- Federal Security Interests Research Study and Report 2000
- PART ONE: INTRODUCTION
- PART TWO: FEDERAL STATUTORY PROVISIONS DEALING WITH SECURITY INTERESTS
- IV. AGRICULTURAL AND AGRI-FOOD ENTERPRISES
- V. INTELLECTUAL PROPERTY
- VI. FEDERAL PROPERTY
- VII. INDIANS AND LANDS RESERVED TO INDIANS
- VIII. NON-CONSENSUAL FEDERAL SECURITY INTERESTS
- IX. BANKRUPTCY ISSUES
- X. PENSION AND BENEFITS ISSUES
- XI. MISCELLANEOUS ISSUES
- PART THREE: POLICY AND CONCLUSION
- APPENDIX A
- APPENDIX B
- APPENDIX C
- APPENDIX D
- APPENDIX E
- APPENDIX F
- APPENDIX G
- APPENDIX H
- APPENDIX I
- APPENDIX J
- APPENDIX K
- All Pages
X. PENSION AND BENEFITS ISSUES
A. Current Statutory/Regulatory Scheme
There are a number of federal statutes that purport to give pensions and benefits to a variety of segments of Canadian society.; These statutes also provide that the pensions and benefits created by the statutes are not capable of being assigned or given as security, nor are they subject to seizure and execution.; A summary of the relevant legislative and regulatory provisions is provided in Appendix J.
The following statutes create pensions and benefits that are subject to the limitations identified above:
Canada Pension Plan, R.S.C. 1985, c. C-8, s. 65(1) (the CPP does not specifically exempt the benefits from seizure and execution, although it provides that any transaction purporting to assign or grant a security interest in a benefit is void);
Canadian Forces Superannuation Act, R.S.C. 1985, c. C-17, ss. 14 and 70;
Labour Adjustment Benefits Act, R.S.C. 1985, c. L-1, s. 23 (section 23 also provides that any transaction purporting to assign or give security in a labour adjustment benefit is void, although there is no prohibition against seizure and execution);
Members of Parliament Retiring Allowances Act, R.S.C. 1985, c. M-5, s. 60;
Old Age Security Act, R.S.C. 1985, c. O-9, s. 36(1);
Public Service Superannuation Act, R.S.C. 1985, c. P-36, ss. 10(10) and 58;
Royal Canadian Mounted Police Superannuation Act, R.S.C. 1985, c. R-11, s. 9(7); and
Special Retirement Arrangements Act, 1992, c. 46, s. 22.
The Pension Benefits Standards Act, R.S.C. 1985, c. 32 (2nd Supp.) is the most important piece of federal legislation governing pensions (although it does not create them).; This Act governs pension plans that are “organized and administered for the benefit of persons employed in connection with certain federal works, undertakings and businesses”.; Under section 4(4), the Act applies to a variety of pension plans in a number of industries, including shipping, navigation and railway pensions, pensions for airline employees, pension plans established by banks, and any pension plan created for a “work, undertaking or business that is within the legislative authority of Parliament”.; Section 36(2) of the Act also voids any agreement to assign or give as security any benefit provided under a pension plan, or any money withdrawn from a pension fund.;
The public policy purpose behind provisions that limit a creditor’s ability to take security in pensions is to preserve the income base of retired individuals receiving pensions and benefits. Nevertheless, these provisions cause difficulty for secured creditors in that they are unable to obtain security on a valuable asset - the pension or benefit.; Often, the pension or benefit may be the most valuable asset possessed by the retired individual.; Likewise, lenders may be unwilling to lend to individuals in need of money because the lender will be unable to obtain security for the funds advanced.
B. Garnishment, Attachment or Diversion of Pensions
Under certain circumstances, pension benefits may be garnished or attached.; For example, the Garnishment, Attachment and Pension Diversion Act (the “Garnishment Act”) permits the garnishment or attachment of the Crown and the diversion of pension benefits payable by the Crown.; The Schedule to the Garnishment Act lists the pension plans which may be diverted under the Act.; For example, pension benefits paid under pension plans created by the Public Service Superannuation Act, the Canadian Forces Superannuation Act, and the Royal Canadian Mounted Police Superannuation Act, among others, may be diverted.; The Garnishment Act also permits the diversion of these pension payments in order to satisfy the payment of financial support orders made pursuant to matrimonial disputes.
This “diversion” of the pensions under the Garnishment Act is essentially an attachment of, and thus a security interest in, the pensions and benefits created under federal legislation.
