Canada: Pensions Newsletter – December 2017

Welcome to the 20th 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.



Virc v. Blair, 2017 ONCA 849

The husband owed the wife C$1,283,595.86 pursuant to a previous court order, consisting of both the equalization payment and retroactive child and spousal support owed. As of February 2017, the husband had not made any payments. To enforce the order, the wife made a request of garnishment of the husband's pension benefits paid through a retirement compensation arrangement (RCA). The Ontario Superior Court of Justice ruled that the RCA is not exempt from garnishment, and the husband appealed.

On appeal, the husband advanced two arguments against the garnishment. First, he claimed that his RCA is exempt from garnishment because it is protected by subsection 66(1) of the Ontario Pension Benefits Act (PBA), which protects from garnishment money payable under a "pension plan." Affirming the lower court's decision, the Ontario Court of Appeal (OCA) dismissed this argument because an RCA is exempted from the application of the PBA and its regulations, pursuant to subsection 47(3) of Regulation 909. Thus, the RCA is not a pension plan for the purposes of subsection 66(1).

The husband also claimed, in the alternative, that the garnishment must be limited to 50 per cent under either the Wages Act or the Family Responsibility and Support Arrears Enforcement Act. The OCA dismissed this argument as payments made under the RCA are not wages as defined by section 1 of the Wages Act. Further, neither the Wages Act nor the Family Responsibility and Support Arrears Enforcement Act apply because the garnishment is pursued to satisfy an equalization payment and not spousal or child support.

The OCA dismissed the appeal and upheld the wife's garnishment of the husband's RCA.

Ontario Court of Appeal Decision


ITB Marine Group Ltd. v. Northern Transportation Company Limited, 2017 BCSC 2007

On December 30, 2016, Northern Transportation Company Limited (NTCL), the sponsor of a federally registered pension plan, assigned itself into bankruptcy. ITB Marine Group Ltd. (ITB) sought a declaration that it has a valid and enforceable security interest in certain marine vessels and equipment (Marine Assets) that it sold to NTCL in a conditional sale agreement under which ITB retained title to the Marine Assets until the purchase price was paid, though NTCL had possession and use of them. The Marine Assets were subsequently sold by NTCL to a third party. Morneau Shepell Inc. (Morneau), the administrator of the plan, opposed the declaration on the basis that, pursuant to section 8 of the federal Pension Benefit Standards Act, 1985 (PBSA), a deemed trust exists in respect of amounts required to be paid into the pension fund at the time of bankruptcy, giving priority to Morneau's claim.

The Supreme Court of British Columbia (BCSC) considered the workout agreement entered into by NTCL and the unions representing its employees to fund the pension deficit prior to NTCL entering into bankruptcy, extending the period of time available to NTCL to annuitize the solvency deficiency in the plan. The BCSC found that, although most of the payments under the workout agreement were not yet payable, these payments are captured by paragraph 8(1)(b)(ii), which provides for a deemed trust of an amount equal to payments required to be made under a workout agreement that have "accrued to date." Applying the definition of "accrued" provided by the Supreme Court of Canada (SCC) in Sun Indalex Finance, LLC v. United Steelworkers (Indalex), the BCSC held that the payments in the present case were fully constituted and precisely ascertainable as of the date of bankruptcy. Thus all the payments required to be paid under workout agreement were accrued on the date of bankruptcy and subject to a subsection 8(2) deemed trust.

Having found that a deemed trust exists, the BCSC then concluded that, by virtue of the fact that NTCL did not own the Marine Assets outright, pending completion of the conditional sales agreement, the deemed trust attaches only to NTCL's equity interests in the Marine Assets, and not to the Marine Assets themselves.

Finally, the BCSC held that the deemed trust ranks below ITB's claim as a secured creditor in bankruptcy. In Royal Bank of Canada v. Sparrow Electric Corp. (Sparrow), the SCC decided that the deemed trust under the Income Tax Act, Canada (ITA) was subject to the interests of secured creditors if those interests arose prior to the deemed trust. The ITA was subsequently amended to clarify that the deemed trust arising under the ITA ranked in priority to the interests of secured creditors even if those interests arose after the deemed trust was created. The BCSC noted that a similar amendment was not made to the deemed trust provisions of the PBSA, which were substantially similar to the deemed trust provisions of the ITA, as they read prior to the amendment made in response to Sparrow. The BCSC inferred from this that a deemed trust arising under the PBSA is subject to the interests of secured creditors that existed at, or before, the time the deemed trust arose. Therefore, ITB has a valid and enforceable security interest in the Marine Assets that ranks in priority to the pension beneficiaries' deemed trust.

