Packed with valuable information, our publications help you stay in touch with the latest developments in the fields of law affecting you, whatever your sector of activity. Our professionals are committed to keeping you informed of breaking legal news through their analysis of recent judgments, amendments, laws, and regulations.
How will the Superior Court of Québec deal with pension laws from Newfoundland and Labrador, Québec and the Parliament?
On January 30, 2017, Justice Stephen W. Hamilton issued an interlocutory decision1 in the context of a motion for directions, the outcome of which will be most interesting. On May 19, 2015, the debtors, Wabush Iron Co. Limited, Wabush Resources Inc., Wabush Mines, Arnaud Railway Company and Wabush Lake Railway Company, Limited (the “Wabush CCAA Parties”) filed a motion for the issuance of an initial order under the Companies’ Creditors Arrangement Act, which was granted the following day by the Superior Court of Québec. The Wabush CCAA Parties had two pension plans for their employees, which included defined benefits. The first one was a hybrid pension plan for salaried employees (the “Salaried Plan”) registered with the Newfoundland and Labrador (“NL”) pension regulatory authority. The second one was for unionized hourly employees(the “Union Plan”) and was registered with both the NL and federal pension regulatory authorities. The Wabush CCAA Parties employed workers in NL as well as in Québec. Moreover, some of the Wabush CCAA Parties’ facilities fell under federal jurisdiction and therefore federal laws applied to the employees of these facilities. As a result, the Salaried Plan was governed by the Newfoundland and Labrador Pension Benefits Act (the “NLPBA”) and the Québec Supplemental Pension Plans Act (the “SPPA”), while the Union Plan was governed by the NLPBA, the SPPA and the federal Pension Benefits Standards Act (the “PBSA”). On December 16, 2015, the NL pension regulator terminated both the Salaried Plan and the Union Plan (the “Plans”) on the basis that: The Plans failed to meet applicable solvency requirements; The Wabush CCAA Parties had discontinued or were in the process of discontinuing all of their business operations; and It was highly unlikely that any potential buyer would accept to assume the Plans. On the same date, the federal pension regulator terminated the Union Plan for similar reasons. In their termination notices, both the NL and federal pension regulators indicated that the Wabush CCAA Parties were required to pay to the pension funds all amounts that would have been required to be paid to meet the prescribed solvency requirements, as well as the amounts necessary to fund the benefits provided for in the Plans. Both pension regulators also took the position that a deemed trust had been created in respect of such amounts. While the Wabush CCAA Parties paid the monthly normal cost payments for both Plans up to the wind-up date(i.e. December 16, 2015), both Plans had unpaid special payments and were underfunded (i.e. had wind-up deficiencies) as of the wind-up date. The Plans administrator filed proof of claim for the following amounts: Salaried PlanUnion Plan Secured claim:$24,000,000 Secured claim: $29,000,000 Restructuring claim:$1,932,940 Restructuring claim:$6,059,238 In that context, the monitor moved for directions to the Superior Court of Québec with respect to the priority of these pension claims, and the applicability and scope of deemed trusts, if any, under the NLPBA, the PBSA and the SPPA. More specifically, the monitor sought an order to determine the priority of the various components of the pension claims to be as follows: That special payments outstanding as of the date of the initial order were subject to a limited deemed trust; That special payments payable after the date of the initial order constituted unsecured claims; That the wind-up deficiencies constituted unsecured claims; and That any deemed trust created pursuant to the NLPBA may only charge property located