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Docket: 2002-246(IT)G |
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BETWEEN: |
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GENERAL MOTORS OF CANADA LIMITED, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeal heard on January 22, 2003, at Toronto, Ontario,
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by the Honourable Justice M.A. Mogan |
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Appearances: |
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Counsel for the Appellant: |
Al Meghji and Gerald Grenon |
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Counsel for the Respondent: |
Alexandra K. Brown and Bobby Sood |
____________________________________________________________________
JUDGMENT
The appeal from the reassessment of tax made under the Income Tax Act for the 1995 taxation year is allowed, without costs, and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that:
1. the Appellant is entitled to deduct the amount claimed in respect of Residual Value Support in computing its income for the 1995 taxation year;
2. the Appellant is entitled to deduct the amount claimed in respect of Pre-Delivery Inspections in computing income for its 1995 taxation year;
3. the Appellant is entitled to deduct the amount $444,000 claimed in respect of loan arranging fees in computing income for its 1995 taxation year; and
4. the amount of $3,120,000 claimed in respect of GM Place is an expenditure on capital account and is to be added to the underpreciated capital cost of Class 14 in the 1995 taxation year; but
5. the appeal with respect to the Special Canadian Contingency Fund is dismissed, with costs.
Signed at Ottawa, Canada, this 14th day of November, 2003.
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"M.A. Mogan" |
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Citation: 2003TCC815 |
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Date: 20031114 |
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Docket: 2002-246(IT)G |
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BETWEEN:
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GENERAL MOTORS OF CANADA LIMITED,
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Appellant, |
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and |
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HER MAJESTY THE QUEEN,
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Respondent. |
REASONS FOR JUDGMENT
Mogan J.
[1] The Appellant is a Canadian corporation in the business of designing, manufacturing, assembling and distributing passenger cars and trucks as well as related parts and accessories. The Appellant's fiscal period and taxation year end on December 31 in each year. When computing income for its 1995 taxation year, the Appellant deducted the amount $13,834,902 with respect to a fund identified as the Special Canadian Contingency Fund ("SCCF"). By Notice of Reassessment dated November 22, 2000, the Minister of National Revenue disallowed the deduction of the amount $13,834,902 claiming that it was a contingent liability. The Appellant has appealed from that reassessment. The main issue is whether the amount $13,834,902 is deductible in computing income. The only taxation year under appeal is 1995.
[2] At the hearing, the parties filed as Exhibit 1 a binder containing an Agreed Statement of Facts ("ASF") plus 13 documents (Tabs 1 to 13) referred to in the ASF. They also agreed that each party could call evidence to supplement but not contradict any fact in the ASF. The ASF (comprising 28 paragraphs) is a good summary of the basic facts relevant to the issue under appeal. I will therefore reproduce the ASF verbatim and then comment on the other documents which I find most relevant.
"Special Canadian Contingency Fund"
1. Every three years since at least 1984 the Appellant has entered into a collective agreement with the National Automobile, Aerospace and Agricultural Implement Workers Union of Canada (the "CAW").
2. Each successive collective agreement from 1984 to 1999 provided that for each overtime hour worked by employees covered by the collective agreement in excess of 5% of straight time hours, the Appellant would accrue a specified sum to a "Special Canadian Contingency Fund" ("SCCF").
3. The Appellant and the CAW entered into a collective agreement on September 29, 1993 (the "1993 Collective Agreement"). Appendix "H" to the 1993 Collective Agreement provided that an amount of $2.00 per overtime hour worked by all covered employees in excess of five percent (5%) of straight time hours worked by such covered employees calculated on a twelve month average would be accrued to the SCCF. Tab 1 is an authentic copy of Appendix "H" to the 1993 Collective Agreement "Memorandum of Understanding covering Special Canadian Contingency Fund " (the "Memorandum of Understanding") dated September 29, 1993, The balance of the accrued amounts in the SCCF as at the end of the 1995 taxation year was $13,834,902.
Uses of Funds
4. The amounts accrued in the SCCF are to be used primarily for specific purposes identified in the Memorandum of Understanding. The amounts may also be used for "jointly agreed to initiatives as determined by the President, National Union CAW and the Vice President and General Director Personnel". [Please refer to Tab 1 for particulars of the Memorandum of Understanding.]
5. The specific uses identified in the Memorandum of Understanding are the support of the "negotiated Child Care Programs", the "Legal Services Plan" and to finance the "CSUB Plan", as needed.
6. The Legal Services Plan and the CSUB Plan each have both SCCF and non-SCCF sources of funding (further specifics of the non-SCCF funding are provided below).
7. Amounts accrued in the SCCF are paid to the Legal Services Plan and the CSUB Plan when, on the application of a formula, prescribed thresholds in those two plans are reached.
8. Funds are contributed to the Legal Services Plan reducing the balance in the SCCF, only when non-SCCF funding to the Legal Services Plan is insufficient to pay for the benefits provided for in the Legal Services Plan. The Trustee of the Plan performs the necessary calculation and advises the Appellant when the funding is required for the Legal Services Plan.
9. Contributions from the SCCF to the CSUB Plan are not dependent on the balance in the CSUB Plan reaching zero. The level of contributions to be made from the SCCF to the CSUB Plan is determined by the "Credit Unit Cancellation Base" under the CSUB Plan. The Credit Unit Cancellation Base is determined as provided at pages 58-59 of Tab 4 to this Partial Agreed Statement of Facts. The Appellant's Finance Department monitors the relevant balances and performs the requisite calculations. Contributions are made when the amount in the CUCB falls below a specified minimum.
10. Payments in respect of child care are not a function of prescribed thresholds. The childcare program is administered by the CAW. When a need for specific funds is identified by the CAW, a request is made, and, there may be a discussion to ensure that the use falls within the framework of child care as has been agreed upon. Once the Appellant is satisfied that the use is included in what was negotiated, the payment is made.
