Performance of services contract must be examined
An Ontario employer has won its appeal of a ruling in which it was ordered to pay pension contributions for disability payments made to employees on leave because they were unable to work.
Hershell Green and Nancy Murphy were both employees at the Toronto Transit Commission (TTC). Green, who had been at the TTC since 1979, became disabled in 2005. Under the collective agreement, the TTC funded long-term disability benefits for unionized employees after other short-term benefits and vacation pay were used up, which kicked in for Green in April 2006.
Murphy, who wasn’t part of the union, became eligible for long-term disability benefits under the TTC’s staff plan after she became disabled and unable to work in 2003. Her benefits began in April 2004.
Both employees’ benefits were administered by the Sun Life Assurance Company of Canada, though the TTC retained ultimate control and reimbursed Sun Life for the payments.
The fully taxable benefits were paid to the employees as long as they remained disabled, until age 65 or retirement, and were increased as necessary according to the cost of living.
TTC employees who went on long-term disability remained employees but were transferred to inactive status so replacements could be hired. They retained seniority, health and dental benefits and employee transportation privileges.
The minister of national revenue determined the disability payments Green and Murphy received from Sun Life on behalf of the TTC constituted remuneration based on their employment and the TTC had to make Canada Pension Plan (CPP) contributions on the payments as it would on regular paycheques.
The TTC disagreed with the finding and took the case to the Tax Court of Canada, which dismissed the appeal in April 2009.
The tax court found the CPP’s interpretation of employment income should coincide with employment insurance (EI) and income tax legislation. It also found since the employees were still considered employees — though on leave of absence — the disability payments constituted “remuneration for the pensionable employment” under CPP legislation.
However, the Federal Court of Appeal had a different view of the situation. It pointed out the CPP legislation defined "employment” as the performance of services under a contract of service and imposed a duty on employers to make a contribution to CPP “for the year in which remuneration for the pensionable employment is paid to the employee.”
Based on the CPP legislation, the Court of Appeal found the disability payments had to have been paid for employment that constituted performance of services under a contract for service in order to qualify as what CPP considered “remuneration.”
The court also found the requirement for CPP payments to be made for paycheques that were “for the pensionable employment” necessitated a close connection between the payments and the performance of services.
Despite the fact Green and Murphy performed services at the TTC before they were disabled and the TTC had to pay the benefits as part of the collective agreement in Green’s case and the employment contract in Murphy’s case, the Court of Appeal found the benefits payment were not “for” the performance of services.
“The payments by the TTC were in the nature of a partial indemnity for wages or salary lost by the employees because they were unable to perform services under their contracts of service by reason of long-term disability,” said the Court of Appeal. “It is not enough that either the payments were made only to employees who had performed services at one time under their contracts, or the TTC’s duty to pay benefits arose out of a contract of employment.”
Though the tax court found CPP should fall in line with employment insurance and tax definitions of employment remuneration, and wage loss indemnity benefits paid by an employer should be considered insurable earnings, the Employment Insurance Act actually defines “insurable earnings” as amounts paid “in respect of” employment, said the Court of Appeal.
The Court of Appeal found the difference in wording between EI and CPP legislation was intentional, with insurable earnings for EI having a broader scope than pensionable earnings for CPP.
Based on the difference in wording between EI and CPP, the Court of Appeal found the CPP’s definition of remuneration “for” the performance of services required a closer connection between the payment and the actual performance of services than the EI definition using “in respect of.”
“It is difficult to avoid the conclusion that when Parliament uses different words in analogous provisions of related statutes, it intends the words to have different meanings,” said the Court of Appeal.
The Court of Appeal also found the CPP definition of “employment” — which specifically links the term to the performance of services under a contract of service — supports the idea that employees who aren’t actively employed are not considered in pensionable employment. This was specifically different from EI and income tax definitions, which refer to employment as a status or position of being employed. The Court of Appeal allowed the TTC’s appeal, ruling the TTC wasn’t required to make CPP contributions on the disability payments of Green and Murphy.
