Surplus

• Author: Ari N. Kaplan
• Profession: Partner, Koskie Minsky LLP. Faculty of Law, University of Western Ontario
• Pages: 552-609

CHAP TER 10

SURPLUS

A. INTRODUCTION

No subject matter in the area of pension law and policy is more divisive

and polarized a s the topic of pension surplus. The debate — often im-

passioned — concerning the ownership, use, and distribution of surplus

under a def‌i ned benef‌i t pension plan has dominated the pension land-

scape, judicially and politically, for over twenty years. This chapter fo-

cuses on the policy considerations, legislative requirements, a nd judicial

principles relating to t he distribution and ow nership of pension surplus.

1) O v er v ie w

a) Ba ck gro un d

The starting point for understanding pension surplus l aw dates back

over half a century, when favourable federal tax r ules were introduced

to encourage employers to implement and register employee pension

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

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

which set out conditions for pension plan registr ation. One of the re-

quirements was that employer contributions had to be irrevocable.

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

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

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Surplus 553

structure their p ension plans to comply with this rule and the most

common and popular funding model s proved to be by way of either

investment annuity contr acts with in surance companies or trust agree-

ments with inst itutional custodi al trustees. These models were per-

ceived to provide the requisite degre e of “irrevocability” of contribution

to entitle the employer to obtain tax relief on its p ension contributions.

Between these two models the pension tru st proved to be a preferred

and eff‌i cient choice by employers, not least of all because of the com-

mercial realitie s in the custodi al marketplace at the time.

In the late 1960s and early 1970s, the federal tax authoritie s relaxed

the irrevocability requirements. By 1981, Revenue Canada expressly

changed its regist ration requirements to provide th at def‌i ned benef‌i t

pension plans must contai n a provision permitting surplus to be re-

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

registration, pen sion plans created since 1981 had to make provi sion

for the distribution of surplus on plan termination. The overwhelm ing

majority of these more recently-e stablished pension plans expres sly

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 ari ses.

In the meantime, provincial pension standards legislation during

the 1970s and early 1980s, and the PBA i n par tic ul ar du rin g th is p er iod,

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

Litigation over surplus owner ship, withdrawal, and us age in Can-

ada commenced in the mid-1980s and reached a clim ax in the early

1990s. During this period, there was a great deal of public attention to

this issue, in part because of the high i nterest rates in the early 1980s

which lowered plan liabilitie s and accelerated surplus accumulations

and, also, because some of the legal disputes involved high-prof‌i le in-

stitutions (for example, Dominion Stores, Bank of British Columbia,

the National Hockey League, among others). Moreover, the mass-lay-

offs, plant shutdowns, and corporate re structuring of the early 1990s

saw a signif‌i cant rise in “premature” terminations of many pension

plans. This resulted in a sha rp increase in t he number of contests over

ownership of the surplus 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

eventually incorporated into the Income Tax Regulations, C.R .C., c. 945, ss.

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

3 See this ch apter, section B(1)(a).

PENSION LAW554

During this early period in jurisprudence, courts in different juris-

dictions offered competing jud icial approaches to resolving sur plus own-

ership disputes. The f‌i rst approach generally favoured employers and is

embodied in the 1990 British Columbia Court of Appeal decision Hockin

v. Bank of British Columbia.4 Under th is approach, pension sur plus is be-

yond the reasonable contractual expectations of employees and, there-

fore, employees are only entitled to the surplus where their employer

contractually promi ses it to them. The second approach generally favours

employees and is ref‌l ected in t he 1986 Ontario Court of Appea l decision

in Reevie and Montreal Trust Company of Canada.5 Under t his approach,

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

to benef‌i t the trust’s benef‌i ciaries, namely the employees.

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

Schmidt v. Air Products of Canada Ltd.,6 adopted the Reevie approach. The

Court rejected the relevance of parties’ original t ax motivations in set-

ting up historical pension plans and prescribed a principled framework

of analysis for determining, on a case-by-case basis, the ownership of

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

interpretative principles for determining when an employer has the right

to take a so-called “contribution holiday” in an ongoing pension plan.

As a result of Schmidt, the applicable common law principles for

determining sur plus ownership upon pension plan term ination are

settled. The law with respect to interpreting pension plans for the pur-

pose of determining whether an employer may t ake a contribution holi-

day 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 t han contribution holidays, for example, to

pay administ rative expens es out of the pension fund,8 merge two or

more pension funds th at are in a state of surplus or def‌i cit,9 or convert

a def‌i ned benef‌i t plan to a def‌i ned cont ribution plan.10 Judici al con sid-

eration of these issues h as been on a case-by-case approach as well,

and the courts have generally based their rea soning and conclusions

4 (1990), 71 D.L.R. (4th) 11 (B.C.C.A.).

5 (1986), 25 D.L.R. (4th) 312 (Ont. C. A.), a ff’g (1984), 10 D.L.R. (4th) 287 (Ont.

H.C.J.) [Reevie].

6 (1994), 115 D.L.R. (4th) 631 (S.C.C.) [Schmidt].

7 However, the law is not sett led with respect to whether a p ension plan can be

amended to give an employe r the right to take a contribut ion holiday: see Chap-

ter 8, section B(5)(b).

8 Chapter 8, section B(5)(c).

9 Chapter 8, sect ion C(4)(h).

10 Chapter 8, section B(5)(a).