T-3892-76
The Queen (Plaintiff)
v.
Lloyd Herman (Defendant)
Trial Division, Walsh J.—Montreal, May 24;
Ottawa, May 30, 1978.
Income tax — Income calculation — Superannuation or
pension fund income — Contributions to pension fund not
deductible in calculating "staff assessments" paid to the
United Nations by quota employees, in lieu of income tax —
Validity of Tax Review Board's ruling that benefits from such
a fund only taxable if contributions to fund deductible —
Whether or not defendant subject to double taxation because
"staff assessments", paid in lieu of income tax and calculated
without regard to fund contributions, were set off in global
amount against employee's home country's dues — Income
Tax Act, R.S.C. 1952, c. 148, ss. 6(1)(a)(iv), 139(1)(ar)(i); S.C.
1970-71-72, c. 63, ss. 56(1)(a), 248(1).
This is an appeal from a decision of the Tax Review Board
allowing defendant's appeal against reassessments from income
tax with respect to amounts received by him which he contend
ed were not benefits deriving from a superannuation or pension
fund, and hence not taxable. The Tax Review Board reasoned
that since the Act defines what superannuation or pension
benefits are, and what a registered retirement savings plan is,
but is silent as to defining what a pension or superannuation
fund is, the Court may interpret it by limiting it to a fund to
provide a taxpayer with income on his retirement "where the
contributions into the fund are deductible". In addition, defend
ant contended that lump sum payments made by way of set-off
against the United Nations contributions due by Canada repre
sented to Canada a return of tax money collected by the United
Nations from members of the Canadian quota in its employ,
and that Canada had already collected tax on the pension plan
contributions which were not deducted by the United Nations
in calculating the employees' staff assessment. To tax the
benefits now received would amount to double taxation by
Canada.
Held, the appeal is allowed. A pension fund need not be
limited to one to which contributions are deductible for tax
purposes when made. There is a superannuation or pension
fund here and there is no justification either in the definitions
of superannuation or pension fund for breaking such a fund
into its elements and holding it is not such a fund with respect
to the payments made by a taxpayer into it and not deductible
by him from income tax when made, but it is nevertheless a
superannuation or pension fund with respect to payments made
by the employer. It would require a specific section of the Act
to consider such a vague assumption concerning income tax
credit and in effect credit defendants as individuals with contri
butions to Canadian income tax in years they were not taxable
in Canada merely because the United Nations credited to
Canada lump sums annually resulting from amounts collected
from United Nations employees, including defendants, as "staff
assessments". It cannot be concluded therefore that defendants
are being subjected to double taxation in Canada.
INCOME tax appeal.
COUNSEL:
Jean Halpin and Guy Du Pont for plaintiff.
David B. Campbell for defendant.
SOLICITORS:
Deputy Attorney General of Canada for
plaintiff.
Hackett, Campbell, Turner, Bissonnette &
Bouchard, Sherbrooke, for defendant.
The following are the reasons for judgment
rendered in English by
WALSH J.: This is an appeal from a decision of
the Tax Review Board rendered on May 31, 1976
allowing defendant's appeal against reassessments
for income tax for the 1971 and 1972 taxation
years with respect to amounts of $7,717.99
received by him in each of the said years which he
contended were not benefits deriving from a super-
annuation or pension fund and hence not taxable.
His wife Stephanie Herman had also been re
assessed for an amount of $5,464.71 received by
her in the 1971 taxation year and the appeal
against the decision of the Tax Review Board in
her favour bears record No. T-3893-76 of the
records of this Court. Both appeals were heard
together on common evidence and these reasons
will apply to both appeals.
In the case of Lloyd Herman he had worked on
a full-time basis on the permanent staff of the
United Nations Secretariat in New York from
August 1945 to August 31, 1969 when he retired.
He is a Canadian citizen and was part of the
Canadian quota. Originally the United Nations
established what was called a Provident Fund for
its employees which ran from March 23, 1946 to
January 22, 1949 to which he contributed
$1,282.03 with his employer contributing an equal
amount. In 1949 the United Nations Joint Staff
Pension Fund was created and he contributed
$16,938.97 to it from January 23, 1949 to August
31, 1969 with his employer contributing double
this amount. The two funds were amalgamated
and the payments to them with interest accruing
thereon are the source of the pension he is now
receiving annually in monthly installments since
his retirement. The pension fund was duly regis
tered in Canada under the provisions of the
Income Tax Act effective April 1, 1961.
In the case of Stephanie Herman she too had
worked as a full-time member of the permanent
staff of the United Nations in New York from
August 1949 until her retirement on August 31,
1969. She had contributed $823.30 into the Provi
dent Fund, as had her employer, and $17,741.07 to
the Joint Staff Pension Fund to which her employ
er had contributed double this amount on her
behalf.
Neither defendant had filed income tax returns
in Canada or elsewhere nor had been required to
pay any tax in this country until the 1971 taxation
year.
The uncontradicted evidence of Lloyd Herman
supported by United Nations forms filed as exhib
its indicates that in addition to the pension deduc
tions, deductions were made under the heading of
"Staff Assessment" which he explained is equiva
lent to income tax payable to the United Nations.
