Welcome to the 24th 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
- Céré v. Canada (Attorney General), 2019 FC 221
VACATION PAY INCLUDED IN PENSION EARNINGS
REGISTERED RETIREMENT SAVINGS PLANS
- Rooke v. M.N.R., 2019 TCC 52
- Rivard v. Essex (County), 2018 HRTO 1535
VESTING DURING THE REASONABLE NOTICE PERIOD
- O’Reilly v. Imax Corporation, 2019 ONSC 342
FOREIGN PENSION AMOUNTS
Reyes v. Canada, 2019 FCA 7
Mr. Reyes came to Canada from Colombia in 2007 and has been a resident of Canada since his arrival. He began receiving pension benefits from Colombia in 2014. In filing his income tax returns in 2014 and 2015, he reported receiving these pension amounts, but claimed deductions from income equal to the Colombian pension amounts for each year.
The Minister of National Revenue (Minister) denied Mr. Reyes’s deductions on the basis that the pension amounts were taxable in Canada. Mr. Reyes objected to this assessment, but it was again confirmed by the Minister. Mr. Reyes appealed the decision to the Tax Court of Canada (Tax Court), which concluded that under the Canada-Colombia Tax Convention Act, 2010 (Convention Act), Canada, as Mr. Reyes’s country of residence, was entitled to tax Mr. Reyes’s Colombian pension benefits. Mr. Reyes then appealed this decision to the Federal Court of Appeal.
The Federal Court of Appeal upheld the Tax Court’s decision. It found that the wording of the Convention Act was clear and that the state of residence has the right to tax pension income arising in another state. Mr. Reyes’s appeal was denied.
DE FACTO EMPLOYMENT
Céré v. Canada (Attorney General), 2019 FC 221
Mr. Céré applied for judicial review of a decision made by the Government of Canada Pension Centre (Pension Centre), which refused to recognize the existence of an employment relationship between Mr. Céré and the government between 1984 and 1995, and thereby denied Mr. Céré’s request to be permitted to buy back service in respect of those years.
Mr. Céré contributed to the David Florida Laboratory (Laboratory) as a technologist in the Thermal Vacuum Facility. However, Mr. Céré did not occupy a position that was created and staffed in accordance with the Public Service Employment Act (PSEA). The Laboratory preferred to ask certain private companies with which it had dealings to provide it with staff, rather than creating and staffing positions under the PSEA. As a result, Mr. Céré was put in touch with private employers, which hired him and made his services available to the Laboratory. However, Mr. Céré had no interaction with the private employers and was fully integrated with the Laboratory team.
Mr. Céré eventually left the Laboratory in June 1995 and became an employee of the public service in October 1997. Since that time, he has contributed to the pension plan established under the Public Service Superannuation Act (PSSA), which covers a wide range of employees, including public servants appointed under the PSEA, and employees of a variety of agencies that are not part of the public service. He sought, on multiple occasions, to buy back his years of service at the Laboratory and was denied on each occasion.
The Federal Court concluded that the Pension Centre’s decision was unreasonable on the basis that it had misapplied the test for determining whether there was a genuine employment relationship, as the decision gave paramount importance to formal relationships. The Federal Court went on to state that there was every indication that the Laboratory wanted to hire Mr. Céré as an employee and treated him as such while he worked there. The Laboratory only put in place a tripartite relationship involving certain private businesses in order to avoid certain administrative constraints. The matter was referred to the Pension Centre for reconsideration, though the Federal Court observed that its reasons should leave no doubt as to the decision to be rendered by the Pension Centre.
VACATION PAY INCLUDED IN PENSION EARNINGS
Notice of Intended Decision
A retired member of the Pension Plan for Employees of Hewlett Packard Enterprise Canada Co. (Pension Plan) challenged Hewlett Packard Enterprise Canada Co.’s (Administrator) calculation of his pension entitlement. The retired member received a lump sum payment for his unused vacation time upon terminating his employment. The Pension Plan terms provided that a pension is calculated using final average earnings, determined based on remuneration paid to the member, including “base pay.” Vacation pay was not specifically excluded from the Pension Plan’s definition of final average earnings.
