This article originally appeared on our sister publication, SmallBizAdvisor.ca.
Thanks to some creative plan design, the Ontario Court of Justice has recently upheld the contractual pre-retirement locking-in provisions in a deferred profit sharing plan (DPSP) established by Canadian Tire for its employees.
The Case
Scott Forbes is a vehicle comptroller in the supply chain division who works at a Canadian Tire transportation facility in Brampton, Ont. The 47-year-old has been a full-time employee and a member of the DPSP since Oct. 3, 1983.
He went to court to get an order directing the trustee of the Canadian Tire DPSP to pay him $150,000 net of taxes from the plan. He said he urgently needed the money to purchase the necessities of daily living and pay off his creditors.
Canadian Tire argued that the DPSP is a retirement fund for company employees, similar to a pension plan. The company said that the trustee does not have the discretionary right to pay funds from the plan because he is bound by the trust deed, which provides very limited circumstances in which plan members can make a pre-retirement withdrawal. Based on the evidence, Forbes did not meet the criteria.
DPSP trust
The provider is the sole institutional trustee of the Canadian Tire DPSP initially established in 1968. The plan and its assets are controlled by the trustee, subject to the direction of the DPSP capital accumulation plan (CAP) committee for most decisions.
Each year, Canadian Tire makes a payment to the trustee equal to at least 1% of the company’s previous year’s net profits after income tax. They designate the amount to be allocated to each employee and officer participating in the plan.
The plan property is divided into units, and each participant is allocated a number of units based on the value of the contributions made on his or her behalf by Canadian Tire. Participants who die, retire after they turn 65 or leave their job because they have a permanent physical or mental disability or because their job is eliminated are entitled to the following:
- receive an amount equal to the net asset value of all units that have been allocated to them;
- direct the transfer of this amount to certain registered plans; or
- purchase an annuity with this amount, whether or not the units have vested.
In order to be eligible under the pre-retirement (before age 65) withdrawal provisions of the trust deed, a participant’s plan holdings must have a market value greater than would be required to provide him or her annual salary payments for a period of 20 years after attaining age 65.
Schedule A of the trust deed provides the method for calculating how much, if anything, a plan participant is entitled to withdraw before retirement.
Based on this calculation, as of Nov. 30, 2012, (the date of the application) Forbes was ineligible for a pre-retirement withdrawal. He had a salary value of $354,161.04 and an asset value of $269,268.14. Therefore, his excess amount was zero.
Beyond the pre-retirement withdrawal provisions, the trustee is entitled to distribute plan property under a valid court order. In the past, court orders have typically been made in cases of division of property on marriage break down.
Decision
The judge dismissed Forbes’ application for the following reasons.
- He sued Canadian Tire, but the trustee legally administers the DPSP. Any order made would not bind the trustee.
- Under the terms of the trust deed, Forbes does not qualify for pre-retirement withdrawal. Even if the trustee has the discretion to order a payment not authorized by the trust deed, the court should not interfere with its discretion.
- The trustee has no separate stand-alone power to pay out the funds under any circumstances it deemed appropriate.
In any event, the judge also found that Forbes had not provided adequate financial disclosure to the court supporting his position that financial situation entitled him to payment of $150,000 from the plan.
Implications for employers and advisors
One criticism of CAPs has been that, unlike DB plans, contributions plus interest are not automatically locked in to ensure members have a balance at retirement.
This case illustrates that a well-designed CAP with creative locking-in provisions will be upheld by the courts. Employers wishing to lock in retirement savings in a CAP until member termination or retirement should have all plan documentation reviewed by a lawyer to ensure that the plan meets their corporate objectives.
These are the views of the author and not necessarily that of Benefits Canada.