The amount is based on earnings and has no
relationship to the national income tax laws of the
various member countries. Employees pay this
assessment in lieu of income taxes to their country
of origin and irrespective of where they are serving
in the employ of the United Nations. This latter
then distributes the sums so collected to the
member countries by deducting the amount
attributable to each of them from the contribu
tions due to the United Nations by each member
country. The sums that are so distributed by way
of set-off are global amounts, however, and, if my
understanding of the arrangement is correct do not
represent the total of the sums so withheld from
the individual employees forming part of each
country's quota. In other words the United
Nations cannot be said to be an agent collecting
income tax at its rates on behalf of the country of
origin of each employee, but each country does
benefit by its share of the total amounts collected
as staff assessments, as a result of deduction of its
share of the amount so allocated from its
contribution.
The individual employee does not file any tax
return with the United Nations, but these deduc
tions are calculated and made by the employer
itself. While the amounts are affected by marital
status and dependents there are no deductions for
charitable donations, pension plan contributions
and so forth.
With respect to the amount of the pension plan
contributions they are not necessarily based on the
entire remuneration. Mr. Herman testified that
the term "post adjustment" on the blank statement
of earnings and deductions form which he filed
refers to an attempt which was made to equalize
salaries according to the cost of living in countries
to which an employee was posted. Geneva was
taken as the base and an attempt made to adjust
the remuneration paid while an employee was
stationed in other countries accordingly, but this
failed because of the rapid changes in inflation
which took place. In any event this additional
amount was never taken into consideration in the
calculation of pension contributions. Originally the
pension contributions were based on net income,
later on half the gross plus net income, and, as a
final step after 1965, on gross income, the pension
deduction being 7%. While statements furnished to
Mr. and Mrs. Herman showing the record of their
respective contributions to September 30, 1967,
give a break-down of the actual amounts con
tributed, and the interest accrued to that date on
these contributions, this is not up to date to the
date of their retirement, and in any event there is
nothing to indicate what portion of the pension
payments they receive each year results from pay
ments contributed by them, and of course interest
continues to accrue on the amounts in the fund;
moreover Mr. Herman testified that the payments
have been increased since 1972 by an escalation
for cost of living. This break-down which would
involve a complicated calculation does not appear
to be an issue in this case in any event as I have
concluded that the amounts received represent
pension or superannuation payments and not
annuities which would require a separation of the
capital and interest elements.
The sections of the former Income Tax Act in
issue relating to the 1971 taxation year are section
6(1)(a)(iv)
6. (1) Without restricting the generality of section 3, there
shall be included in computing the income of a taxpayer for a
taxation year
(a) amounts received in the year as, on account or in lieu of
payment of, or in satisfaction of
(iv) superannuation or pension benefits ...
and section 139(1) (ar)
139. (1) In this Act,
(ar) "superannuation or pension benefit" includes any
amount received out of or under a superannuation or pension
fund or plan and without restricting the generality of the
foregoing includes any payment made to a beneficiary under
the fund or plan or to an employer or former employer of the
beneficiary thereunder,
(i) in accordance with the terms of the fund or plan,
(ii) resulting from an amendment to or modification of the
fund or plan, or
(iii) resulting from the termination of the fund or plan;
In the new Act applicable to the 1972 taxation
year the sections are section 56(1)(a)(i):
56. (1) Without restricting the generality of section 3, there
shall be included in computing the income of a taxpayer for a
taxation year,
(a) any amount received in the year as, on account or in lieu
of payment of, or in satisfaction of,
(i) a superannuation or pension benefit ....
and section 248(1):
248. (1)...
"superannuation or pension benefit" includes any amount
received out of or under a superannuation or pension fund or
plan and without restricting the generality of the foregoing
includes any payment made to a beneficiary under the fund
or plan or to an employer or former employer of the benefici
ary thereunder,
(a) in accordance with the terms of the fund or plan,
(b) resulting from an amendment to or modification of the
fund or plan, or
(c) resulting from the termination of the fund or plan;
While section 56(1)(a)(i) is slightly different in
wording from section 6(1)(a)(iv) of the former
Act the difference does not appear to be signifi
cant. If anything the use of the words "any
amount" instead of merely "amounts" would seem
to be even more comprehensive in indicating that
the origin of the amount has no significance.