11. The SCCF accrues an amount equal to four and on half cents per straight time hour worked ($0.045) for mutually agreed child care activities. The SCCF is the only means by which the Appellant funds the mutually agreed child care activities. These funds are paid out when the union requests the funds for a particular use and the usage is accepted as appropriately employed for child care as described in paragraph 10, above.
12. No funds are segregated by the Appellant in relation to its obligations under Appendix "H" at the time of the accrual. The parties to this litigation dispute whether the $13,834,902 balance in the SCCF as at the end of the taxation year is an accounting entry that represents an actual liability that has been incurred, and if incurred, whether the liability is contingent.
13. Appendix H-1 to the Collective Agreement provides that, in the event of conflict between the use of the accrual remaining in the SCCF, to support the mutually agreed child care activities or Legal Services Plan benefits or the Canadian Supplemental Unemployment Benefit Plan ("CSUB Plan"), the accrual would be used first to support the mutually agreed child care activities and then to support the Legal Services Plan. Tab 2 is an authentic copy of Appendix "H-1" to the 1993 Collective Agreement.
14. The Legal Services Plan provides specified personal legal services regarding Wills and Estates, Real Estate, Tenant's Rights, Family Law, Civil Litigation, Criminal and Motor Vehicle Law, Consumer/Debtor Law, and Administrative Law to employees, retirees, and dependents. Tab 3 is an authentic copy of the Legal Services Plan dated September 29,1993.
15. The CSUB Plan provides benefits to employees of the Appellant who have been laid off or otherwise rendered unemployed in specified circumstances. Tab 4 is an authentic copy of a Supplemental Agreement to the Collective Agreement dated September 29, 1993 covering, inter alia, the CSUB Plan, and including Exhibit C-1 to the Collective Agreement "Canadian Supplemental Unemployment Benefit Plan".
16. As noted above, the Legal Services Plan is funded by the Appellant from the SCCF and also from a non-SCCF source of funding. The Legal Services Plan's non-SCCF funding is established by formula set out at Article 6 of Exhibit F to the Collective Agreement, Supplemental Agreement covering CAW-GM Canadian Legal Services Plan, which is attached as Tab 3 of this Partial Agreed Statement of Facts, and is further addressed at Appendix H-1 to the Collective Agreement attached as Tab 2 to this Partial Agreed Statement of Facts. The terms of this agreement provide that the Plan will be maintained with a qualified trust company (or companies) as trustee. (The deduction of non-SCCF funding to the Legal Services Plan is not at issue in this litigation).
17. As noted above, during the taxation year in issue, the CSUB Plan was also funded by the Appellant both through the SCCF and from a non-SCCF source of funding. The terms of Exhibit C to the collective agreement which governed the CSUB Plan during the tax years in issue required that the Appellant make contributions of funds into the CSUB Plan in certain circumstances (quite apart from any obligation under the terms of the SCCF), and that the CSUB Fund will be maintained with a qualified trust company (or companies) as trustee. [See page 57, Tab 4.] The Appellant contributes non-SCCF money to the CSUB Plan according to the provisions set out at page 60 at Tab 4 to this Partial Agreed Statement of Facts. (The deduction of the non-SCCF funding to the CSUB Plan is not at issue in this litigation.)
18. Article 5 of the Memorandum of Understanding provides as follows;
As of the end of the 1993 Master Agreement period the parties would negotiate the usage of any accrual then remaining in the Special Canadian Contingency Fund.
This same term (other than the year of the Master Agreement referred to ) also appeared in the Memoranda of Understanding regarding SCCF entered into in conjunction with the 1984, 1987, 1990, 1996, 1999 and 2002 Collective Agreements. Authentic copes of these Memoranda of Understanding are attached at Tabs 5, 6, 7, 8, 9, and 10, respectively, of this Partial Agreed Statement of Facts.
19. The SCCF has been continued in subsequent collective agreements effective 1996, 1999 and 2002. In all cases since the SCCF was established in 1984 the balance of the fund at the close of a collective agreement has been carried over under the new collective agreement. The future use of amounts accrued in the SCCF is open to negotiation when collective bargaining takes place.
20. For example, the 1996 and 1999 collective agreement added as uses of the SCCF the C.A.W. Leadership Training Program (Paid Educational Leave), research, leadership and development activities of the CAW, programs and activities of the GM/CAW Training Review Committee, the Social Justice Fund, the Retiree Fund, the Skilled Trades Fund, the Dependent Scholarship Fund, and the Medical Awareness Fund. Tabs 8 and 9, respectively, are authentic copies of Appendixes H and H-1 of the 1996 and 1999 collective agreements.
21. No additional uses of the SCCF were added in 2002. Tab 10 is an authentic copy of Appendixes H and H-1 of the 2002 collective agreement.
22. During the 1995 taxation year a total of $2,270,817.70 was paid out of the accrued balance in the SCCF, being $1,650,000 in respect of child care and $620,817.70 in respect of the CSUB Plan. Tab 11 contains authentic copies of monthly reports provided by the Appellant to the CAW regarding the SCCF throughout the calendar year 1995. The Appellant has been assessed on the basis that the amounts are deductible in computing income for the 1995 taxation year.
23. Between the end of 1995 and the month of December 1999 a total of $19,574,234.78 was paid out of the accrued balance in the SCCF. Of this total: $4,649,840.77 was in respect of the Legal Services Plan; $3,348,654 was in respect of childcare; $4,698,544.51 was in respect of the CSUB Plan; $2,265,289.16 was in respect of the P.E.L. (Paid Educational Leave) program; $1,127,805.66 was in respect of activities of the GM/CAW Training Review Committee; and $3,484,100.68 was in respect of the Health & Safety Environment, Leadership Training and Research activities of the CAW.
