean what the actuary making a recommendation understood it to mean. It is to be noted first that in the memorandum from the Department of Insurance, the statement is not, as in the actuarial certificate, that the fund requires to be augmented “to ensure that all obligations of the Fund in respect of past services may be discharged in full” but that “the Fund requires to be augmented by an amount not less than the amount quoted above to ensure that the maximum possible benefits under the Plan may be provided”. This follows the statement that “the Plan does not provide a specific amount of pension but only sets a maximum limit to the total pension”. The difference between the wording of this memorandum and the wording of the actuarial certificate is quite substantial and it is somewhat surprising that, notwithstanding such advice, departmental approval was given to the payments on behalf of the Minister. 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.
It was contended at the hearing that, in section 76, the word “obligation”, being used in the context of a provision relating to a certificate by an actuary, should not be taken in its ordinary meaning but in the special sense in which it would be understood by an actuary. Assuming this to be so, there is no evidence of such special meaning. The certificate and the testimony of its author at the hearing in the Exchequer Court do not show that the word “obligation” is generally understood among actuaries as having the meaning contended for. As a matter of fact, the memorandum from the Department of Insurance is cogent evidence to the contrary. Furthermore, subsection (2) of section 76 clearly shows that “obligations of the Fund or Plan to the employees” means “superannuation or pension benefits payable”. It is apparent that the situation intended to be met by the special payments provided for is that which arises when a pension plan specifies a scale of benefits payable.
Counsel for the company pointed out that in some other provisions of the Income Tax Act, for instance in paragraph 11(1 )(c) respecting the deduction of interest, the expression used is ‘a legal obligation”. He contended that the absence of the adjective “legal” in section 76 indicated the intention of not requiring a legal obligation. Even at that, the inference that section 76 was intended to apply when there was no obligation legal or otherwise could not be justified. Furthermore, I would observe that in the Income War Tax Act, paragraph 5(1 )(b) respecting the deduction of interest said: “interest payable”. It could hardly have been intended by changing this to read in the Income Tax Act: “pursuant to a legal obligation to pay”, to alter completely the requirements respecting the special payments to pension plans with respect to obligations for past services, which requirements remained substantially unchanged (see paragraph 5(1 )(m) of the Income War Tax Act as enacted in 1942 by 6 Geo VI, c 28, subsection 5(5)).
As to the effect of the actuarial certificate which was said to be “a subjective test”, assuming this to be so, this could not be true with respect to anything more than the quantum of the obligations. It cannot have been intended to be decisive of their existence. It is obvious that the author of the memorandum from the Department of Insurance had this distinction in mind. He clearly indicated that his advice was limited to the actuarial computations and assumptions refraining from any opinion as to the existence of any obligation. In my view, the actuarial certificate was not, any more than the approval on behalf of the Minister, decisive of the existence of any obligation of the fund towards the employee in respect of past services. 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.
For those reasons, I would allow the appeal, reverse the judgment of the Exchequer Court and dismiss the appeal to that Court from the reassessments, with costs throughout against the respondent.
DOCTOR E ROSS HENRY, Appellant,
and MINISTER OF NATIONAL REVENUE, Respondent.
Supreme Court of Canada (Abbott, Hall, Spence, Pigeon and Laskin, JJ), December 20, 1971, on appeal from a judgment of the Exchequer Court, reported [19691 CTC 600.
Income tax — Federal — Income Tax Act, RSC 1952, c 148 — 12(1)(a), (h) —
As an anaesthetist, the taxpayer was self-employed but, with a group of other anaesthetists, was attached to the Royal Jubilee Hospital in Victoria, where all of his professional services were rendered. He and his associates had an office some two miles away, where their records were kept and where patients’ accounts were made up and sent out. The Minister allowed the taxpayer’s automobile expenses referable to periodic trips between the hospital and the office and to evening and emergency trips between home and hospital but refused to allow such expenses as were referable to daily commuting between the hospital and the taxpayer’s home.
HELD (per curiam):
The case of Cumming v MNR, on which the appellant relied, was distinguishable and no difference was discernible between the appellant and the selfemployed owner of any business who commuted daily between his home and place of business. Appeal dismissed.
G F Jones for the Appellant.
G W Ainslie, QC for the Respondent.
CASES REFERRED TO:
Cumming v MNR, [1968] 1 Ex CR 425; [1967] CTC 462;
Randall v MNR, [1967] SCR 484; [1967] CTC 236;
Pook v Owen, [1970] AC 244.
Hall, J (all concur):—This is an appeal from the judgment of the Honourable Mr Justice F A Sheppard, Deputy Judge of the Exchequer Court of Canada, reported [1969] CTC 600. The appellant is an anaesthetist who practices his profession as one of a group. By an agreement dated June 6, 1961 between Royal Jubilee Hospital of Victoria, British Columbia, and this group of anaesthetists, the group agreed to supply at all times all anaesthetic services required by the hospital and they were to have the exclusive right to administer such services. In accordance with the agreement, the appellant restricted his practice to supplying his services at the hospital, and although he did with approval supply anaesthesia for certain dentists outside the hospital that fact is not relevant to this appeal.
The appellant had his home at 2025 Lansdowne Road in Victoria where he lived with his wife and two daughters, a distance of about 1%2 miles from Royal Jubilee Hospital. He also had an office at 1207 Douglas Street in Victoria in common with a group of anaesthetists where they kept their records and had a secretary employed to send out their accounts, receive and record payments. The appellant did not see any patients there nor at his home. In his home, in common with other members of his family, he used a den or study in one area of which he had a desk where he kept stationery, a typewriter and materials for correspondence as well as a supply of anaesthetic record cards and a copy of the fee schedule to which he referred in making out the accounts. Having made out the accounts, he took them to the office on Douglas Street once or twice a week.
In the appeal before this Court the only matter in issue is the amount claimed as a business expense for going from his home to the hospital in the morning and returning home from the hospital in the afternoon five days a week and the capital cost allowance referable thereto. The Minister allowed as a deduction for business use and capital cost allowance the total mileage claimed for emergencies and for trips from the hospital to the office on Douglas Street and also allowed for 299 trips claimed by the appellant as trips made during the evening from his home to the hospital to interview patients to whom he was going to administer an anaesthetic the following day.
The appellant relied principally on the judgment of Thurlow, J in Cumming v MNR, [1968] 1 Ex CR 425; [1967] CTC 462. In that case Thurlow, J held that Dr Cumming, who was an anaesthetist under a contract with the Ottawa Civic Hospital similar to the appellant’s contract with Royal Jubilee Hospital, was entitled to deduct as a business expense the cost of going from his home in Ottawa to the Ottawa Civic Hospital and back each day. The facts in Cumming are somewhat different from those in the present appeal, but even assuming that Cumming was properly decided which is not necessary to do in this appeal, I am of opinion that the appeal must fail. The appellant has been allowed his expenses of going to and from his Douglas Street office and for emergency calls as well as for trips from his home to the hospital in the evenings so that there remains solely his claim to deduct for going to and from the hospital each working day of the week and the proportion of the capital cost allowance claimed in respect of these trips. I am unable to discern any difference between the appellant and the self-employed owner of any business who maintains a home from which he leaves in the morning and returns in the late afternoon as a matter of course. The appellant relied on Randall v MNR, [1967] SCR 484; [1967] CTC 236, and Pook v Owen, [1970] AC 244. Neither of these cases are of any assistance to him. In both the taxpayer was doing business and earning income at two separate localities.
I would, accordingly, dismiss the appeal with costs.