1. Division of Pension Benefits Between Spouses
The federal government has enacted legislation that creates a scheme for the division between spouses (or former spouses) of pensions, pension credits, and benefits.; Previously, federal legislation failed to provide for a scheme by which pension plan administrators were required and authorized to divide the pension at source.; As a result, plan administrators often failed to honour court orders dividing pension benefits.; These failures to satisfy court orders hindered a spouse’s (or ex-spouse’s) ability to obtain the diversion of the pension and; benefits, as ordered by the court. Therefore, under previous legislation, even though a spouse (or ex-spouse) may have been successful in his/her application to divert the pension funds, the administrative branch of the pension fund would not be bound to “cut two cheques at the source” as it were, to pay both the spouse and the respondent.; For example, in a case decided by the Saskatchewan Court of Queen’s Bench, the Court heard evidence to confirm that “the administrative branch of the Public Service Superannuation Act would not honour a judgment dividing a pension benefit at source”.; Thus, the spouse would be forced to rely upon his or her own efforts to obtain the pension and benefits in order to fulfil the support order.; This fact created uncertainty regarding the practical effect of the Garnishment Act.
The Courts have employed creative solutions, in an attempt to assist spouses in collecting pensions and benefits.; For example, in Britney v. Britney, the Court declared the petitioner’s right to receive a portion of the pension and benefits a form of “maintenance” in order to ensure that the payments could be subject to garnishment.; Unfortunately, there may be problems with viewing pension payments as maintenance.; For example, if the petitioner dies before the respondent does, the petitioner’s estate may not be able to collect the remainder of the pension payments because maintenance is deemed to terminate upon the death of the petitioner.
In order to resolve these problems, and to provide guidance with respect to the division of pension benefits between spouses, Parliament adopted the Pension Benefits Division Act in 1994. This Act applies to a variety of federally administered pensions, including pensions operated under the Public Service Superannuation Act, the Canadian Forces Superannuation Act, the Royal Canadian Mounted Police Superannuation Act, and the Special Retirement Arrangements Act, among others.; The Pension Benefits Division Act describes more specifically the circumstances in which pension benefits can be divided, as well as the procedures to be followed regarding the approval of division, lump sum payments, and the method of division of benefits.; This legislation reduces the uncertainty surrounding the division of pension benefits pursuant to court orders and spousal agreements.
2. Receivership and Bankruptcy
The courts have also attempted to appoint a “receiver” to distribute pension entitlements. Unfortunately, the case law is unclear as to whether a receiver can be appointed to garnish a pension.
For example, case law has held that the provisions of the Public Service Superannuation Act prohibit the use of an “equitable” solution, such as the appointment of a receiver.; In one Ontario Court decision, Justice Rutherford struck out portions of an order obtained in Motions Court that appointed a receiver to act in place of the respondent to permit the petitioner to receive any pension benefits or income tax refund that the respondent might obtain.; The Court examined the legislative scheme established under section 10(10) of the Public Service Superannuation Act, which exempted a pension or benefit from attachment, seizure and execution either at law or in equity.; The Court concluded that because the appointment of a receiver was an equitable remedy, the legislative scheme did not permit the Court to appoint a receiver in place of the respondent.; The appointment of a receiver was seen by the Court as an attempt to act outside of a clear statutory framework provided by Parliament for the diversion of amounts payable by the Crown to judgment debtors.; Likewise, the British Columbia Supreme Court declined to appoint a receiver to receive benefits paid to a judgment debtor pursuant to a pension plan registered under the Pension Benefits Standards Act (B.C.).; Justice Meredith found that because the provisions in the Old Age Security Act and the Canada Pension Plan prohibited attachment, assignment, seizure and execution both in law and in equity, the appointment of a receiver would violate these principles.; As well, the Court reasoned that seizure of pension payments would likely cause the debtor to apply for welfare, thereby causing the public to indirectly pay the creditor.
In contrast, numerous cases have held that a receiver may lawfully be appointed to receive benefits payable to a debtor from an employer’s pension plan.; In Frueh v. Mair, the Court held that the appointment of a receiver for benefits paid to a debtor by his employer out of his pension plan would not offend the Pension Benefits Standards Act.; In fact, Master Leacock concluded that section 85(1) of the Civil Enforcement Act (Alberta) permitted the appointment of a receiver where property of a debtor could not easily be realized.; Furthermore, Master Leacock stated that the modern definition of attachment and garnishment in the context of the Civil Enforcement Act (Alberta) did not include the appointment of a receiver.; Likewise, the Court in Re Burton determined that payments made to a bankrupt under the Canada Pension Plan were available for collection by creditors pursuant to section 68(1) of the Bankruptcy and Insolvency Act.; In this case, Registrar Ferron concluded that no provision in the Bankruptcy and Insolvency Act precluded this form of payment.; In Re Halldorsson, the Court held that a disability benefit received by a bankrupt from the Canada Pension Plan was available for seizure by the bankrupt’s creditors.;;
Case law has failed to maintain a consistent approach with respect to the treatment of pensions upon bankruptcy and whether or not a receiver may be appointed to collect a debtor’s (or a former spouse’s) pension and benefit payments.; The combined application of both federal and provincial legislation often leads to inconsistent court decisions.; Any changes to federal legislation should attempt to provide guidance in the application of this legislation to clarify the legal effect.