24. [There was no paragraph 24 in the ASF.]
25. Tab 12 is a Schedule accurately detailing the uses of funds in the years 1996, 1997, 1998 and 1999 from the amounts paid out of the balance recorded in the SCCF as of the end the 1995 taxation year. The schedule shows that the amount of $13,834,902, being the closing balance in the SCCF account at the end of the 1995 taxation year, was fully paid out by the end of January, 1999.
Appellant's Tax Treatment and Minister's Reassessment
26. Each year, including 1995 and subsequent years, additional amounts are accrued to the SCCF and deducted by the Appellant in the year that the overtime to which they relate is worked by and employee of the Appellant. The Appellant seeks to deduct the amounts in the year the overtime is worked and the amounts are accrued to the SCCF. The Respondent's view is that the amounts are deductible when payments for qualifying purposes are triggered by either a request or by the calculation producing a specific result, depending on the purpose which is being supported.
27. The figure of $13,834,902 which is employed in the pleadings is the closing balance in the SCCF at the end of the 1995 year. The opening balance in the SCCF at January 1, 1995 was $4,479,874. The mechanics by which the reassessment at issue operated were to add $13,834,902, i.e. the closing balance of the SCCF, to the Appellant's income and to deduct under the heading "Canadian Contingency Fund Accrual Reversed" the opening balance of $4,479,874. The result was a net addition to income of $13,834,902 - $4,479,874 equals $9,355,028 in respect of SCCF. Tab 13 is an authentic copy of the T7W/C issued by the Minister of National Revenue in conjunction with the assessment under appeal.
28. The amount of $9,355,028 ($13,834,902 less the opening balance of $4,479,874 equals $9,355,028) represents the net increase in the SCCF balance during the 1995 taxation year, and is entirely attributable to overtime worked in that year.
29. The Reassessment issued by the Minister did not allow the Appellant the deduction claimed in respect of the Special Canadian Contingency Fund.
[3] Paragraph 2 of the ASF describes the method by which the Appellant would accrue a specific sum to the SCCF; and paragraph 3 states that, for the 1993 Collective Agreement, the specific sum was $2.00 per overtime hour worked by all covered employees in excess of 5% of straight time hours worked by all covered employees. The 1993 Collective Agreement was in effect from September 1993 to September 1996. Because the amount accrued each month to the SCCF was calculated on a twelve-month rolling average, the amount accrued for any particular month was based on that month and the 11 preceding months. Tab 11 of the ASF contains 12 monthly reports from the Appellant to the Union ("CAW") regarding the SCCF for the 1995 calendar year. To illustrate how the Appellant accrued a specific amount to the SCCF for January 1995, the following extract is taken from the first page of Tab 11.
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GM-CAW Special Canadian Contingency Fund Pursuant to Appendix "H" of the Master Agreement Month: January 1995 Period: February 1994 to January 1995
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Cumulative 12 Month Period |
Monthly Average
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Straight Time Hours Worked |
44,386,576 |
3,698,881 |
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Overtime Hours Worked |
8,202,436 |
683,536 |
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5% of Straight Time Hours Worked |
XXX |
184,944 |
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Overtime Hours Worked in Excess of 5% Straight Time Hours Worked |
XXX |
498,592 |
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Accrual Rate per Hour |
XXX |
$2.00 |
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Accrual @ $2.00 January 1995 |
XXX |
$997,184 |
[4] In paragraph 3 of the ASF, the parties have agreed that the balance of accrual amounts in the SCCF at the end of 1995 was $13,834,902. This amount is slightly different from the amount $13,834,082 appearing in the Revenue Canada reassessment form T7W-C at Tab 13 of the ASF. According to the monthly statement for January 1995 at Tab 11 of the ASF, the opening balance of accrued amounts in the SCCF at January 1, 1995 was $4,470,620. Again this amount is slightly different from the amount $4,479,874 appearing in the Revenue Canada reassessment form T7W-C at Tab 13 of the ASF. Although these differences are not significant, I have attempted to compute the balance of accrued amounts in the SCCF as at December 31, 1995 by using only the monthly sheets at Tab 11 of the ASF.
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Opening Balance at January 1, 1995 |
$4,470,620 |
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12 monthly accruals from January to December 1995 |
11,463,857
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Subtotal |
15,934,477 |
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Amounts paid out of SCCF from January to December 1995 |
2,270,817
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Balance of accrued amounts in SCCF at December 31, 1995 |
$13,663,660 |
[5] The above balance of $13,663,660 is consistent with the closing balance ($13,663,665) shown on the monthly sheet for December 1995 at Tab 11 of the ASF. There is a discrepancy, however, between the above year end balance and the amount agreed between the parties as a year end balance:
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Balance at 31/12/95 per paragraph 3 of ASF |
$13,834,902 |
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Balance at 31/12/95 per Tab 11 of ASF |
13,663,665
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Difference |
$171,237 |
The difference of $171,237 is not important to the issue which must be decided in this appeal but, in my view, the method of determining the year end balance of $13,663,660 as shown in paragraph 4 above is important.
[6] As stated in paragraph 3 of the ASF, Appendix "H" to the 1993 Collective Agreement set the amount at $2.00 per overtime hour worked in excess of 5% of straight time hours worked as the only source of amounts accrued to the SCCF. Appendix "H" is a separate code which defines the source of funds for the SCCF and the possible uses for those funds. Because Appendix "H" is short, I will set it out in full.
