Q.B. A.D. 1994 J.C. R. IN THE COURT OF QUEEN'S BENCH JUDICIAL CENTRE OF REGINA BETWEEN: MARY CORSCADDEN, and CROWN LIFE INSURANCE COMPANY, RESPONDENT R. M. Sandbeck for the applicant P. R. McIntyre for the respondent JUDGMENT KLEBUC J. December 2, 1994 NATURE OF APPLICATION Ms. Corscadden seeks a declaration under s. 63 ofThe Personal Property Security Act, S.S. 1979-80, c. P-6.1,that her interest in a group registered retirement savingsplan (later defined as the "Group Plan") is not subject to asecurity interest she granted to Crown Life. She further seeks an order restraining Crown Life from arbitrarily cancelling her participation in the Group Plan. ISSUES The following issues arise: 1.Do the provisions of s. 146(2)(c.3) of the Income Tax Actapply to Ms. Corscadden\'s interest in the Group Plan? 2.Does the taking of security for loan on the Group Plan contravene the provisions of ss. 146(12) and (13) of the Income Tax Act? 3.Does the Plan Contract prohibit Ms. Corscadden from pledging her interest in the Group Plan? 4.May Crown Life realize on Ms. Corscadden's interest in the Group Plan prior to its registration being revoked? 5.Is Crown Life required to transfer Ms. Corscadden's interest in the Group Plan as directed by her? FACTS Crown Life and the association representing its employees known as the "Crown Life Insurance Company, Canadian salaried employees group retirement plan committee" (the "Association") agreed to establish retirement savings plan for Crown Life's employees. To such ends, Crown Life as insurer and the Association as contract holder, entered into group retirement savings plan contract dated December 6, 1985 (the "Plan Contract"), thereby creating group retirement savings plan (herein described as the "Group Plan"), pursuant to s. 146 of the Income Tax Act, R.S.C. 1985, c. (5th Supp.). The Plan Contract sets out the terms on which the Group Plan is to operate, including the basis on which participating employees may withdraw therefrom. To encourage their participation in the Group Plan, Crown Life also provided its employees with interest-free loans. In connection with each loan, Crown Life and the borrowing employee executed printed form of loan agreement prepared by Crown Life. The loan agreement in part provides: In consideration for this loan promise to repay any outstanding principal to Crown Life immediately upon the earliest of: 1.my employment being terminated for any reason; 2.my withdrawal from the Group R.R.S.P.; 3.my ceasing to make the semi-monthly salary deduction payments; or 4.a demand by Crown Life for repayment. At the time of my termination of employment for any reason, hereby authorize Crown Life to deduct the outstanding balance under this loan agreement from any amounts owing to me by Crown Life, including, but not limited to severance or termination pay, final salary or pension refund. also hereby authorize and direct Crown Life to repay itself any outstanding amounts owing under this loan agreement after my termination of employment from the funds in the Group R.R.S.P., or any successor Plan, when Transfer is requested. Crown Life shall be entitled to deduct the outstanding loan and remit the balance to the designated Transferee. Ms. Corscadden entered the employ of Crown Life in February of 1994. Shortly thereafter, she elected to participate in the Group Plan. To finance her contribution of $3,000 to the Group Plan, she obtained an interest-free loan from Crown Life for like amount and executed loan agreement in the prescribed form, under date of February 15, 1994. Ms. Corscadden's employment with Crown Life ended on March 31, 1994. Following her release, she executed and delivered to Crown Life "record of direct transfer under paragraph 146(1)(a)" directing Crown Life to transfer the proceeds of her interest to the Royal Bank of Canada without repaying her indebtedness to Crown Life which was then due and payable. Crown Life in turn ignored her request for direct transfer and advised Ms. Corscadden of its intention to "collapse" her interest in the Group Plan, and to apply the proceeds realized in payment of her outstanding loan obligation. Ms. Corscadden responded by bringing the application now before me. THE LAW Legislative Provisions The statutory provisions governing the creation and operation of registered retirement savings plans are set forth in s. 146 of the Income Tax Act. Of particular significance are the provisions of ss. 146(1), 146(2)(c), 146(2)(c.3), 146(12) and 146(13). Sections 146(1), 146(2)(c) and 146(2)(c.3) in part read: 146. (1) Definitions In this section "retirement savings plan" means (a) contract between an individual and person licensed or otherwise authorized under the laws of Canada or province to carry on in Canada an annuities business, under which, in consideration of payment by the individual or the individual's spouse of any periodic or other amount as consideration under the contract, retirement income commencing at maturity is to be provided for the