3. Pension Payments and the Bankruptcy and Insolvency Act
One additional issue relating to bankruptcy and pensions is whether or not pension payments are given a place in line for the bankruptcy scheme set out in the Bankruptcy and Insolvency Act (the “BIA”).; Section 136(1)(d) of the BIA states the following:
136.(1) Subject to the rights of secured creditors, the proceeds realized from the property of a bankrupt shall be applied in priority of payment as follows:
(d) wages, salaries, commissions or compensation of any clerk, servant, travelling salesman, labourer or workman for services rendered during the six months immediately preceding the bankruptcy to the extent of two thousand dollars...[together with disbursements and commissions].
Specifically, the issue is whether pension payments can be classified as “wages, salaries, commissions or compensation”, thus allowing employees to bring a claim for these payments in the event of the bankruptcy of their employer.
Case law has considered this question.; In Abraham v. Canadian Admiral Corp. (Receiver of) employees sought vacation pay and pension payments from their bankrupt employer.; At trial, Wilson J. found that:
Because of the unique and complex nature of pension benefits [being amounts owing as contributions by an employer to a plan], I would find that they do not fit within the intended scope of the definition of “wages, salaries, commission or compensation” owed to employees, as defined by s. 107(1)(d) [now 136(1)(d) of the Bankruptcy and Insolvency Act].
Wilson J. further acknowledged that as the employees had a lien on the bankrupt’s assets, they could proceed with a claim as secured creditors.; Thus, although this case was decisive at trial in its finding with respect to section 136(1)(d) of BIA, the Court of Appeal was not as decisive.; Indeed, McKinlay J.A. and Finlayson J.A. stated that the trial judge was correct in her decision that the claim for vacation pay was a preferred one in bankruptcy and that the pension one was not.; Nevertheless, the Court of Appeal refused to comment on whether or not Wilson J.’s characterization of the pension payments was correct and commented instead that:
The trial judge was of the view that since the pension claim was not dealt with in the detailed portion of s. 107 [of the Bankruptcy Act], that claim retained the character it held in a non-bankruptcy situation - that of a secured creditor.; Whether or not that decision is correct, it does not affect the rights of the appellant in this case.
Thus, although the Court of Appeal did not specifically address the issue, Wilson J.’s statement on the issue remains persuasive.; Indeed, further support for Wilson J.’s decision is found in the case of Neal v. Toronto-Dominion Bank at the Ontario Court General Division. In this case, MacPherson J. cited Wilson J.’s decision and stated: “I agree with the observations of Wilson J. in Abraham v. Coopers and Lybrand Ltd.”; Thus, it appears that pension payments are not considered to be wages, salaries, commissions or compensation in the context of section 136(1)(d) of the BIA.; Thus, while employees are not entitled to a preferred claim in bankruptcy with respect to pension contributions, they may in fact have a secured claim where conferred by statute.; Because the statutory lien is in favour of employees, the provisions of sections 86 and 87 of the Bankruptcy and Insolvency Act do not apply in a bankruptcy.
C. Canada Pension Plan, Old Age Security
Both the Canada Pension Plan and the Old Age Security Act state that a benefit shall not be assigned, charged, attached, anticipate or given as security.; Both Acts also provide that any transaction purporting to assign, charge, attach, anticipate or give as security a benefit is void.; Benefits are also exempt from seizure or execution, either at law or in equity.; Section 65.1 of the Canada Pension Plan allows for one exception to this rule - an individual is permitted to assign his or her benefits to a spouse.; Section 65.1 further describes the form of spousal agreement that is binding upon the Minister.
Case law has confirmed that benefits available under the Canada Pension Plan and the Old Age Security Act are not available for garnishment by a creditor.; One exception to this rule, however, is that Revenue Canada is permitted to garnish payments made under the Canada Pension Plan for payment of income tax arrears.; The courts have held that, where a person owes money to the Crown, section 224.1 of the Income Tax Act permits the Minister to retain benefit payments by way of deduction or “set-off”.; According to the courts, “set-off” is not equivalent to “attachment”, and thus the prohibition on attachment under section 65(1) of the Canada Pension Plan does not prevent the Minister from seizing benefit payments.
With few exceptions, legislation provides, and case law has confirmed, that pensions and benefits are unavailable as security to creditors.; This in turn affects whether or not pension contributions of an employer or debtor may take priority over security held by a secured creditor.; Generally speaking, few creditors attempt to obtain security over pension benefits, simply because the law prohibits this form of security.; Nevertheless, the legislative scheme surrounding pension payments could be further clarified by specifying whether or not a receiver may be appointed to receive pension benefits.; Jurisdictions across Canada have often produced conflicting results.; Clarifying this issue would avoid the confusion surrounding the use of receivership as a method by which a creditor may obtain pension benefits.