APPENDIX "H"
MEMORANDUM OF UNDERSTANDING
COVERING SPECIAL CANADIAN CONTINGENCY FUND
ENTERED into this twenty-ninth day of September 1993
BETWEEN
General Motors of Canada Limited, referred to hereinafter as "Company"
AND:
National Union CAW, and its Locals No. 222, 1973, 199, 303, 1163, 27, and 636, said National Union CAW and said Local Unions being referred to jointly hereinafter as "Union":
The Company and the Union agree that:
1. The Special Canadian Contingency Fund will be continued during the term of the 1993 Master Agreement.
2. Such Special Canadian Contingency Fund will equal an accrual by the Company of two dollars ($2.00) per overtime hour worked by all covered employees in excess of five percent (5%) of straight time hours worked by such covered employees calculated on a twelve month rolling average.
3. During the term of the 1993 Master Agreement, the Special Canadian Contingency Fund will be utilized primarily in support of the negotiated Child Care Programs, the Legal Services Plan and to finance the CSUB Plan, and then only if needed. It may also be used to fund jointly agreed to initiatives as determined by the President, National Union CAW and the Vice President and General Director of Personnel. At any point in time, the Special Contingency Fund Balance shall be equal to the cumulative accrual calculated in Section 2 above, less the cumulative utilization calculated in this Section 3. The cumulative accrual and utilization shall include balances carried forward from prior Agreements.
4. The use of the SCC Fund for support of the CSUB Plan would be determined solely by the amount of the Credit Unit Cancellation Base (CUCB) as determined from time to time under the CSUB Plan for the purpose of determining the cancellation rate of Credit Units on the payment of Regular Benefits under the CSUB Plan.
In the event that such CUCB amount otherwise would fall below the applicable amount that would require an increased Credit Unit cancellation rate from 3.33 to 5.00 Units for Employees with one but less than five years of Seniority, the Company will make weekly contributions to the CSUB Fund from the balance in the SCC Fund. Such additional contribution amount from the SCC Fund would be an amount that, together with the amount of regular Company contributions to the CSUB Fund that week, would be sufficient to pay all CSUB Benefits then due and payable and still keep such CUCB from falling below the amount requiring the increased cancellation rate described above. At any time the balance of the SCC Fund is exhausted, the regular provisions of the CSUB Plan would apply.
5. As of the end of the 1993 Master Agreement period, the parties would negotiate the usage of any accrual then remaining in the Special Canadian Contingency Fund.
NOTE: The underlining is actually in Appendix "H" to indicate changes from the 1990 Collective Agreement.
[7] Paragraph 1 of Appendix "H" required the balance in the SCCF under the 1990 Collective Agreement (as at September 1993) to be carried forward into the 1993 Collective Agreement. Paragraph 2 set the accrual rate at $2.00 per overtime hour worked under the 5% formula. Paragraph 3 described how the SCCF would be used during the term of the 1993 Collective Agreement. Specifically, it was to be used primarily to support (i) Child Care Programs; (ii) the Legal Services Plan; and (iii) the Canadian Supplemental Unemployment Benefit Plan (the "CSUB Plan"). Although the SCCF could also be used to fund "jointly agreed to initiatives" as determined by an officer of the CAW and an officer of the Appellant, there is no evidence of any such "agreed to initiatives" during the term of the 1993 Collective Agreement.
[8] To provide a better description of the three primary beneficiaries of the SCCF, I will consolidate and edit certain statements from the ASF (with the corresponding paragraph noted in the margin), and will add two comments based on Tab 3 and Tab 4 of Exhibit 1:
Legal Services Plan
6. The Legal Services Plan and the CSUB Plan each has both SCCF and non-SCCF sources of funding.
14. The Legal Services Plan provides specified personal legal services regarding Wills and Estates, Real Estate, Tenant's Rights, Family Law, Civil Litigation, Criminal and Motor Vehicle Law, Consumer/Debtor Law, and Administrative Law to employees, retirees, and dependents.
16. The Legal Services Plan is funded by the Appellant from the SCCF and also from a non-SCCF source of funding. The Legal Services Plan's non-SCCF funding is established by formula set out at Article 6 of Exhibit F to the 1993 Collective Agreement.
Exhibit 1, Tab 3
Under Article 6 of Exhibit F to the 1993 Collective Agreement, the Appellant's non-SCCF payments to the Legal Services Plan were approximately 12 ¢ for each straight time hour worked when the Plan's "funding excess" and the SCCF balance exceeded $3,000,000; and 18 ¢ for each straight time hour worked when such "funding excess" and balance were below $3,000,000.
16 The terms of the Legal Services Plan provide that the Plan will be maintained with a qualified trust company (or companies) as trustee.
8. Funds are contributed from the SCCF to the Legal Services Plan only when non-SCCF funding to the Legal Services Plan is insufficient to pay for the benefits provided in the Legal Services Plan. The Trustee of the Plan performs the necessary calculation and advises the Appellant when funding is required for the Legal Services Plan.
Supplemental Unemployment Benefit Plan
15. The CSUB Plan provides benefits to employees of the Appellant who have been laid off or otherwise rendered unemployed in specified circumstances. Tab 4 is an authentic copy of a Supplemental Agreement to the 1993 Collective Agreement covering, inter alia, the CSUB Plan.
17. During the taxation year in issue, the CSUB Plan was funded by the Appellant both through the SCCF and from a non-SCCF source of funding. The terms of Exhibit C to the 1993 Collective Agreement which governed the CSUB Plan during the tax year in issue required the Appellant to contribute funds into the CSUB Plan in certain circumstances (quite apart from any obligation under the terms of the SCCF), and the CSUB Plan would be maintained with a qualified trust company as Trustee. The Appellant contributed non-SCCF money to the CSUB Plan according to the provisions set out at page 60 of Tab 4.
Exhibit 1, Tab 4
The formula at page 60 of Tab 4 is very complicated but the amount contributed directly to the CSUB Plan by the Appellant in 1995 appears to be in the range of 26 ¢ to 59 ¢ per straight time hour worked; with slightly higher rates for time and one-half and double time.