The Superintendent of Financial Services (Superintendent) concluded that the retired member’s lump sum vacation pay should have been included in the determination of final average earnings. The Superintendent stated that because the Ontario Employment Standards Act, 2000 (ESA) provides that vacation pay is a statutory entitlement that accrues during employment, then vacation pay, even if it is paid as a lump sum upon termination of employment, represents the base pay amounts owing in respect of earned but unused vacation time. The Superintendent did not specify whether the retired member’s lump sum vacation pay included both minimum ESA entitlements and contractual entitlements.
The Administrator has requested a hearing before the Financial Services Tribunal.
REGISTERED RETIREMENT SAVINGS PLANS
Roy v. The Queen, 2019 TCC 50
Mr. Roy appealed assessments made by the Minister of National Revenue (Minister) for the 2013, 2014, and 2015 taxation years. In those assessments, the Minister reduced Mr. Roy’s Registered Retirement Savings Plan (RRSP) deductions on the basis that he had unused RRSP contributions from prior years of C$2,000, which the Minister allowed for 2013, thus reducing the balance to zero. The Minister took the position that Mr. Roy did not carry forward any unused contributions in 2014 and 2015 and did not make any actual contributions to his RRSP such that he was not entitled to a deduction for those years. Mr. Roy, however, disagreed with the Minister’s position. He argued that he made a substantial contribution to his RRSP in 2006 and that, taking into consideration the RRSP deductions claimed from 2006 to 2012, he had unused RRSP contributions within the deduction limit for each of the subject taxation years.
It was not disputed that Mr. Roy’s contributions in 2006 exceeded his RRSP deduction limit, as defined in the Income Tax Act (Act). However, Mr. Roy argued that those excess contributions were invested in securities that quickly became worthless. As a result, he was unable to withdraw the excess contributions, except for a sum of C$1,090 that was withdrawn in 2008.
Mr. Roy, however, did not report his excess contributions and was eventually assessed a tax calculated on a monthly basis at the rate of one per cent of the cumulative excess contributions pursuant to Part X.1 of the Act in addition to late filing penalties and arrears. He eventually filed an application for relief from the aforementioned tax, and the Minister accepted it, indicating that she was satisfied that the “excessive contribution arose due to reasonable error.” As a result, the excessive contribution was “eliminated.” However, the Minister did not provide any explanation as to what effect this would have on Mr. Roy’s unused RRSP contributions going forward.
Before the court, the Minister argued that it would be “unfair” for the court to allow Mr. Roy to reduce his taxable income in future years while never having paid taxes on the excess contribution as taxable income. However, the court noted that there was no legislative provision that would specifically prevent a taxpayer from claiming RRSP deductions with respect to excess contributions, so long as they are within the RRSP deduction limit, nor was there any legislative provision that would allow the Minister to eliminate unused RRSP contributions on the basis that they represented excess contributions. As a result, the court concluded that there was no legal basis for the Minister’s reassessment and that Mr. Roy had unused RRSP deductions.
Stewart v. The Queen, 2019 TCC 22
In 2000, Mr. and Mrs. Stewart’s self-directed RRSPs acquired an interest in a mortgage (Zowtra Mortgage) for a consideration of C$37,000 and C$42,500 respectively. The Minister subsequently reassessed Mr. and Mrs. Stewart to include $37,000 and $42,500 respectively in their taxable income for the 2000 taxation year. The Minister also levied a gross negligence penalty under section 163(2) of the Act on both Mr. and Mrs. Stewart, who appealed the reassessments.
The Minister argued that Mr. and Mrs. Stewart participated in an RRSP scheme to obtain tax-free access to their RRSP funds through a collateral arrangement that included an investment source of income from which they would receive funds. As a result, the amounts would have to be included in their income. However, Mr. and Mrs. Stewart argued that they did not receive such a benefit or participate in any collateral arrangement. The monies were transferred to allow the self-directed RRSPs to acquire interests in the Zowtra Mortgage.
The Minister then argued that Mr. and Mrs. Stewart’s self-directed RRSPs acquired an interest in the Zowtra Mortgage for an amount that was greater that the fair market value of that interest. As a result, the difference between the consideration paid and the fair market value would have to be included in Mr. and Mrs. Stewart’s income. Mr and Mrs. Stewart disagreed, stating that their RRSPs paid consideration equal to the fair market value of the interests in the Zowtra Mortgage.
