CURRENCY CONVERSION FOR TAXATION OF WORKPLACE BENEFITS
Korfage v. The Queen, 2016 TCC 69
Herman Korfage was a Canadian resident receiving pension income from the United States. In 2000, he elected to convert his pension amount from American dollars to Canadian dollars, using the applicable exchange rate: the average exchange rate over the 36 months preceding his last month of employment. This exchange rate was 1.47.
In 2010, Mr. Korfage received C$59,753 from the plan. Under the Canada-United States Convention with Respect to Taxes on Income and on Capital (Treaty), there was a tax exemption available to Mr. Korfage for US$12,024 of pension income, based on the amount of pension income that would be non-taxable under U.S. tax law. In order to claim this deduction, Mr. Korfage was required to convert US$12,024 into Canadian dollars. The exchange rate used in this calculation is the subject of this dispute.
Over the preceding eight years, Mr. Korfage had been applying the Bank of Canada annual average exchange rate for each year for the purposes of calculating the deduction. In 2009, however, he requested a refund from Canada Revenue Agency (CRA) on the grounds that he should have been using the 1.47 exchange rate used in 2000, when he elected to convert his pension from American to Canadian dollars. To determine which exchange rate to use, the Tax Court of Canada had to determine the date the tax-exempt amount "arose."
Mr. Korfage argued that the tax-exempt amount arose on the date of his retirement, so every calculation should use the exchange rate as of that date. The Crown argued that the tax exempt amount arises on a monthly basis with each benefit payment received by Mr. Korfage
Justice Lamarre sided with the Crown. She ruled that according to documents related to the U.S.-based pension plan, as well as Internal Revenue Service tax guidance documents, it was clear that the tax-exempt amount arose on a monthly basis when Mr. Korfage received his benefit payment. According to section 261(1) of the Income Tax Act (Canada) (ITA), the "relevant spot rate" for a currency conversion is the rate quoted by the Bank of Canada on the day the amount arose, or another rate acceptable to the Minister of National Revenue (Minister). In this case, the Minister accepted an annual average exchange rate, which fell within the definition in section 261(1) of the ITA.
Ferlaino v. The Queen, 2016 TCC 105
Natale Ferlaino was granted stock options in 2000 and 2002, but he exercised them in 2010 and 2012. The benefit was paid in American dollars. For tax reporting purposes, the benefit had to be converted to Canadian dollars. The question in this case was how to calculate the benefit with respect to the conversion to Canadian dollars. The structure of the benefit was such that Mr. Ferlaino was granted the option to purchase the shares in the future at a set price. When Mr. Ferlaino exercised his option to purchase the shares in 2010 and 2012 (at US$35.25 and US$33.50 respectively), the shares were worth far more on the open market (US$75.75 and US$78.60). Mr. Ferlaino immediately sold his newly acquired shares on the open market for a substantial profit. His benefit, therefore, was the amount he sold his shares for, minus the amount he bought them for.
In declaring this benefit under section 7 of the ITA, Mr. Ferlaino calculated the sale price of the shares on the open market using the exchange rate at the time of exercise (when the two currencies were close to par), and calculated his own cost of the shares using the exchange rate at the time the options were granted (in 2000 and 2002, when the U.S. dollar was worth approximately 1.5 Canadian dollars). This had the effect of dramatically increasing the tax cost of the shares and consequently decreasing the value of the declared benefit, netting Mr. Ferlaino major tax savings.
Justice Smith ruled that the wording of section 7 of the ITA indicated that a stock option benefit is not recognized for tax purposes until the stock (or cash consideration in lieu thereof) is in the hands of the taxpayer. While the granting of an unexercised stock option conveys theoretical value to an employee, as a matter of policy the ITA ignores this value's existence until its benefit is quantifiable.
Section 261 of the ITA deals with converting income to Canadian currency for tax reporting. This section indicates that the day on which the taxable amount arose determines the appropriate exchange rate to use.
Justice Smith ruled that both the sale price and the cost base of the shares to which the relevant options related should be valued based on the exchange rate at the time of the exercise of those stock options.
Groskopf v. Shoppers Drug Mart Inc., 2016 ONCA 486
As discussed in the December 2015 Pensions Newsletter, the applicants in Boys v. Shoppers, 2015 ONSC 5870 had the value of statutory grow-in benefits received in connection with their registered pension plan entitlements excluded in (and effectively deducted from) the calculation of their additional entitlements under a supplementary executive retirement plan (SERP). This decision centred on the interpretation of the text of the SERP and the extent to which grow-in benefits were to be considered in determining the benefit payable from the underlying registered plan (and deducted from the value of the member's pension benefit, calculated without reference to ITA maximum pension limits). The applicants appealed that decision to the Ontario Court of Appeal. The appeal was denied on the grounds that the Superior Court judge's interpretation was reasonable as it: (1) correctly applied principles of contractual interpretation, (2) was alert to the sponsor's exclusive right reserved under the plan text to interpret the plan and make conclusive determinations with respect to benefit entitlements, (3) was supported by the plan text, and (4) in the face of conflicting actuarial testimony, reasonably accepted the testimony of the administrator's actuary.
The Court of Appeal also declined to reverse the lower court finding that costs were not payable from the SERP.