Jeffrey R. Smith is the editor of Canadian Employment Law Today, a publication looking at workplace law from a business perspective. For more information, visit employmentlawtoday.com.
Hershell Green and Nancy Murphy were both employees at the Toronto Transit Commission (TTC). Green, who had been at the TTC since 1979, became disabled in 2005. Under the collective agreement, the TTC funded long-term disability benefits for unionized employees after other short-term benefits and vacation pay were used up, which kicked in for Green in April 2006.
Murphy, who wasn’t part of the union, became eligible for long-term disability benefits under the TTC’s staff plan after she became disabled and unable to work in 2003. Her benefits began in April 2004.
Both employees’ benefits were administered by the Sun Life Assurance Company of Canada, though the TTC retained ultimate control and reimbursed Sun Life for the payments.
The fully taxable benefits were paid to the employees as long as they remained disabled, until age 65 or retirement, and were increased as necessary according to the cost of living.
TTC employees who went on long-term disability remained employees but were transferred to inactive status so replacements could be hired. They retained seniority, health and dental benefits and employee transportation privileges.
The minister of national revenue determined the disability payments Green and Murphy received from Sun Life on behalf of the TTC constituted remuneration based on their employment and the TTC had to make Canada Pension Plan (CPP) contributions on the payments as it would on regular paycheques.
The TTC disagreed with the finding and took the case to the Tax Court of Canada, which dismissed the appeal in April 2009.
The tax court found the CPP’s interpretation of employment income should coincide with employment insurance (EI) and income tax legislation. It also found since the employees were still considered employees — though on leave of absence — the disability payments constituted “remuneration for the pensionable employment” under CPP legislation.
However, the Federal Court of Appeal had a different view of the situation. It pointed out the CPP legislation defined "employment” as the performance of services under a contract of service and imposed a duty on employers to make a contribution to CPP “for the year in which remuneration for the pensionable employment is paid to the employee.”
Based on the CPP legislation, the Court of Appeal found the disability payments had to have been paid for employment that constituted performance of services under a contract for service in order to qualify as what CPP considered “remuneration.”
The court also found the requirement for CPP payments to be made for paycheques that were “for the pensionable employment” necessitated a close connection between the payments and the performance of services.
Despite the fact Green and Murphy performed services at the TTC before they were disabled and the TTC had to pay the benefits as part of the collective agreement in Green’s case and the employment contract in Murphy’s case, the Court of Appeal found the benefits payment were not “for” the performance of services.
“The payments by the TTC were in the nature of a partial indemnity for wages or salary lost by the employees because they were unable to perform services under their contracts of service by reason of long-term disability,” said the Court of Appeal. “It is not enough that either the payments were made only to employees who had performed services at one time under their contracts, or the TTC’s duty to pay benefits arose out of a contract of employment.”
Though the tax court found CPP should fall in line with employment insurance and tax definitions of employment remuneration, and wage loss indemnity benefits paid by an employer should be considered insurable earnings, the Employment Insurance Act actually defines “insurable earnings” as amounts paid “in respect of” employment, said the Court of Appeal.
The Court of Appeal found the difference in wording between EI and CPP legislation was intentional, with insurable earnings for EI having a broader scope than pensionable earnings for CPP.
Based on the difference in wording between EI and CPP, the Court of Appeal found the CPP’s definition of remuneration “for” the performance of services required a closer connection between the payment and the actual performance of services than the EI definition using “in respect of.”
“It is difficult to avoid the conclusion that when Parliament uses different words in analogous provisions of related statutes, it intends the words to have different meanings,” said the Court of Appeal.
The Court of Appeal also found the CPP definition of “employment” — which specifically links the term to the performance of services under a contract of service — supports the idea that employees who aren’t actively employed are not considered in pensionable employment. This was specifically different from EI and income tax definitions, which refer to employment as a status or position of being employed. The Court of Appeal allowed the TTC’s appeal, ruling the TTC wasn’t required to make CPP contributions on the disability payments of Green and Murphy.
Jeffrey R. Smith is the editor of Canadian Employment Law Today, a publication looking at workplace law from a business perspective. For more information, visit employmentlawtoday.com.