The Minister also argued that the interests in the Zowtra Mortgage were not a qualified investment under the RRSP regime. Mr. and Mrs. Stewart disagreed; they argued that the Zowtra Mortgage was clearly a mortgage as that term is defined in the Land Titles Act (Alberta).
The court accepted evidence that the persons behind the Zowtra Mortgage stole Mr. and Mrs. Stewart’s money and that they were innocent victims of a con. In addition, the court concluded that when Mr. and Mrs. Stewart’s RRSPs acquired the undivided interests in the Zowtra Mortgage, the relevant RRSPs acquired an interest in a mortgage, namely “a charge on land created . . . for securing a debt or loan”. As a result, in the court’s view, the investment by the RRSPs in the Zowtra Mortgage was a qualified investment. Finally, the court also held that Mr. and Mrs. Stewart dealt at arm’s length with the persons who sold them their interests in the Zowtra Mortgage. As a result, the court allowed the appeal and referred the reassessments back to the Minister.
Rooke v. M.N.R., 2019 TCC 52
Mr. Rooke received an offer from the University of Waterloo (Payer) in July 2010 for admission to the master of arts program to study sociology. In this admission offer, Mr. Rooke was offered funding for the first year of the program in the amount of C$12,000. This funding was through a combination of two teaching/research assistantships and a University of Waterloo Graduate Entrance Scholarship.
The issue before the court was whether the C$12,000 that Mr. Rooke received from the Payer was insurable and pensionable under the Employment Insurance Act and the Canada Pension Plan Act. A Trust Accounts Examination had been conducted on the books and records of the Payer, and a Canadian Pension Plan/employment insurance rulings officer found that Mr. Rooke was engaged in insurable and pensionable employment with respect to the teaching/research assistantships, but was not engaged in insurable and pensionable employment with respect to the scholarship amount. Mr. Rooke’s position was that the entire funding amount of C$12,000 referred to in the offer of admission was a non-taxable scholarship amount.
The court concluded that Mr. Rooke was engaged in pensionable and insurable employment, as there was a clear nexus between the funding associated with the two teaching/research assistantships and the work completed by Mr. Rooke. The court accepted evidence that if Mr. Rooke had not performed the duties of a teaching assistant, then he would have forgone that funding. In addition, the court held that while intention is a relevant factor, the subjective views of the parties to a contract must be supported independently by the objective independent facts and circumstances surrounding their relationship. So, while Mr. Rooke’s view was that he was performing the work quid pro quo in respect of the funding as the offer of admission did not specifically reference “wages” or “salary”, the court held that this view was not supported by the evidence.
DENIAL OF COVERAGE
Rivard v. Essex (County), 2018 HRTO 1535
Ms. Rivard was a dependent of an employee of the Corporation of the County of Essex (Employer). Ms. Rivard had been authorized to obtain medical cannabis by a health professional and sought reimbursement for the cost of this treatment through the Employer’s health and benefits plan (Plan), which was administered by a third-party insurer, Green Shield Canada Inc. (Administrator).
The Plan limited reimbursements to treatments with a drug identification number issued by Health Canada. As medical cannabis does not have one, the Administrator denied Ms. Rivard’s reimbursement request.
Ms. Rivard alleged that the denial was discrimination on the basis of her disability, contrary to the Ontario Human Rights Code (Code). The Employer denied any discriminatory action, stating that the decision to deny coverage was a technical one that was not related to Ms. Rivard’s disability. Ms. Rivard sought relief from the Human Rights Tribunal of Ontario (HRTO).
The HRTO held that the denial of coverage was not discriminatory in nature and went on to say that even if the Employer had denied coverage because of a bias against cannabis use, it would not amount to a breach of Ms. Rivard’s Code rights. The HRTO ultimately concluded that Ms. Rivard’s claim had no reasonable prospect of success, stating that “decisions on what is included in a benefits plan can be based on a number of factors that are unrelated to a claimant’s disability,” and that “the purpose of the Code is not to define the appropriate scope of a benefit plan without regard to the underlying purpose of the plan or to require that benefits be made available to individuals simply because they identify with a Code-related factor.”
