Surplus

• Author: Ari Kaplan, Mitch Frazer
• Pages: 548-604

548

CH AP TER 10

SURPLUS

A. INT RODUC TION

Historically, no subject matter in the area of pension law and policy

has been more divis ive and polariz ed than the topic of pension surplus.

The debate — often impassioned — concerning the ownership, use, and

distribution of surplus under a def‌ined benef‌it pension plan domin-

ated the pension landscape, judicially and politically, for over twenty

years. Downward cycles in the economy including low interest rates

put a spotlight on the consequences of pension def‌icits. But the is sue of

how surplus should be divided during good economic times is a major

issue in pension law. This chapter focuses on the policy considerations,

legislative requirements, and judici al principles relating to the distri-

bution and ownership of pension surplus.

1) O v ervi ew

a) Background

The starting point for understandi ng pension surplus law dates back

over half a century, when favourable federal tax rules were introduced

to encourage employers to implement and register employee pension

plans.1 During the 1950s and 1960s, the Department of National Rev-

enue maintained its “Blue Book” (later Information Bulletin No. 14)

1 See Chapter 2, Se ction B(3)(b).

Surplus 549

which set out conditions for pension plan registration. One of the

requirements was th at employer contributions had to be irrevocable.

There were a number of different ways that employers were able to struc-

ture their pension plan s to comply with th is rule and the most common

and popular funding models proved to be by way of either investment

annuity contracts wit h insurance companies or tr ust agreements with

institutional custodial trustees. These models were perceived to pro-

vide the requisite degree of “ir revocability” of contribution to entitle

the employer to obtain tax relief on its pen sion contributions. Between

these two models the pen sion trust proved to be a preferred and ef-

f‌icient choice by employers, not least of all because of the commercial

realities in the custodial marketplace at the ti me.

In the late 1960s and early 1970s, the federal tax authorities rela xed

the irrevocability requirements. By 1981, Revenue Canada ex pressly

changed its registration requirements to provide that def‌ined benef‌it

pension plans must contain a provi sion permitting surplus to be re-

funded to the employer on termination of the plan.2 In order to obtain

registration, pension plan s created since 1981 had to make provision

for the distribution of surplus on plan ter mination. The overwhelm-

ing majority of these more recently-est ablished pension plans expressly

provide for the reversion of surplus to the employer. Therefore, it is

generally only in pre-1981 (and more likely, pre-1970) pension plans

that the “problem” of surplus ownership arises.

In the meantime, provincial pension standards legislation during

the 1970s and early 1980s, and the PBA in particu lar during this period,

provided little, if no, direction on surplus wit hdrawal and ownership.3

Litigation over surplus ownership, withdr awal, and usage in Canada

commenced in the mid-1980s and reached a climax in t he early 1990s.

During thi s period, there was a great deal of public attention to this

issue, in part bec ause of the high interest rates in the early 1980s, which

lowered plan liabilities and accelerated sur plus accumulations and, also,

because some of the legal disputes involved high-prof‌ile institutions

(for example, Dominion Stores, Bank of British Columbia, the National

Hockey League, among others). Moreover, the mass-layoffs, pla nt shut-

downs, and corporate restr ucturing of the early 1990s saw a sig nif‌icant

rise in pension plan terminations. This resulted in a sharp increase in

the number of contests over ownership of the sur plus as between groups

of terminated employees and the employer (or its creditors).

2 See Informat ion Circulars 72-13R7 (1981) and 72-13 R8 (1988), which

were eventuall y incorporated into the Income Tax Regulations, CRC,Sch945,

ss 8502(c) and 8503(4)(c). See also Chapter 2 , Section D(1)(a).

3 See Section B(1)(a), below in thi s chapter.

PENSIO N LAW

550

During thi s early period in jurisprudence, courts in different juri s-

dictions offered competing judicial approaches to resolving surplus

ownership disputes. The f‌irst approach generally favoured employers

and is embodied in the 1990 Brit ish Columbia Court of Appeal decision

Hockin v Bank of British Columbia.4 Under this approach, pension sur-

plus is beyond the reasonable contractual e xpectations of employees and,

therefore, employees are only entitled to the surplus where their em-

ployer contractually promises it to them. The second approach generally

favours employees and is ref‌lected in the 1986 Ontario Court of Appeal

decision in Reevie v Montreal Trust Co of Canada.5 Under this appro ach,

pension surplus, to the extent it is held in a t rust fund, can only be used

to benef‌it the trust’s benef‌iciar ies, namely the employees.

In 1994, the Supreme Court of Canada, in the landmark ruling

Schmidt v Air Products Canada Ltd,6 adopted the Ree vie approach. The

Court rejected the relevance of parties’ orig inal tax motivations i n set-

ting up historical p ension plans and prescribed a principled framework

of analysis for determini ng, on a case-by-case basis, t he ownership of

surplus when a plan is wound up. The Court also set out the applic-

able interpretative principles for determining when an employer has

the right to apply the actuarial surplus in an ongoing pension plan to

take a so-cal led “contribution holiday.”

As a result of Schmidt, a s subsequently reaff‌irmed by the Supreme

Court several times, t he applicable common law principles for deter-

mining surplus ownership upon pension plan termination are settled.

The law with respect to inter preting pension plans for the purpose of

determining whether an employer may ta ke a contribution holiday is

also settled.7 What Schmidt did not largely resolve, however, was the

scope of an employer’s right to use surplus in an ongoing pension plan

for purposes other than contribution holidays, for example, to pay ad-

ministrative expenses out of the pension fund,8 merge two or more pen-

sion funds that are in a state of surplus or def‌icit,9 or convert a def‌ined

benef‌it plan to a def‌ined contribution plan.10 Judicial consideration of

these issues i n the immediate post-Schmidt era wa s on a case-by-case

approach, and courts largely construed the legal principles under the

4 (1990), 71 DLR (4th) 11 (BCCA) [Hockin].

5 (1986), 25 DLR (4th) 312 (Ont CA), aff’g (1984), 10 DLR (4th) 287 (Ont HCJ)

[Reevie].

6 (1994), 115 DLR (4th) 631 (SCC) [Schmidt].

7 See Chapter 8, Sec tion B(5)(b).

8 See Chapter 8, Sec tion B(5)(c).

9 See Chapter 8, Sec tion C(4)(h).

10 S ee Chapter 8, Section B(5)(a).