individual, or (b) an arrangement under which payment is made by an individual or the individual's spouse (i) in trust to corporation licensed or otherwise authorized under the laws of Canada or province to carry on in Canada the business of offering to the public its services as trustee, of any periodic or other amount as contribution under the trust, (ii) to corporation approved by the Governor in Council for the purposes of this section that is licensed or otherwise authorized under the laws of Canada or province to issue investment contracts (iii) as deposit with branch or office, in Canada, of (A) person who is, or is eligible to become, member of the Canadian Payments Association, or (B) credit union that is shareholder or member of body corporate referred to as "central" for the purposes of the Canadian Payments Association Act. (in this section referred to as "depositary") to be used, invested or otherwise applied by that corporation or that depositary, as the case may be, for the purpose of providing for the individual, commencing at maturity, retirement income; 146. (2) The Minister shall not accept for registration for the purposes of this Act any retirement savings plan unless (c) the plan provides that retirement income under the plan may not be assigned in whole or in part; (c.3) the plan, where it involves depositary, includes provisions stipulating that (i) the depositary has no right of offset as regards the property held under the plan in connection with any debt or obligation owing to the depositary, and (ii) the property held under the plan cannot be pledged, assigned or in any way alienated as security for loan or for any purpose other than that of providing for the annuitant, commencing at maturity, retirement income. (Emphasis added) Section 146(2)(c.3) came into force on December 1, 1980. Section 146(2)(c) came into force much earlier. The creation and operation of registered retirement savings plan under s. 146 of the Income Tax Act are fully discussed in Information Circular 72-22R8 published by Revenue Canada. Of particular significance are the provisions of paras. 5, 6, 7, 11, 12 and 13 thereof. Paragraph states that no registered retirement savings plan may be sold until the issuer has submitted specimen retirement savings plan to Revenue Canada and Revenue Canada has approved the same. The documentation to be submitted as part of specimen plan is set out in para. and includes plan contract. Paragraph outlines in detail the mandatory terms to be included in specimen plan including the following: 7. The RSP must (j) prohibit the retirement income from being assigned in whole or in part; and (k) clearly state, when involving depositary, that (i) the depositary has no right of offset as regards the property held under the plan in connection with any debt or obligation owing to the depositary, and (ii) the property held under the plan cannot be pledged, assigned or in any way alienated as security for loan or for any purpose other than to provide the annuitant with retirement income commencing at maturity. (Emphasis added) Paragraphs 11, 12 and 13 of the circular deal with the creation of group registered savings plans of the nature and kind before me. Of particular note are the requirements that either the employer or an employee association must act as agent for the annuitant and that the issuer must deal with Revenue Canada with all matters concerning the retirement savings plan, including any proposed amendment thereof. Judicial Authorities There is authority for the position that retirement savings plans may be assigned or attached by way of security interest, or both, in circumstances where the provisions of s. 146(2)(c.3) did not exist, or were not considered. See: Re Berman (1979), 1979 CanLII 1770 (ON CA), 31 C.B.R. (N.S.) 313 (Ont. C.A.); Re Dowe; Bank of British Columbia v. Thorne Riddell Inc. (1986), 62 C.B.R. (N.S.) 289 (B.C.C.A.); and Re Lifshen, (1978) 25 C.B.R. (N.S.) 12 (Sask. Q.B.). The Saskatchewan Court of Appeal in Bank of Nova Scotia v. Phenix (Bankrupt) et al. (1989), 1989 CanLII 4448 (SK CA), 74 Sask. R. 143, concludes that where retirement savings plan involves depositary, the taxpayer's interest therein may not be pledged as security for loan, and if pledged, the plan will deem to be deregistered and the taxpayer subject to payment of income tax on the proceeds realized therefrom. The Court further concludes that where parties intend to take an assignment or pledge over registered savings plan which involves depositary, their violation of s. 146 of the Income Tax Act renders the assignment illegal and unenforceable. ANALYSIS The parties wish to employ the summary procedures under s. 63 of The Personal Property Security Act to resolve the issues between them. They have further agreed that the loan agreement creates security interest in favour of Crown Life. Accordingly, will deal with the application in summary manner and will assume that security interest exists. Issue No. -Do the provisions