9. Contributions from the SCCF to the CSUB Plan are not dependent on the balance in the CSUB Plan reaching zero. The level of contributions to be made from the SCCF to the CSUB Plan is determined by the "Credit Unit Cancellation Base" ("CUCB") under the CSUB Plan. The Appellant's Finance Department monitors the relevant balances and performs the require computations. Contributions are made from the SCCF when the amount in the CUCB falls below a specified minimum.
7. Amounts accrued in the SCCF are paid to the Legal Services Plan and the CSUB Plan when, on the application of a particular formula designed for each Plan, a prescribed threshold in each Plan is reached.
Child Care Programs
10. Payments in respect of child care are not a function of prescribed thresholds. The child care program is administered by the CAW. When a need for specific funds is identified by the CAW, a request is made, and, there may be a discussion to ensure that the use falls within the framework of child care as has been agreed upon. Once the Appellant is satisfied that the use is included in what was negotiated, the payment is made.
11. The SCCF accrues an amount equal to four and on half cents per straight time hour worked for mutually agreed child care activities. This appears to be an accrual within the SCCF itself. The SCCF is the only means by which the Appellant funds the mutually agreed child care activities. These funds are paid out when the union requests the funds for a particular use and the usage is accepted as appropriately employed for child care.
13. Appendix H-1 (Exhibit 1, Tab 2) to the 1993 Collective Agreement provides that, in the event of conflict between the use of the accrual remaining in the SCCF, to support the mutually agreed child care activities or Legal Services Plan benefits or the CSUB Plan, the accrual would be used first to support the mutually agreed child care activities and then to support the Legal Services Plan.
[9] There is only one "CAW Legal Services Plan" which provides legal assistance to those employees of 20 different corporations who are represented by the CAW. Exhibit A-2, Tab 5 lists the 20 corporate employers including General Motors, Ford, Chrysler, Lear-Kitchener, 3M, Kenworth and Mack Montreal. Tab 5 is a letter from CAW Legal Services Plan requesting funds for the estimated cash requirements for October 1996 (total $1,013,105) and allocating the total among the 20 employers based on weighted usage.
[10] Exhibit A-2, Tabs 8 and 9 are an example of a request for child care funding. Tab 8 is a letter dated September 11, 1995 from the CAW to the Appellant asking for $1,400,000 for the construction of the CAW Child Care Centre in Oshawa. Tab 9 is the Appellant's Remittance Advice dated November 3, 1995 showing payment of the $1,400,000. Because there is no funding for the Child Care Programs apart from the SCCF (unlike the Legal Services Plan and the CSUB Plan), the entire amount of $1,400,000 was paid out of the SCCF. This payment can be seen at Exhibit 1, Tab 11, the monthly statement for November 1995. It was the only payment out of the SCCF in November 1995.
[11] In paragraph 4 above, there is a table which shows how the balance of accrued amounts in the SCCF increased from an opening balance of $4,470,000 at January 1, 1995 to a closing balance of $13,663,000 at December 31, 1995. That table (derived from the monthly statement in Exhibit 1, Tab 11) shows that the total of all amounts paid out of the SCCF during 1995 was only $2,270,817. Exhibit 1, Tab 12 is a schedule showing payments out of the SCCF during the four-year period January 1996 to December 1999. The extreme right-hand column of the schedule is a "rolling total" month by month. According to the rolling total, the $13,663,000 balance in the SCCF at December 31, 1995 was actually paid out over the 35 months from January 1996 to November 1998. If I take the balance in the SCCF at December 31, 1995 to be $13,834,902 in accordance with the ASF, that higher balance was not paid out of SCCF until January 1999. See paragraphs 23 and 25 of the ASF.
[12] The only witness who testified for the Appellant was Jim Cameron, the director of labour relations for General Motors of Canada Limited. Mr. Cameron stated that when the 1996 Collective Agreement was negotiated, the balance in the SCCF was carried forward into the new agreement, and certain additional beneficiaries of the SCCF were added. Those additional beneficiaries are listed in Appendix "H" to the 1996 Collective Agreement. See Exhibit 1, Tab 8. Their identity is not relevant but all beneficiaries under the 1996 Collective Agreement were potential recipients of payments out of the SCCF after October 1996. All of those beneficiaries appear on the schedule (Exhibit 1, Tab 12) showing payments out of the SCCF in the four-year period January 1996 to December 1999.
[13] Independent of the ASF, the parties have agreed (Exhibit A-1) as follows:
(i) the amount $13,834,902 (the accrued balance in the SCCF at December 31, 1995) was treated as an expense in the Appellant's financial statements for the year ended December 31, 1995;
(ii) that amount is also recorded in "other current liabilities" in those same financial statements; and
(iii) the Appellant's financial statements as at December 31, 1995 were audited, and the external auditors were of the opinion that the financial statements were prepared according to Generally Accepted Accounting Principles ("GAAP").
There is no issue in this appeal concerning GAAP. There is no issue as to whether the amount $13,894,902 may be deducted in computing income or profit under subsection 9(1) of the Income Tax Act. The only issues are (i) whether the balance in the SCCF at the end of 1995 is an actual liability which has been incurred and, if so, (ii) whether that liability is contingent. See paragraph 12 of the ASF.
Analysis
[14] This appeal will be decided on the interpretation of paragraph 18(1)(e) of the Income Tax Act and its application to the facts herein:
18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
(a) ...
(e) an amount as, or on account of, a reserve, a contingent liability or amount or a sinking fund except as expressly permitted by this Part;
The basic questions are whether the obligation accepted by the Appellant in Appendix "H" of the 1993 Collective Agreement is an actual liability and, if so, is it a "contingent liability" within the meaning of paragraph 18(1)(e). In a recent decision (Wawang Forest Products Ltd. v. The Queen, 2001 DTC 5212), the Federal Court of Appeal considered paragraph 18(1)(e) and adopted the following test for determining whether a liability was contingent:
I should define a contingency as an event which may or may not occur and a contingent liability as a liability which depends for its existence upon an event which may or may not happen. (at page 5215)
There is much case law concerning paragraph 18(1)(e) and its predecessor in the Act but, before turning to the law, I will review in detail the terms of Appendix "H" which is set out in full in paragraph 6 above.