McKearney-Morgan v. Morgan, 2016 NSSC 79
Upon termination of the parties' very brief marriage, Justice Legere Sers of the Supreme Court of Nova Scotia, Family Division awarded the applicant, Michelle Marie McKearney-Morgan, a 35-per-cent interest in the respondent's, John Bernard Morgan, workplace pension pursuant to section 4(1) of the Matrimonial Property Act (Nova Scotia) (MPA). This interest — valued at C$44,818.90 — was substantially more than the maximum benefit available to Ms. McKearney-Morgan under section 74(2) of the Pension Benefits Act (Nova Scotia) (PBA), which limits marital property divisions to 50 per cent of the pension benefit earned during the marriage. In this case, the maximum division under section 74(2) was valued at C$2,822. Therefore, the marital division order was directly at odds with the PBA.
Mr. Morgan's pension plan administrator (Administrator), after consultation with the Nova Scotia pension regulator, declined to follow the judge's order on the basis of the conflict with the PBA. It instead transferred the maximum permitted amount under the PBA, C$2,822. Ms. McKearney-Morgan brought this motion for directions so that she could enforce the order and obtain the additional interest in her former husband's pension.
The jurisprudence regarding conflicts between the MPA and the PBA holds that the two statutes can be interpreted such that they can coexist. In Morash v. Morash, 2004 NSCA 20, the Nova Scotia Court of Appeal concluded that the two statutory provisions were not in conflict because the PBA does not purport to govern entitlement. It merely provides a mechanism for the division of pension benefits. In other words, the Administrator is solely responsible for administering the order while the courts, under the authority of the MPA, determine entitlement.
The court noted that this does little to prevent the situation at hand, where a court order under the MPA can be effectively frustrated by the PBA, and identified necessary legislative action to resolve this conflict between statutes. Due to this legislative impasse, the court concluded that its only recourse was to establish a trust over the portion of the pension benefit (which had been transferred to a locked-in retirement account) that represented the balance of the former wife's marital property entitlement, and order that the former husband serve as trustee on behalf of his former wife. The court acknowledges that this is a less than satisfactory remedy because it depends on the cooperation of the husband and does not guarantee that her entitlement will be realized in the future.
Lacroix v. CMHC and McCann v. CMHC, 2016 ONSC 2641
As discussed in our April 2015 Pensions Newsletter and July 2015 Pensions Newsletter, the class action proceeding in Lacroix v. Canada Mortgage and Housing Corp. was first certified by consent order in 2000, and a companion action, McCann v. Canada Mortgage and Housing Corp. was certified in 2002. Certain additional common issues were added to the certification order in Lacroix v. Canada Mortgage and Housing Corp., 2015 ONSC 387 and McCann v. Canada Mortgage and Housing Corp., 2015 ONSC 496. The defendants, Canada Mortgage and Housing Corporation, appealed from these 2015 decisions. The appeal of the certification decision was dismissed.
Parrett v. Parrett, 2016 BCCA 151
In our December 2015 Pensions Newsletter, we discussed W.G.P. v. D.F.P., 2015 BCSC 1791, regarding the division of a judge's judicial annuity under section 52.16 of the Judges Act (British Columbia). In that case, Justice Hinkson ruled that a judicial annuity divided pursuant to a separation order should not be subject to further divisions for the purposes of spousal support variation later on. He ruled that this would amount to double recovery and is also explicitly prohibited by the Judges Act.
This decision was overturned on appeal. The B.C. Court of Appeal found that the lower court decision did not consider whether it would be appropriate to divide the portion of the annuity that had accrued since the separation. That portion of the annuity had not been subject to division under the original division (because it did not exist yet), and therefore double recovery would not be an issue. Furthermore, the relevant portion of the Judges Act prohibiting more than one division of an annuity specifically states that it only applies "in respect of the same period." The B.C. Court of Appeal interpreted this to mean that more than one division of an annuity could occur, provided the amounts being divided related to separate periods of time.
Lade v. Perreault, 2016 BCSC 535
The respondent, Paul Edmond Perreault, had worked for B.C. Rail for many years. Upon termination of his employment in 2002, a portability election was made and the commuted value of his B.C. Rail pension benefits was transferred to a locked-in registered account (LIRA). Mr. Perreault and the claimant, Betty Lade, married after the transfer to the LIRA and separated in 2013. The issue in this decision was how to characterize Mr. Perreault's LIRA for the purposes of the division of marital property.
Ms. Lade argued that the LIRA was an asset under section 5 of the Family Law Act (British Columbia) (FLA) while Mr. Perreault argued that it was a pension under section 6 of the FLA. If it were considered a pension, it would not be divided at all and would stay with Mr. Perreault because the entire period of accrual occurred prior to the marital relationship. If it were considered a family asset, then Ms. Lade would be entitled to one half of the growth of the LIRA during the marriage, which amounted to C$54,575.50.
Justice Hyslop ruled that the LIRA was an asset under section 5 of the FLA because it was a registered retirement savings plan (RRSP). According to section 96 of the Pension Benefits Standards Regulation (British Columbia), an RRSP is a LIRA if it includes locked-in money. The court concluded that there is ample support for the argument that an RRSP is an asset, not a pension, for the purposes of family property. Therefore, Ms. Lade was entitled to half of the LIRA's earnings accrued over the course of the relationship.
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