of s. 146 (2)(c.3) of the Income Tax Act apply to Ms. Corscadden's interest in the Group Plan? Ms. Corscadden initially submitted that the Group Plan involves depositary within the meaning of s. 146(2)(c.3) but filed no affidavit evidence confirming such fact. Crown Life in turn filed no evidence rebutting the alleged involvement of depositary. Instead, it submitted that since it is life insurance company, the provisions of s. 146(2)(c.3) of the Income Tax Act do not apply to the Group Plan. During argument, counsel for Ms. Corscadden acknowledged that Crown Life is an insurance company and is authorized to issue annuity contracts, but continued to maintain that the ratio in Phenix applied to the Group Plan. Counsel for the parties by agreement filed photocopy of the Group Plan with the court. The Plan Contract provides employees of Crown Life, therein defined as "annuitants", may participate in the Group Plan by making contributions thereto and that such contributions together with interest and other returns earned thereon are to be allocated to an account defined as the "annuitant's account". Crown Life, as the issuer of the Group Plan, covenants to pay to each annuitant the retirement benefit referred to in Article of the Plan Contract immediately upon the annuitant reaching retirement age. In my view the Group Plan falls squarely within the provisions of clause (a) of the definition of "retirement savings plan" in s. 146(1) of the Income Tax Act, namely, contract issued by person authorized to carry on an annuities business, and does not involve depositary of the nature contemplated in clause (b) of the definition. The provisions of s. 146(2)(c.3) therefore do not apply to it. am further of the view that Phenix does not apply to the Group Plan because the relationship between Crown Life and Ms. Corscadden is substantially different from the relationship that arises when credit union, trust company or bank underwrites retirement savings plan. These institutions cannot issue annuities or investment contracts described in clause (b)(ii) of the definition of retirement savings plan in s. 146(1). Consequently, all contributions paid by the taxpayer to such institutions, together with the returns earned thereon, are held by them as deposit or in trust, as the case may be, for the taxpayer until the taxpayer reaches qualifying age at which time the funds so held must be used to purchase qualifying annuity, or transferred to registered retirement income fund ("RRIF") authorized by the Income Tax Act. Issue No. -Does the taking of security for loan on the Group Plan contravene the provisions of ss. 146(12) and (13) of the Income Tax Act? During argument, counsel for Ms. Corscadden suggested the execution of loan agreement had the legal effect of amending the Group Plan and such amendment resulted in her interest in the Group Plan being deregistered by way of the operation of ss. 146(12) and (13) of the Income Tax Act. In support of his argument he referred to the decision of Sherstobitoff J.A. in Phenix (at p. 145) and requested that the loan agreement be declared illegal and therefore unenforceable for the reasons stated by Sherstobitoff J.A. propose to consider whether the loan agreement gives rise to deregistration, and, if so, whether the requested declaration sought should be granted. Subsection 146(12) in part reads: (12) Where, on any day after retirement savings plan has been accepted by the Minister for registration for the purposes of this Act, the plan is revised or amended or new plan is substituted for it, and the plan as revised or amended or the new plan, as the case may be (in this subsection referred to as the "amended plan"), does not comply with the requirements of this section for its acceptance by the Minister for registration for the purposes of this Act, subject to subsection (13.1), the following rules apply: (a) the amended plan shall be deemed, for the purposes of this Act, not to be registered retirement savings plan; and (b) the taxpayer who was the annuitant under the plan before it became an amended plan shall, in computing the taxpayer's income for the taxation year that includes that day, include as income received at that time an amount equal to the fair market value of all the property of the plan immediately before that time. Subsection 146(13) provides: (13) For the purposes of subsection (12), an arrangement under which right or obligation under retirement savings plan is released or under which payment of any amount by way of loan or otherwise is made on the security of right under retirement savings plan, shall be deemed to be new plan substituted for that retirement savings plan. While agree with the interpretation of these subsections by Sherstobitoff J.A. in the context of the Phenix case, in my judgment such interpretation is not applicable to the facts before me. Section 146(13) provides, inter alia, that the taking of security on retirement savings plan for the payment of loan deems the retirement