[15] In paragraph 1 of Appendix "H", the SCCF from the 1990 Collective Agreement was "continued during the term of" the 1993 Collective Agreement. Paragraph 2 of Appendix "H" is important because it clearly describes the only source of money for the SCC Fund as a fund which "will equal an accrual by the Company of two dollars ($2.00) per overtime hour worked" under the 5% formula. That formula is demonstrated in the table at the end of paragraph 3 above. Paragraph 2 did not require the Company (i.e. the Appellant herein) to pay any amount to a trustee, custodian, agent or other person. Paragraph 2 did not require the Company to set aside or segregate or withdraw any amount from its ordinary working capital. See paragraph 12 of the ASF. Paragraph 2 required the Company only to accrue $2.00 per overtime hour worked under the 5% formula. In other words, paragraph 2 required the Company to make a bookkeeping entry and no more.
[16] Paragraph 3 of Appendix "H" described how the amount accrued for the SCCF would be used. Here is the first sentence in paragraph 3:
During the term of the 1993 Master Agreement, the Special Canadian Contingency Fund will be utilized primarily in support of the negotiated Child Care Programs, the Legal Services Plan and to finance the CSUB Plan, and then only if needed.
This sentence deserves a number of comments:
(i) The first phrase refers to the term of the 1993 Collective Agreement (September 1993 to September 1996) which includes the 1995 calendar year - the year under appeal.
(ii) The negotiated Child Care Programs are funded only by the SCCF, and then, only when "the Appellant is satisfied" that a use "identified by the CAW" is included in "what was negotiated". See paragraph 10 of the ASF. A request for money by the CAW does not automatically trigger a payment by the Appellant. The two parties (CAW and the Company) must agree with respect to each identified use. See Exhibit A-2, Tabs 8 and 9 as an example of a request by the CAW.
(iii) The Legal Services Plan is funded primarily by direct contributions from the Appellant, based on a formula of 12 ¢ per straight time hour worked if the Plan and the SCCF are above a certain threshold, and 18 ¢ per straight time hour worked if the Plan and the SCCF are below that threshold. See Exhibit 1, Tab 3 summarized in paragraph 8 above. This primary funding flows directly from the Appellant to the Legal Services Plan each month based on the estimated needs of the Plan as determined by its independent administrator. See Exhibit A-2, Tab 5 as an example of the administrator's request for funds for the month of October 1996.
(iv) The CSUB Plan is funded primarily by direct contributions from the Appellant, based on a complicated sliding formula of at least 26 ¢ per straight time hour worked in 1995. See Exhibit 1, Tab 4 summarized in paragraph 8 above. I assume that this primary funding flows directly from the Appellant to the trustee of the CSUB Plan each month but I have not found any direct evidence or agreed fact on this point.
(v) The first sentence of paragraph 3 of Appendix "H" ends with the phrase: "and then only if needed". These words imply contingency. I will have more to say about this phrase in paragraph 25 below.
[17] The second sentence in paragraph 3 of Appendix "H" states:
It may also be used to fund jointly agreed to initiatives as determined by the President, National Union CAW and the Vice President and General Director of Personnel.
This is nothing more than an agreement to agree. It does not create any liability. Mr. Cameron's evidence is that there were no "jointly agreed to initiatives" in 1995. The third and fourth sentences in paragraph 3 describe how the balance in the SCCF will be computed at any point in time. Each sentence uses the words "cumulative accrual"; no reference to liability.
[18] Paragraph 4 of Appendix "H" is concerned only with the "use of the SCC Fund for support of the CSUB Plan". Its use is "determined solely by the amount of the Credit Unit Cancellation Base ("CUCB"). According to paragraph 9 of the ASF, the Appellant's Finance Department monitors the relevant balances and performs the requisite calculations; and the Appellant contributes from the SCCF when the amount in the CUCB falls below a specified minimum. Paragraph 5 of Appendix "H" simply provides that the Appellant and the CAW would negotiate the usage of "any accrual" remaining in the SCCF at the end of the 1993 Collective Agreement. This ends my review in detail (paragraphs 15 to 18 inclusive) of the terms of Appendix "H".
[19] Left to myself, I would conclude that Appendix "H" (Memorandum of Understanding Concerning Special Canadian Contingency Fund) to the 1993 Collective Agreement, by itself, did not create or impose any liability on the Appellant with respect to payments out of that Fund. Black's Law Dictionary, Seventh Edition (1999) defines "liability" as follows:
liability: The quality or state of being legally obligated or accountable; legal responsibility to another or to society, enforceable by civil remedy or criminal punishment. (Page 925)
Having regard to the accrued balance of $13,834,902 in the SCC Fund as at December 31, 1995, I cannot find any identifiable creditor who could make a legally enforceable claim against the Appellant with respect to all or any part of that balance on that date.
[20] Exhibit A-1 is a letter written the day before the hearing from the Respondent's counsel to the Appellant's counsel stating in part:
As you know, it is the Respondent's view that the fact that the balance in the Special Canadian Contingency Fund was deducted on the Appellant's financial statements and the issue of whether the financial statements were prepared according to GAAP are irrelevant. These facts might be relevant if the "most accurate picture of profit" and the calculation of profit under section 9 of the Income Tax Act were issues raised in this appeal, however, the Respondent does not take issue with the calculation of profit under section 9.