Human Rights Tribunal of Ontario Decision
VESTING DURING THE REASONABLE NOTICE PERIOD
O’Reilly v. Imax Corporation, 2019 ONSC 342
Mr. O’Reilly was employed as a senior executive with Imax Corporation (Imax) until his employment was terminated without cause. As part of his compensation, Mr. O’Reilly received a number of Restricted Share Units (RSUs) and stock options from Imax. Certain of these RSUs and stock options would have vested during the 24-month reasonable notice period Mr. O’Reilly was entitled to. In addition, Mr. O’Reilly participated in a pension plan under which Imax was responsible for contributing five per cent of Mr. O’Reilly’s annual earnings. Imax only paid the required contributions during the first six months of the reasonable notice period. Mr. O’Reilly also received certain benefits and allowances, including a car allowance of C$750 per month, a fitness reimbursement payment of up to C$500 per year, an executive wellness healthcare spending account of up to C$5,000 per year, and a comprehensive employee benefits plan for which Imax paid C$886.23 per month.
In respect of the RSUs and stock options, the court held that due to the absence of clear language to the contrary in the grant documents, Mr. O’Reilly’s unlawful termination did not cancel his rights to RSUs and stock options within the reasonable notice period of 24 months. In addition, the court noted that the phrase “cancelled immediately without consideration,” which was included in the equity compensation plans Mr. O’Reilly participated in, did not amount to a clear, express provision that removed the common law right of an employee, terminated without cause, to claim damages in respect of the lost unvested RSUs and stock options.
“First, the grant documents provide that the RSUs and stock options are cancelled immediately where when employment ‘terminates for any reason’. This phrase cannot be presumed to include termination without cause. In Veer v. Dover Corp. (Canada) Ltd. (1999), 120 O.A.C. 394 (C.A.), Goudge J.A. stated, at para. 14:
‘…the termination contemplated must, I think, mean termination according to law. Absent express language providing for it, I cannot conclude that the parties intended that an unlawful termination would trigger the end of the employee’s option rights. The agreement should not be presumed to have provided for unlawful triggering events. Rather, the parties must be taken to have intended that the triggering actions would comply with the law in the absence of clear language to the contrary.’
The Defendant relies on the 2011 Ontario Court of Appeal case, Love. In that case, an employer had the right to buy back shares from an employee on the date that an employee ‘ceases to be an employee’. The Ontario Court of Appeal found that the date that the Plaintiff ceased to be an employee was the date of his dismissal rather than the last day of the reasonable notice period, as the share buy-back plan expressly provided that it applied to an employee if he was ‘terminated by Acuity without cause’. Goudge, J.A. stated, at para. 43, that the preamble to the agreement ‘… makes [it] clear that the Agreement is to apply to every circumstance in which the appellant ceases to be an employee …’. However, Love is inapplicable as no such express language is found in the grant documents in this case that would make the cancellation provisions of the grant documents clearly applicable to employees terminated without cause.”
As a result, the court concluded that Mr. O’Reilly was entitled to the value of the loss of the RSUs and the stock options based on what would have probably happened had he been employed until the end of the notice period. The court directed the parties to provide additional evidence as to the quantification of this value and ultimately concluded in a subsequent Supplementary Reasons for Decision that Mr. O’Reilly would have sold the resulting shares five months after the vesting date for all such RSUs and stock options.
In respect of the pension contributions, the court held that the value of the pension contributions that would have been made by Imax during the last 18 months of the reasonable notice period amounts to the damages owed in respect of lost pension contributions.
In respect of the benefits and allowances, the court held that an employee is entitled to receive damages for the pecuniary value of a lost benefit flowing from dismissal unless the employer establishes that such benefit was paid on a reimbursement basis; an employee need not prove that he replaced the lost benefits during the notice period. The court accepted evidence that the fitness and wellness benefits were paid on a reimbursement basis and, therefore, dismissed Mr. O’Reilly’s claim for those amounts. However, the court was satisfied that the car allowance was paid as part of total compensation and concluded that Mr. O’Reilly was entitled to that amount in damages as well as the replacement cost of the employee benefits coverage plan.
Ontario Superior Court Decision