savings plan to be new plan for the purposes of ss. 146(12). Section 146(12) in turn requires the new deemed plan to comply with the general provision of s. 146. In Phenix, the amended plan could not comply because the Bank of Nova Scotia was depositary and therefore the provisions of s. 146(2)(c.3) applied. There being no depositary involved in the matter before me, the taking of security by Crown Life does not result in the deregulation of Ms. Corscadden's interest in the Group Plan. The legal effect of the loan agreement is similar to the security arrangements discussed in McMahon v. Canadian Permanent Trust Company, 1979 CanLII 769 (BC CA), [1980] W.W.R. 438 (B.C.C.A.); Re Berman; and Re Lifshen. Issue No. -Does the Plan Contract prohibit Ms. Corscadden from pledging her interest in the Group Plan? Ms. Corscadden submits that: (1) the provisions of Article 8.03 of the Plan Contract prohibit any assignment or pledge of her interest under the Group Plan and therefore s. 146(2)(c.3) of the Income Tax Act and the reasons in Phenix apply to the Group Plan; (2) the taking of security interest by way of the loan agreement contravenes s. 146(2)(c.3) and Article 8.03 of the Plan Contract; and (3) the contravention of Article 8.03 renders the loan agreement illegal and unenforceable. Article 8.03 of the Plan Contract contains two distinct provisions. They in part read: 8.03 Commutation Assignments No retirement benefit payment payable hereunder is capable, either in whole or in part of surrender or commutation and such payments shall not be subject to any legal process to levy upon or attach the same for payment of any claim against any annuitant, annuitant's spouse or beneficiary. No assignment by an annuitant of any rights or interest under this contract shall be valid (emphasis added) The commutation and surrender provisions contained in Article 8.03 refer to "retirement benefit payment" payable upon an annuitant retiring. There being no evidence before me of Ms. Corscadden having retired, or of retirement benefit payment arising as outlined in Articles 5.02 and 5.03 of the Plan Contract, conclude the commutation and surrender provisions do not apply. The second provision in Article 8.03 consists of prohibition against any assignment. While the intention of the draftsperson may have been merely to comply with the requirements of s. 146(2)(c) of the Income Tax Act by providing that retirement income payable under the Group Plan may not be assigned, the provision goes substantially further than necessary and prohibits assignments of any right or interest in the Group Plan by the annuitant. Consequently, the granting of any security interest by Ms. Corscadden in the Group Plan, which would entitle the secured party to directly attach her annuitant's account or to otherwise collapse her interest in the Group Plan, conflicts with the aforementioned provision, particularly if the rule of contra proferentum is applied. Assuming that the loan agreement gives rise to security interest which enables Crown Life to "collapse" Ms. Corscadden's interest in the Group Plan, the provision in the loan agreement giving rise to such right must be read down to avoid conflict with the provisions of Article 8.03 of the Plan Contract. Such interpretation results in Crown Life having limited right to pursue "pension refunds" and other proceeds in the circumstances described later in connection with issue no. 4. Ms. Corscadden seeks an order restraining Crown Life from "collapsing" her interest in the Group Plan. ShouldCrown Life breach the terms of the Plan Contract, I am of theview that Ms. Corscadden can be amply compensated by way ofdamages. Her application for a restraining order is thereforedenied. Issue No. -May Crown Life realize on Ms. Corscadden's interest in the Group Plan prior to its registration being revoked? The third and fourth paragraphs of the loan agreement provide Crown Life with the limited right to realize on Ms. Corscadden's interest in the Group Plan in two events. Paragraph provides that Crown Life may deduct Ms. Corscadden's indebtedness from any amounts it may owe her, including "a pension refund", following her termination. Paragraph authorizes Crown Life "to repay itself any outstanding amounts owing under this loan agreement" following request for transfer. Before pension refund can exist, Ms. Corscadden's participation in the Group Plan must end. Cancellation of her employment is insufficient, for Article 7.02 of the Plan Contract specifically provides that upon termination of an annuitant, the annuitant's account is to remain with the insurer and the proceeds of the account are to be used to purchase retirement benefit for the annuitant upon the annuitant reaching retirement age. In my view the loan agreement contains no provision enabling Crown Life to collapse Ms. Corscadden's account in the Group Plan and thereby create an attachable pension refund. If it did, such provision would violate Article 8.03 as previously discussed. Similarly, the