Notwithstanding the above, for the purposes of this litigation and without prejudice to the Respondent's objection that this is irrelevant, the Respondent admits the following:
· the amount of $13,834,902 was treated as an expense in the Appellant's financial statements for its year ended December 31, 1995;
· the amount is also recorded in "Other current liabilities" in the Appellant's financial statements for that year;
· the financial statements were audited and the external auditors were of the opinion that these statements were prepared according to Generally Accepted Accounting Principles; ...
The position of the parties on the question of "liability" is confirmed in the following sentence taken from paragraph 12 of the ASF:
... The parties to this litigation dispute whether the $13,834,902 balance in the SCCF as at the end of the taxation year is an accounting entry that represents an actual liability that has been incurred, and if incurred, whether the liability is contingent.
There is no doubt that the $13,834,902 amount was treated as an expense in the Appellant's audited financial statements for 1995, and was also recorded among "other current liabilities" in those same financial statements. This case may illustrate one of the differences between accounting and law. An accountant may look at what appears to be a de facto obligation and, as a matter of caution, record it as a liability; but a lawyer looking at the same obligation may conclude that there is no liability unless an identified creditor has a legally enforceable claim.
[21] The SCC Fund grew during 1995 from an opening balance of $4,479,874 to a year end balance of $13,834,902 because there were so few amounts paid out of the Fund in contrast with the amounts accrued during the year. According to Exhibit 1, Tab 11, the following amounts were paid out month-by-month through 1995.
|
|
Child Care Program |
Legal Services Plan |
CSUB Plan |
|
January |
- |
- |
- |
|
February |
- |
- |
- |
|
March |
- |
- |
- |
|
April |
- |
- |
- |
|
May |
$250,000 |
- |
- |
|
June |
- |
- |
- |
|
July |
- |
- |
- |
|
August |
- |
- |
$502,568 |
|
September |
- |
- |
$118,249 |
|
October |
- |
- |
- |
|
November |
$1,400,000 |
- |
- |
|
December |
- |
- |
-
|
|
Totals |
$1,650,000 |
- |
$620,817 |
Similarly, according to Exhibit 1, Tab 12, during the 12 months of 1996 there was one amount paid out of the SCCF for Child Care; four amounts for legal services; and one amount for CSUB. The rate at which amounts were paid out of the SCCF in 1995 and 1996 indicate that the Appellant's obligation with respect to the SCCF was not a liability at law. If it was a liability in accordance with "well-accepted principles of business (or accounting) practice", then I think it was a contingent liability depending upon defined thresholds in the legal services plan and CSUB plan, and the acceptance of specific requests from the CAW with respect to child care.
[22] Appellant's counsel relied on three recent court decisions. Canadian Pacific Limited v. The Minister of Revenue (Ontario), 99 DTC 5286, is a decision of the Ontario Court of Appeal. As a Schedule 2 employer under the Ontario Workmen's Compensation Act, CP was liable to reimburse the Workmen's Compensation Board for benefits payable to CP workers. When the Board made an award to a CP worker, CP would calculate an amount based on the worker's life expectancy; that amount would be added to its "Deferred Liabilities - Workmen's Compensation" account; and that amount would then be deducted as a charge to income. In the taxation years 1981 to 1984, CP deducted in computing income those amounts which had been added to its "Deferred Liabilities" account. The deduction of those amounts was disallowed by the Ontario Minister of Revenue under paragraph 18(1)(e) of the Federal Act which was worded somewhat differently for 1981-1984. At trial, CP's claim was dismissed. Upon appeal, CP was successful. Borins J.A., writing for the Court, stated at page 5293:
[34] Following the reasoning of Pigeon, J. in Time Motors, the annual amounts which CP added to its account should not be considered apart from its statutory liability under the Workmen's Compensation Act. Under that Act, CP was obligated to reimburse the Workmen's Compensation Board for awards made by the Board to its disabled workers. At the time CP added the capitalized amount to the account, in respect to a disabled worker, it did so pursuant to a statutory obligation. Thus, as in Time Motors, each time an amount was added to the account, it was on the basis of an existing liability, or obligation. That liability was not contingent, in the sense that, at the relevant time, it was a liability that was not fixed and absolute, but one which may become so in the future with the occurrence of some uncertain event. Rather, at the time of transfer to the account, there was an existing, ascertained liability; and not a liability which would arise only upon the happening of a future event. At the time a payment was made to the account, the following facts were ascertained: CP's statutory liability to pay the award made to its disabled worker; the monthly amount of the award; the effective date of the award; and that monthly payments would be paid to the worker for the duration of his or her disability.
The last sentence in the passage just quoted shows that CP had a real liability when it added the particular amount to its "Deferred Liabilities" account. In this appeal by General Motors, the Appellant had no real liability to any person with respect to any part of the $13,834,902 as at December 31, 1995.
[23] In Fédération des caisses populaire Desjardins de Montréal et de l'Ouest du Québec v. Canada, 2002 DTC 7413, the taxpayer's office workers were required to take their vacations in years after the year in which a particular vacation was actually earned. In 1992, the Fédération deducted $752,000 representing employer contributions payable with respect to vacation pay earned by employees in 1992 but to be paid in subsequent years. The Minister disallowed the deduction and, on appeal, the taxpayer's appeal to this Court was dismissed. Upon further appeal to the Federal Court of Appeal, the Fédération was successful. Writing for the majority in a divided Court, Desjardins J.A. stated in paragraphs 44 to 46:
[44] It follows that once the vacation pay is earned, the obligation to pay the employer contributions comes into being. The vacation pay will be paid later and the employer contributions will be paid within the next fifteen days. However, the employer's debt to the Unemployment Insurance Commission and the various provincial administrative bodies is "incurred" from the day on which the vacation pay originates was acquired.
[45] My interpretation corresponds to that adopted by the respondent herself on vacation pay. The respondent agreed that in the case at bar the vacation pay which was all accumulated by the appellant's employees during 1992 was a debt to those employees in 1992 even though the debt was not yet liquidated. ...