The reasoning of the decision of the Tax Review
Board was that since the Act defines what super-
annuation or pension benefits are, and in section
139(1)(ahh) what a registered retirement savings
plan is, but is silent as to defining what a pension
or superannuation fund is, the Court may interpret
it by limiting it to a fund to provide a taxpayer
with income on his retirement "where the contri
butions into the fund are deductible". In the
present case contributions were, at least after 1965
calculated on gross income, and hence no deduc
tions were made for the employees' contributions
in calculating the "staff assessment" or tax, and,
of course none in Canada where no tax was pay
able by either defendant during the years of
employment in New York. While the learned
Chairman clearly states that he realizes that there
is no equity in tax law and that he is not basing his
decision on that ground, I cannot agree that a
pension fund must be limited to one to which
contributions are deductible for tax purposes when
made. Certainly there was a superannuation or
pension fund here, and the Regulations which were
filed as an exhibit in the present trial make this
abundantly clear, and I can find no justification
either in the definitions of superannuation or pen
sion benefit in section 139(1)(ar) of the former
Act (section 248(1) of the present Act) which
refers to any amount paid out of a "superannua-
tion or pension fund" in accordance with the terms
of the fund, nor elsewhere in either Act, for break
ing down such a fund into its elements and holding
it is not such a fund with respect to the payments
made by a taxpayer into it and not deductible by
him from income tax when made, but is neverthe
less a superannuation or pension fund with respect
to payments made by the employer. While this
might seem to be an equitable result, the text of
the Act does not give any indication that this can
be done.
With respect to the registration of the fund in
Canada, the only significance of this would appear
to be that, if an employee of the United Nations
resident in Canada (such as employees of ICAO
which, like other similar agencies of the United
Nations, come within the pension plan) had other
taxable income in Canada as a result of which he
had to file a return during the time of his employ
ment with the United Nations, he might perhaps
have been able to deduct his contributions to the
plan after April 1, 1961, from his taxable income.
I merely mention this, without so deciding, as
except for this possibility there would appear to be
no advantage to the taxpayer resulting from the
registration. Employees of ICAO for example
although residing in Montreal would still pay no
Canadian income tax on United Nations income
while in its employ any more than the defendants
herein became liable to United States income tax
while working for the United Nations in New
York.
In taxing superannuation or pension income the
Act appears to make no distinction as to the origin
of it. It merely taxes all of it when received by a
taxpayer resident in Canada and liable to Canadi-
an income tax. In this case it differs from the
taxation of annuities in which only the interest
element is taxable as income and part of each
annuity payment received would represent a return
of the annuitant's capital and be treated as such.
Defendants' most serious argument, in my view,
is unfortunately also an equitable one, rather than
one which can find any support in either the
former or current Income Tax Act. It was con
tended that the lump sum payments made by way
of set-off against United Nations contributions due
by Canada represented a return to Canada of tax
money collected by the United Nations from mem
bers of the Canadian quota in its employ, and that
Canada had therefore already in effect collected
tax on the pension plan contributions which was
not deducted by the United Nations when cal
culating the employees' "staff assessment", so that
by now taxing the benefits received double taxa
tion is being imposed in Canada. It would certainly
require a specific section of the Act to consider
such a vague assumption and in effect credit the
defendants as individuals with contributions to
Canadian income tax in years when they were not
taxable in Canada merely because the United
Nations credited to Canada lump sums annually
resulting from amounts collected from defendants
and other United Nations employees under the
heading of "staff assessments". It cannot be con
cluded therefore that defendants are being subject
ed to double taxation in Canada.
Some jurisprudence was referred to by plaintiff
but no case appears to have been decided on this
precise point although some of the comments made
by the learned judges are helpful and confirm the
conclusion which I have reached. The Tax Appeal
Board case of Moore v. Minister of National
Revenue 66 DTC 657, with which I fully agree,
called attention to the distinction between an
annuity and a pension. Section 11(1) (k) of the
former Act (now section 60(a)) permitted the
deduction in calculating a taxpayer's income of
"the capital element of each annuity payment
(other than a superannuation or pension benefit
. included in computing [the taxpayer's] income
for the year". A reading of the Regulations and
Rules of the United Nations Joint Staff Pension
Fund makes it clear, as I have already indicated,
that these payments constitute bona fide superan-
nuation or pension fund benefits, and not benefits
from an annuity. The reason why a distinction is
made in the Income Tax Act is clearly explained
by the Assistant Chairman, R. S. W. Fordham,
Q.C., in his decision at page 659 where he states:
The reasoning underlying the exception to the provisions of
section 11(1)(k) is that where an annuity has been purchased
by the annuitant solely with his own funds, it is only just that
the capital element should be deductible; otherwise, he would
be paying income tax on what unquestionably had been capital
in his hands. When, however, the annuity has been obtained
with money provided partly by the annuitant and partly by his
former employer, the position is different. Still to give the
annuitant the right to deduct the capital element would result
in his getting a deduction in respect of money that had come
not from him but from the employer. Patently, that would be
giving the annuitant a benefit that was neither intended by
Parliament nor merited.
In the absence of any provision of Canadian tax
law or any Convention between Canada and the
United Nations which would allow the deduction
claimed, I must regretfully maintain the appeals
even though in the result both defendants Lloyd
Herman and Stephanie Herman are required to
pay income tax on the full pension benefits
received by them from the United Nations without
having previously benefited by any tax deductions
resulting from the amounts contributed by them
toward these pensions. Pursuant to section 178(2)
of the Income Tax Act the Minister shall pay all
reasonable costs of the taxpayer in connection with
this appeal in which the amount of tax involved is
less than $2,500. Under the circumstances only
one set of costs will be allowed on the two appeals,
however.
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