provisions of s. 58 of The Personal Property Security Act are of no assistance in light of the provisions of Article 8.03. Consequently, no "pension refund" exists which Crown Life could attach. The remedy provided in the fourth paragraph of the loan agreement is dependent on whether proper request for transfer was made by Ms. Corscadden. The same is discussed as part of the fifth issue. am of the further view that nothing in the Plan Contract or the Income Tax Act prohibits Crown Life from setting off Ms. Corscadden's indebtedness to it against any monetary sum due from it to her. Since Ms. Corscadden has notretired and no pension refund exists, there appears to be nomonetary sum current for Crown Life to set off, unless aproper request for a transfer has been made by Ms. Corscadden. Issue No. Is Crown Life required to transfer Ms. Corscadden's interest in the Group Plan as directed by her? Determination of this issue requires consideration of two sub-issues. The first sub-issue is whether Ms. Corscadden's request for transfer of her interest to third party complies with the Plan Contract. The second sub-issue is whether Crown Life is entitled to attach the proceeds of her account, assuming she has complied with the requirements of the Plan Contract relating to transfers. The first sub-issue is fully dealt with by Articles 7.02 and 7.03 of the Plan Contract. As previously mentioned, Article 7.02 provides that upon an annuitant's coverage terminating, the annuitant's account is to remain in place. Article 7.03 in turn provides: Upon written direction from the Contractholder that an annuitant wishes to continue coverage under another Registered Retirement Savings Plan this contract will be amended to allow the value of the annuitant's account, less the market value adjustment to be transferred to another depository in accordance with subsection 146(1) of the Income Tax Act. (Emphasis added) Ms. Corscadden's request for direct transfer does not comply with Article 7.03. Accordingly, she is not entitled to the order directing transfer of the market value of her interest in the Group Plan to the Royal Bank of Canada. Further, her account in the Group Plan was not terminated by the defective request for transfer. Therefore no attachable proceeds exist. Had Ms. Corscadden complied with Article 7.03, am satisfied that Crown Life would be entitled to attach the resulting proceeds pursuant to the terms of the loan agreement in the same manner as the secured party was able to do in Re Dowe and Re Berman, or to assert right of set off. CONCLUSION The Group Plan does not involve depositary and otherwise meets the requirements of s. 146 of the Income Tax Act. Crown Life is not entitled to "collapse" Ms.Corscadden\'s interest in light of the provisions of Article8.03 of the Group Plan. The provisions of the loan agreement do not violate the provisions of the Income Tax Act. The provisions of the Plan Contract regarding transfers of an annuitant's interest have not been complied with. Therefore, Ms. Corscadden's interest in the Group Plan remains in place and no pension refund or "market value of her account" exists upon which Crown Life's security interest can attach. Ms. Corscadden\'s application is dismissed. No costs are awarded to either party in the circumstances.
The Applicant participated in a group retirement savings plan ('GRSP') created by Crown Life for its employees. The GRSP provided for an annuity income on retirement for each participating employee. To finance her contribution to the GRSP, she secured an interest-free loan from Crown Life and pledged her interest in the GRSP as security for the loan. Subsequent to leaving her employment with Crown Life, she refused to repay her loan and requested that her contributions to the GRSP be transferred to another carrier. When Crown Life refused, she applied under s.63 of the PPSA for an order declaring that Crown Life's security interest in the GRSP offended s. 146(2)(c.3) of the Income Tax Act which prohibits the taking of security in an RRSP in certain circumstances. She also sought orders requiring Crown Life to comply with her request to transfer her contributions and restraining Crown Life from realizing on its security. HELD: Application dismissed. 1)The terms of the GRSP and the security agreement in this case did not offend s.146(2)(c.3) of the Income Tax Act. 2)If the terms of the GRSP were breached by Crown Life, damages would be an adequate remedy. The Applicant's request for a restraining order was therefore refused. 3)Under the terms of the GRSP contract, Crown Life was not entitled to collapse the Plan. 4)No amount was due out of the Plan to the Applicant until she retired or made a proper request for a transfer. In this case her request for a transfer did not comply with the terms of the Plan. There was therefore nothing to which the security interest of Crown Life could attach until a proper request for a transfer was made or until the Applicant commenced her pension.