[46] In my opinion, however, the respondent and the trial judge did not take into account the nexus existing between the vacation pay and the employer contributions. Once the legal obligation in respect of future vacations becomes a reality, the obligation in respect of employer contributions becomes one as well. The one does not go without the other.
In paragraph 46, the learned appeal court Justice writes of a "legal obligation". In this appeal, the Appellant had a legal obligation to accrue the $13,834,902 but no legal obligation in 1995 to pay any part of that amount.
[24] And lastly, in Wawang Forest Products Limited et al v. The Queen, 2001 DTC 5212, Wawang and Nerak were in the forestry business, and they contracted out their logging activities. Upon each payment to a subcontractor, they held back a certain amount pending confirmation from the Ontario Worker's Compensation Board that the subcontractor had made the required payments to the Board. In the taxation years 1987 to 1991, the corporations deducted the holdbacks in question. The Minister disallowed the deductions and, upon appeal to this Court, the assessments were upheld. Upon further appeal to the Federal Court of Appeal, the corporations were successful. Writing for a unanimous Court, Sharlow J.A. stated in part:
[11] The generally accepted test for determining whether a liability is contingent comes from Winter and Others (Executors of Sir Arthur Munro Sutherland (deceased)) v. Inland Revenue Commissioners, [1963] A.C. 235 (H.L.), in which Lord Guest said this (at page 262):
I should define a contingency as an event which may or may not occur and a contingent liability as a liability which depends for its existence upon an event which may or may not happen.
[17] It remains only to apply the Winter principle to the facts of this case. The facts are not disputed. The Wawang contractors were engaged to cut, delimb and skid logs. Their contract provided that they would be paid bi-weekly on the basis of a stipulated amount per cord. The Nerak contractors were engaged to haul wood from various logging sites to the mills. They were to be paid bi-weekly on the basis of a stipulated amount per metric tonne of wood delivered.
[18] The amount of wood cut or delivered was determined by independent scalers, who would provide a scaling slip. The practice was that the completed scaling slip was accepted as conclusive proof as to the work done. Once the scaling slips were presented to the taxpayers, the work of the contractors was considered complete.
[20] The taxpayers were aware that if they paid a contractor in full upon completion of its work, they might find later that the contractor had failed to make the required workers' compensation contributions. In that event, the taxpayers could be in the position of having to make good a contractor's default and being left only with an unsecured right of recovery against the contractor.
[32] ... the contract price becomes an absolute obligation of the taxpayers when the contractors complete their work, as evidenced by the scalers slips.
[33] ... The holdbacks thus constitute amounts due to the contractors and the taxpayers have a continuing obligation to pay the holdbacks even though, as long as no clearance certificates are provided, they may choose whether to pay them to the contractors or to the Workers' Compensation Board for the account of the contractors. Until payment by one of these methods (or by setoff in the event of a penalty for trespass), the obligation remains outstanding.
In paragraph 33, the Federal Court of Appeal speaks of "a continuing obligation to pay the holdbacks". At December 31, 1995, General Motors did not have any legal "obligation to pay" any part of the $13,834,902 in dispute.
[25] In paragraph 16 above, I reviewed in detail the first sentence in paragraph 3 of Appendix "H" (Exhibit 1, Tab 1). That sentence (describing how the amount accrued for the SCCF would be used) ends with the phrase "and then only if needed". For me, that phrase is at least an indication of contingency. There were no amounts to be paid out of the SCCF to the legal services plan or the CSUB plan unless a specified funding threshold (for each plan) had been crossed. For the child care program, the Appellant had to accept a request from the CAW before an amount was paid out of the SCCF. I have no hesitation in concluding that any obligation on the Appellant to pay an amount out of the SCCF during the 1993 Collective Agreement was a contingent obligation. The contingent nature of the Appellant's obligation is reinforced by the phrase "and then only if needed".
[26] Having regard to the three cases relied on by counsel for the Appellant, nothing in those cases causes me to qualify the conclusion just expressed. Indeed, the description of "contingent liability" from Winter adopted by the Federal Court of Appeal in Wawang persuades me that any obligation on the Appellant to pay an amount out of the SCCF during the 1993 Collective Agreement was a contingent obligation.
[27] In paragraphs 25 and 26 above, I refer only to the Appellant's "obligation" to pay an amount out of the SCC Fund because I am not satisfied that the Appellant had a legal liability to pay any amount out of the $13,894,902 as at December 31, 1995. In my view, there is little merit in the Appellant's case. The appeal is dismissed, with costs with respect to the issue discussed above.
[28] There were four other significant issues which were settled (without costs) by the parties before the hearing. The appeal for the 1995 taxation year will be allowed, in part, only for the purpose of giving effect to that settlement.
Signed at Ottawa, Canada, this 14th day of November, 2003.
|
"M.A. Mogan" |
|
CITATION: |
2003TCC815 |
|
COURT FILE NO.: |
2002-246(IT)G |
|
STYLE OF CAUSE: |
General Motors of Canada Limited and Her Majesty the Queen |
|
PLACE OF HEARING: |
Toronto, Ontario |
|
DATE OF HEARING: |
January 22, 2003 |
|
REASONS FOR JUDGMENT BY: |
The Honourable Justice M.A. Mogan |
|
DATE OF JUDGMENT: |
November 14, 2003 |
|
APPEARANCES: |
|
Counsel for the Appellant: |
Al Meghji and Gerald Grenon |
|
Counsel for the Respondent: |
Alexandra K. Brown and Bobby Sood |
|
COUNSEL OF RECORD: |
|
For the Appellant: |
|
Name: |
Al Meghji |
|
Firm: |
Osler, Hoskin & Harcourt |
|
For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |