Surplus

• Author: Ari Kaplan/Mitch Frazer
• Pages: 561-617

561

CH AP TER 10

SURPLUS

A. INTRODUCTION

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

has been more divis ive and polari zed than the topic of pension surplus.

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

distribution of surplus under a def‌i ned benef‌it pension plan dominated

the pension landsc ape, judicially and polit ically, for decades. The reces-

sion of 2008–2009 and downwa rd cycles in the economy, including low

interest rates, put a spotlight on the consequences of pension def‌icits.

That said, the issue of how surplus should be div ided between employ-

ers and employees is a major issue in pension law. This chapter focuses

on the policy considerations, legislative requi rements, and judicial prin-

ciples relating to the dist ribution and ownership of pension surplus.

1) O v ervi ew

a) Background

The starting point for understandi ng pension surplus law dates back

three-quarter s of a century, when favourable federal tax ru les were intro-

duced to encourage employers to implement and register employee pen-

sion plan s.1 During the 1950s and 1960s, the Department of National

Revenue maintained its “Blue Book” (later Information Bulletin No14),

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

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

requirements was that employer contributions had to be irrevocable.

There were a number of dierent ways that employers were able to struc-

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

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

annuity contracts with insurance companies or tr ust agreements with

institutional custod ial 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 ecient

choice by employers, not least of all because of the commercial rea lities

in the custodial m arketplace at the time.

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

the irrevocability requirements. By 1981, Revenue Canada expressly

changed its regist ration requirements to provide that def‌ined b ene-

f‌it pension plans must contain a provision permitting sur plus to be

refunded to the employer on termination of the pla n.2 In order to obtain

registration, pension plans created since 1981 had to make provision

for the distribution of surplus on plan ter mination. The overwhelming

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 pension plans that the “problem” of surplus

ownership arises.

In the meantime, provincial pension standards legi slation during

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

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

Litigation over surplus ownership, withdrawal, and usage in Can-

ada commenced in the mid-1980s and reached a climax in the 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 su rplus accumulations and, also,

because some of the legal disputes i nvolved high-prof‌ile institutions

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

Hockey League, among others). Moreover, the mass layos, plant shut-

downs, and corporate restr ucturing of the 1990s saw a sign if‌icant rise

in pension plan termi nations. This resulted in a sharp increase in the

number of contests over ownership of the surplus a s 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 i ncorporated into the Income Tax Regulations, CRC, Sch 945,

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

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

Surplus 563

During thi s period in jurispr udence, courts in dierent jurisdic-

tions oered competing judicial approaches to res olving sur plus owner-

ship 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

employer contractually promises it to them. The second approach gen-

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

Appeal decision in Reevie v Montreal Trust Co of Canada.5 Under this

approach, pension surplus, to the extent it is held in a t rust fund, can

only be used to benef‌it the tr ust’s benef‌iciaries, namely the employees.

In 1994, the Supreme Court of Canada, in the landma rk ruling

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

Court rejected the relevance of parties’ original tax motivations in set-

ting up historical p ension plans and prescribed a principled fra mework

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

interpretive principles for determining when an employer has the right

to apply the actuarial sur plus in an ongoing pension plan to take a

so-called contribution holiday.

As a result of Schmidt, a s subsequently rearmed by the Supreme

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

ing surplus ownership upon pension plan termination are settled. The

law with respect to i nterpreting pension plans for the pur pose of deter-

mining whether an employer may take a contr ibution 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 admin-

istrative 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 (DC) plan.10 Judicial c onsideration

of these issues in the immediate post-Schmidt era took a case-by-case

approach, and courts consistently const rued the legal principles under

4 Hockin v Bank of British Columbia (1990), 71 DLR (4th) 11 (BCCA) [Hockin].

5 Reevie v Montreal Trust Co of Canada (1986), 25 DLR (4th) 312 (Ont CA), a’g

(1984), 10 DLR (4th) 287 (Ont HCJ) [Reevie].

6 Schmidt v Air Products Canada Ltd (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).