The BCSC also noted the SCC's reasoning in Indalex to justify limiting the protection granted by pension legislation in the context of a bankruptcy as it would complicate creditors' rights and may affect the availability of funds from lenders.

British Columbia Supreme Court Decision


Threlfall c. Carleton University, 2017 QCCA 1632

George Rosme was a retired professor receiving pension benefits under a "life only" pension plan sponsored by Carleton University (Carleton). In September 2007, Mr. Rosme disappeared. Lynne Threlfall was appointed his tutor on February 4, 2008, upon a motion for the Institution of a Tutorship to the Absentee under article 86 of the Québec Civil Code (Code). After learning of Mr. Rosme's disappearance, Carleton advised Ms Threlfall that all pension payments would be stopped and requested that Ms Threlfall return the money paid since Mr. Rosme's disappearance.

Ms Threlfall's notary advised Carleton that Mr. Rosme's death had not been established, and he would be presumed to be alive for a period of seven years as per article 85 of the Code. Carleton resumed the pension payments.

In July 2013, Mr. Rosme's remains were found, and a coroner's report determined that he had died in September 2007. After learning that Mr. Rosme's body had been found, Carleton ceased payments in the summer of 2013 and brought an action to recover the payments against Ms Threlfall personally and in her capacity as liquidator of the estate and as tutor to the absentee. The Quebec Superior Court found that Ms Threlfall owed the pension plan C$497,332.64, representing payments made to her by Carlton between September 11, 2007 and August 16, 2013.

On appeal, the Quebec Court of Appeal (QCA) held that the pension plan expressly provides that Mr. Rosme's entitlement under his "life only" pension plan ended at the date of his true death. Further, Mr. Rosme had signed a memorandum of election confirming his acknowledgment that payments under the "life only" plan would cease on the date his death occurred.

The QCA also found that presumption of life established by article 85 of the Code is rebuttable by proof of death and that the rebuttal has retroactive effect to the date of death. Though the presumption created by article 85 is protective in character and thus protective of Mr. Rosme's entitlement under the "life only" pension plan, it does not create a right that Mr. Rosme would not otherwise have. To allow Ms Threlfall to retain the payments made between 2007 and 2013 would result in her unjust enrichment at the expense of the pension plan. Finally, the QCA held that, although the Code does not expressly order restitution in the present set of circumstances, such remedy may be extrapolated through an expansive reading of the provisions of the Code relating to restitution, supported by the principle of unjust enrichment.

The QCA confirmed the lower court's decision but found that the trial judge erred in ordering Ms Threlfall to pay legal interest from the date of death. Instead, the QCA ordered Ms Threlfall to pay legal interest only from February 17, 2014.

Quebec Court of Appeal Decision


Kerwin v. Manulife Financial, 2017 ONSC 7166

David Kerwin, an employee of AT&T Global Services Canada Co. (AT&T), became disabled after a motor vehicle accident. He was covered by a group disability insurance policy (Policy) that AT&T had purchased from Manulife Financial (Manulife). The Policy included a benefit for Long Term Disability (LTD). AT&T terminated Mr. Kerwin, following an attempted gradual return to work process. AT&T and Mr. Kerwin reached a settlement after his termination for C$314,813.

Manulife accepted that Mr. Kerwin is totally disabled within the meaning of the Policy and that he has coverage for his claim. Manulife agreed to pay Mr. Kerwin C$7,497.76 per month on a non-taxable basis until he turns 65 years of age, but ceased to make those payments for nearly two years, on the basis that Mr. Kerwin's generous retirement package is deductible from the LTD benefits payable to him under the Policy.

The issue in this case is whether the settlement amount paid to Mr. Kerwin for his retirement package is deductible from LTD benefits payable under the Policy. The Policy stated that, "the amount of the disability benefit payable is the benefit amount [...], less any amount of benefits the employee receives, or is entitled to receive, from various sources for the same or related disability." One of the sources is "earnings or payments from any employer, including severance payments and vacation pay."

Justice Emery found that he did not have sufficient evidence on the record to determine whether or not the settlement amount paid to Mr. Kerwin was a severance payment, which under the Policy is deductible from LTD benefits, or consideration for Mr. Kerwin's waiver of all claims against AT&T generally, which is not deductible under the Policy. Following the approach to policy deduction taken by the Ontario Court of Appeal in Cobb v. Long Estate and El-Khodr v. Lackie, Justice Emery found that the payment must be an income replacement in order to be deductible, although the employee does not have to remain employed for it to qualify as income replacement. Without a full evidentiary record, Justice Emery could not determine whether the settlement included amounts for income replacement purposes, so he dismissed Manulife's motion for summary judgment.

Ontario Superior Court Decision

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