in Newfoundland and Labrador. The January 30 decision dealt with a preliminary matter. Although all parties agreed that the Superior Court of Québec had jurisdiction to deal with all the issues at bar, the Plans administrator, the NL pension regulator and the representatives of the salaried employees and retirees asked the Superior Court of Québec to seek the assistance of the Supreme Court of Newfoundland and Labrador (the “NL Court”) with respect to several questions, including the following: 1. The Supreme Court of Canada has confirmed in Indalex that provincial laws apply in CCAA proceedings, subject only to the doctrine of paramountcy. Assuming there is no issue of paramountcy, what is the scope of section 32 in the NPBA [NLPBA] deemed trusts in respect of: (…)b) unpaid special payments; and,c) unpaid wind-up liability. 2. The Salaried Plan is registered in Newfoundland and regulated by the NPBA. a) (i) Does the PBSA deemed trust also apply to those members of the Salaried Plan who worked on the railway (i.e., a federal undertaking)? (ii) If yes, is there a conflict with the NPBA and PBSA if so, how is the conflict resolved? b) (i) Does the SPPA also apply to those members of the Salaried Plan who reported for work in Québec? (ii) If yes, is there a conflict with the NPBA and SPPA and if so, how is the conflict resolved? (iii) Do the Québec SPPA deemed trusts also apply to Québec Salaried Plan members? For various legal, factual and practical reasons, Justice Hamilton decided not to exercise the Court’s discretion to seek the assistance of the NL Court. More particularly, Justice Hamilton was of the opinion that the deemed trust provision contained in section 32 of the NLPBA is not particularly unique, considering that there are similar deemed trust provisions in the PBSA and other provincial pension laws. He also noted that there is no jurisprudence interpreting section 32 of the NLPBA. While acknowledging that the NL Court has greater expertise in interpreting the NLPBA as a whole, Justice Hamilton stated that such was not the case with respect to the relevant deemed trust provision, i.e. section 32. He also added that because of the similarities between the NLPBA, the PBSA and other provincial pension laws, the judge interpreting the NLPBA will likely refer to decisions of the courts of other provinces interpreting their legislation or the PBSA. In this context, the Superior Court of Québec is in as good a position as the NL Court. Moreover, since this case also raises issues respecting the PBSA and the SPPA, Justice Hamilton did not see on what basis he should conclude that the NL Court would be in a better position to decide on these issues. He stated the following: The Court will not refer issues of Québec law or federal law to the NL Court, and if those issues are too closely interrelated to the NLPBA issues, or if in the interests of simplicity and expediency they should all be decided by the same court, then the solution is not to refer any issues to the NL Court. Furthermore, although there were significant factual links between the issues and NL, it was equally true that strong factual links existed with Québec. Indeed, one of the Wabush CCAA Parties’ facility and most of the organizations’ railways are in Québec. Also, Justice Hamilton, stated that there were almost as many employees and retirees in Québec as there were in NL. Finally, he was also concerned that requesting the aid of the NL Court could result in additional delay. Comment The Superior Court of Québec will therefore review the pension plans’ deemed trust issues and will likely analyze the deemed trust provisions contained in the NLPBA, the PBSA and the SPPA. For the first time, it appears that such provisions will be compared and interpreted in one case. The hearing on these issues was held on June 28 and 29, 2017. Be on the lookout for the next newsletter to find out how this story unfolds. Arrangement of Bloom Lake, 2017 QCCS 284.
Employers, the VRSP: Ring any Bells?
On July 1, 2014, most of the provisions of the Voluntary Retirement Savings Plans Act1 (the “VRSP Act”) came into effect. At the time, this raised questions in the minds of numerous employers about their obligations under this new law. Since a first group of employers had until December 31, 2016 to comply with certain obligations, we are providing you with a summary of the main obligations of employers under the VRSP Act. But before anything else: what is a VRSP? It is a group retirement savings plan set up and administered by an authorized administrator and governed by the VRSP Act. VRSPs are designed to have a low cost in order to encourage saving for retirement. Which employers are covered by the VRSP Act? Any employer that has an establishment in Québec and five or more “eligible employees”. What is an “eligible employee”? According to the VRSP Act, it is essentially an employee2 who: is 18 or more years of age; has at least one year of uninterrupted service;3 and performs his work: - in Québec; or - partially in Québec and outside Québec for an employer having an establishment in Québec; or - outside Québec but who has his domicile or a residence in Québec and whose employer is located in Québec. If an employer does not have five or more eligible employees, it must ensure, on December 31st of every year, that it still does not have five or more eligible employees. If an employer has five or more eligible employees, it has the obligation to offer a VRSP and to automatically enroll all of its eligible employees therein. But! The employer is not required to enroll any eligible employee in the VRSP if the employee: has the opportunity to contribute, through payroll deductions, (whether or not he/she actually does so) to a designated registered retirement savings plan (“RRSP”) or a designated tax-free savings account (“TFSA”) set up by the employer; OR belongs to a category of employees who benefit from a registered pension plan,4 i.e. a pension plan.5. When must the VRSP be offered? The deadline by which an employer must offer a VRSP and automatically enroll its eligible employees depends on the number of eligible employees on certain given dates. The deadline for employers with 20 or more eligible employees as of June 30, 2016 was December 31, 2016. The deadline for employers with 10 or more eligible employees as of June 30, 2017 is December 31, 2017. Note that the deadline has yet to be determined for employers with 5 to 9 eligible employees, but it will not be before January 1, 2018. Choose a VRSP set up by an authorized administrator and give notice to the employees An employer who is required to offer a VRSP must choose from among those set up by the authorized administrators. A list of authorized administrators who have set up a VRSP is available on the website of Retraite Québec.6 Once it has made its choice, the employer must, no less than 30 days before offering the chosen VRSP, notify its eligible employees7 in writing that: it intends to join that VRSP; the eligible employees will be automatically enrolled in the VRSP, but will be able to opt out; each eligible employee may choose the contribution he/she wishes to make to the VRSP This written notice must also contain all the other information required by the VRSP Act. Once the employer has joined the chosen VRSP, it has 30 days to enroll its employees with the VRSP. The VRSP administrator will then send a written notice to the enrolled employees, by the statutory deadline, containing the prescribed information. Is the employer required to contribute to the VRSP? Under the VRSP Act, the employer has no obligation to contribute to the VRSP on behalf of its enrolled employees. If it chooses to contribute, it may subsequently change its contribution, subject to any contrary clause contained in a collective agreement or individual employment contract. To change its contribution, the employer must give written notice to the employees concerned and to the VRSP administrator. If the amendment has the effect of reducing its contribution, it cannot take effect before the 30th day following the date written notice is given. Other obligations of the employer Employers who must offer a VRSP also have other obligations under the VRSP Act. The following is a non-exhaustive list of those obligations.8 Opting out of or not contributing to the VRSP Employees may opt out of the VRSP offered by their employer by advising in writing of their intention to do so within the time period specified in the VRSP Act. In such a case, the employer must retain this written notice for the entire duration of the employee’s employment. The employer will also be required to verify periodically whether the employee wishes to change his/her mind and enroll in the VRSP. This must be carried out in the month of December, every two years following the employee’s decision to opt out. If an employee has decided to opt out of the VRSP, the employer must also give the VRSP administrator written notice within 30 days of its receipt of the written notice from the employee. Pursuant to the regulation, enrolled employees may set their contribution rate to 0%.9 When an employee does so, the employer must periodically give them the opportunity to start making contributions again. The employer must do so in the month of December, every two years following the date on which the contribution rate was set to 0%. Deduction and payment of contributions The employer must deduct the contributions of each employee who is a member of the VRSP from his/her pay cheque10 and pay it to the VRSP within the time period specified in the statute, i.e. no later than the last day of the month following the deduction thereof (for example, contributions collected in April 2017 must be paid into the VRSP by May 31, 2017).11 Should the employer not pay the contributions to the VRSP within the requisite time period, the employer will be required to pay interest at the rate and according to the method specified in the regulation.12 Access to documents The employer must make the following documents available to employees at their request and free of charge: the contract between the employer and the VRSP administrator and the VRSP’s annual statement and financial report. Submission of documents or information to the VRSP administrator The employer is required to provide the VRSP administrator with any documents or information it requests and which are necessary to comply with the VRSP Act. Termination of employment Where an employee’s employment is terminated, the employer must notify the VRSP administrator thereof within 30 days. Contravention of the VRSP Act Different bodies are responsible for applying the VRSP Act, including Retraite Québec and the Commission des normes, de l’équité, de la santé et de la sécurité du travail (the “CNESST”). Moreover, the CNESST oversees the employer’s compliance with its obligation to offer a VRSP to its eligible employees. In the event of a violation of the VRSP Act, the employer may be subject to penal sanctions, among other things. Indeed, the VRSP Act states that if an employer fails to pay a contribution to the VRSP by the specified deadline or to offer a VRSP within the time period prescribed by law, it commits an offence and may be liable to a fine ranging from $500 to $10,000. Fines are doubled in the event of a subsequent conviction. Where the employer violates any of its other obligations under the VRSP Act, it commits an offence and may be liable to a fine of $600 to $1,200, which, again, is doubled in the event of a subsequent conviction. In closing, we note that, as reported by some recently published articles, it appears the CNESST will only intervene if a complaint is received. If you were supposed to offer a VRSP by no later than December 31, 2016 and you have not yet done so, you should act quickly. However, if a complaint has been filed with the CNESST, you could be subject to prosecution and payment of a fine. R.S.Q., c. R-17.0.1. According to the definition contained in the Act respecting labour standards, R.S.Q., c. N-1.1. As defined in the Act respecting labour standards, R.S.Q., c. N-1.1. Within the meaning of this expression in the Income Tax Act, R.S.C. (1985) c. 1 (5th Supp.). Where an employer offers membership to all its eligible employees in a pension plan, or in an RRSP or TFSA (through source deductions on their salary), and some of them decide not to enroll, the employer is not obligated to offer a VRSP to the employees who have chosen not to enroll. Retraite Québec website (in french only). The employer is not required to give notice to the eligible employees who are excluded from the enrolling requirement, as previously noted. We note that the VRSP Act expressly states that the employer is not liable for any acts or omissions of the VRSP administrator. Regulation respecting voluntary retirement savings plans, R.S.Q., c. R-17.0.1, r. 3. It must begin collecting the contributions as of the first payroll following the 61st day after the requisite notice is given by the VRSP administrator to the enrolled employees once the employer has joined the VRSP. The VRSP administrator must inform the employer without delay of the date on which such notice was given. If the employer has chosen to contribute, it must pay its own contributions within the same time period as that specified for the payment of the employees’ contributions. We note also that until they are paid to the VRSP, the contributions and accrued interest, if any, are deemed to be held in trust by the employer, whether or not it has kept them separate from its own assets.
Artificial Intelligence and the 2017 Canadian Budget: is your business ready?
The March 22, 2017 Budget of the Government of Canada, through its “Innovation and Skills Plan” (http://www.budget.gc.ca/2017/docs/plan/budget-2017-en.pdf) mentions that Canadian academic and research leadership in artificial intelligence will be translated into a more innovative economy and increased economic growth. The 2017 Budget proposes to provide renewed and enhanced funding of $35 million over five years, beginning in 2017–2018 to the Canadian Institute for Advanced Research (CIFAR) which connects Canadian researchers with collaborative research networks led by eminent Canadian and international researchers on topics including artificial intelligence and deep learning. These measures are in addition to a number of interesting tax measures that support the artificial intelligence sector at both the federal and provincial levels. In Canada and in Québec, the Scientific Research and Experimental Development (SR&ED) Program provides a twofold benefit: SR&ED expenses are deductible from income for tax purposes and a SR&ED investment tax credit (ITC) for SR&ED is available to reduce income tax. In some cases, the remaining ITC can be refunded. In Québec, a refundable tax credit is also available for the development of e-business, where a corporation mainly operates in the field of computer system design or that of software edition and its activities are carried out in an establishment located in Québec. This 2017 Budget aims to improve the competitive and strategic advantage of Canada in the field of artificial intelligence, and, therefore, that of Montréal, a city already enjoying an international reputation in this field. It recognises that artificial intelligence, despite the debates over ethical issues that currently stir up passions within the international community, could help generate strong economic growth, by improving the way in which we produce goods, deliver services and tackle all kinds of social challenges. The Budget also adds that artificial intelligence “opens up possibilities across many sectors, from agriculture to financial services, creating opportunities for companies of all sizes, whether technology start-ups or Canada’s largest financial institutions”. This influence of Canada on the international scene cannot be achieved without government supporting research programs and our universities contributing their expertise. This Budget is therefore a step in the right direction to ensure that all the activities related to artificial intelligence, from R&D to marketing, as well as design and distributions, remain here in Canada. The 2017 budget provides $125 million to launch a Pan-Canadian Artificial Intelligence Strategy for research and talent to promote collaboration between Canada’s main centres of expertise and reinforce Canada’s position as a leading destination for companies seeking to invest in artificial intelligence and innovation. Lavery Legal Lab on Artificial Intelligence (L3AI) We anticipate that within a few years, all companies, businesses and organizations, in every sector and industry, will use some form of artificial intelligence in their day-to-day operations to improve productivity or efficiency, ensure better quality control, conquer new markets and customers, implement new marketing strategies, as well as improve processes, automation and marketing or the profitability of operations. For this reason, Lavery created the Lavery Legal Lab on Artificial Intelligence (L3AI) to analyze and monitor recent and anticipated developments in artificial intelligence from a legal perspective. Our Lab is interested in all projects pertaining to artificial intelligence (AI) and their legal peculiarities, particularly the various branches and applications of artificial intelligence which will rapidly appear in companies and industries. The development of artificial intelligence, through a broad spectrum of branches and applications, will also have an impact on many legal sectors and practices, from intellectual property to protection of personal information, including corporate and business integrity and all fields of business law. In our following publications, the members of our Lavery Legal Lab on Artificial Intelligence (L3AI) will more specifically analyze certain applications of artificial intelligence in various sectors and industries.
Pension plans and their investment rules: investing in alternative investment funds in full compliance
Numerous pension plans today are among the largest investors of capital in private equity, venture capital and hedge funds.1 In many cases, such pension plans hold assets valued in the tens or hundreds of millions of dollars (or even more) consisting of various categories and sub-categories of investments. It is therefore not surprising that with the recent lower rates of return of the traditional forms of investments, pension plans are increasingly opting to invest a portion of their assets in alternative investment funds. Pension plans are however subject to many particular legislative and regulatory provisions, including rules governing their investments that they must take into account when making such investments. For example, regarding defined benefit pension plans, Quebec’s Supplemental Pension Plans Act (hereinafter the “SPPA”) stipulates that only the pension committee2 (or a person to whom it has delegated this power) may “decide how the assets of the plan are to be invested.”3 In addition, the pension committee must adopt a written investment policy. This policy must, in particular, take into account the characteristics of the pension plan, its financial obligations and the other requirements prescribed by law.4 The SPPA also provides that the investments must be made in conformity with this investment policy, as well as the rules and limits provided by law.5 The federal statute governing pension plans, i.e. the Pension Benefits Standards Act, 1985 (hereinafter the “PBSA”), as well as the main regulation thereunder, the Pension Benefits Standards Regulations, 1985 (hereinafter the “PBSR”), also impose various obligations on pension plan administrators pertaining to investments.6 Thus, in the case of a defined benefit pension plan that is subject to the PBSA, the plan administrator is required to establish a written statement of investment policies and procedures (i.e. an investment policy)7 and to invest the assets of the pension fund in accordance with the regulations58 and in a manner that a reasonable and prudent person would apply in respect of a portfolio of investments of a pension fund (i.e. the prudent method of portfolio management).9 This article will not describe all the investment obligations of pension plan administrators, but will highlight several significant principles that administrators of defined benefit pension plans must keep in mind before investing in an investment fund. 1. Does the pension plan’s investment policy permit the proposed investment in the investment fund? The SPPA not only requires the pension committee to adopt a written investment policy, it also provides that this written policy must set out specific conditions, such as the permitted categories and sub-categories of investments.10 Similarly, under the PBSR, a pension plan’s written investment policy must, among other things, set out the categories of investments.11 The pension plan administrator must therefore verify whether the language of the investment policy permits investments in the investment fund in which it plans to invest. For example, does the pension plan’s investment policy permit a portion of the pension fund’s assets to be invested in units of a limited partnership whose purpose is to hold equity interests in real estate or infrastructure projects? Another example was considered in the case of Syndicat général des professeurs et professeures de l’Université de Montréal c. Gourdeau et al.12 in which the plaintiff, the University of Montreal’s union of professors, alleged in its court proceedings that the members of the investment committee of the University of Montreal’s pension plan had made investments in a hedge fund, notwithstanding that the applicable investment policy did not specifically allow investments in this category of funds.13 We note also that some investment policies only provide that the plan administrator may assign a portion of the portfolio to a portfolio manager, without any reference to the notion of investment funds. However, because of the characteristics of the funds they administer, many managers of alternative investment funds are not registered managers. Private equity and venture capital funds that invest for the purpose of exercising a certain degree of control in, or to participate actively in the management of, the projects or businesses they invest in, typically do not qualify as “investment funds” within the meaning of the law, and their managers are not normally registered, whether as portfolio managers or investment fund managers.14 The language of the investment policy should therefore be considered carefully, and special attention should be paid to the terminology used and its legal meaning. If a conclusion cannot be made that the proposed investment clearly qualifies as one of the permitted categories or sub-categories of investments under the pension plan investment policy, it would be prudent for the policy to be amended before the proposed investment is approved. The amendment in question could refer specifically to that investment or provide for the addition of a new category or subcategory of investments that clearly includes the proposed investment. The pension plan administrator should also ensure that the amendment to the investment policy is appropriate in the circumstances, particularly in light of the characteristics of the pension plan, its financial obligations and the other provisions of the investment policy. In addition to the foregoing, we believe it would be prudent for the plan administrator to verify whether the categories of investments described in the targeted investment fund’s investment policy are included in the permitted categories or sub-categories of investments under the pension plan’s investment policy. It should be remembered that, in accordance with the standard structure of alternative investment funds, once the plan administrator has committed capital in the targeted investment fund by signing a subscription agreement, the fund manager generally has the right to make calls for payment at its discretion during the fund’s investment period, by requiring investors (including the plan administrator) through drawdowns to pay a part or all of the amount they committed to the fund. The fund manager may then invest the said amounts in any portfolio investment of its choosing that complies with the investment policy of the fund. Furthermore, unlike hedge funds, the majority of private equity and venture capital funds do not usually allow investors to request the redemption of their interests in the fund. Therefore, the pension plan becomes “captive” and will not be able to recover its investment until liquidation of the fund, unless it finds a purchaser in the secondary market. In addition, the plan administrator cannot assume that the fund manager will follow or comply with the terms and conditions of the pension plan’s investment policy, even if it has been disclosed to it. Indeed, the investment fund manager is not acting as agent for the pension plan administrator investing in its fund. Since the amount invested by the pension plan administrator is pooled with the funds of other investors, the investment fund manager (unlike a portfolio manager) cannot undertake to comply with the investment policy of a specific investor. The manager’s investment decisions are collective (for the entire fund) and are therefore only subject to the restrictions imposed on it by the investment fund’s organizational documents, i.e. primarily the restrictions set out in the fund’s investment policy. However, there are ways to circumscribe this power of the manager, as we shall see in greater detail in the sections below. Finally, we note that the plan administrator should also satisfy itself that the other pension plan documents contain no provisions that could prohibit, restrict or otherwise limit the proposed investment. 2. Does the proposed investment comply with the other limits or requirements set out in the investment policy? The permitted categories and sub-categories of investments are not the only conditions that must be set out in the pension plan’s written investment policy. Indeed, the SPPA stipulates that the investment policy must, for instance, also set out the proportion of the assets that can be invested in debt securities and equity securities, as well as measures for ensuring the diversification of the portfolio.15 As for the PBSR, it provides that the investment policy provisions must also deal with the asset allocation and the diversification of the portfolio.16 Investment policies usually contain one or more provisions that set out the maximum percentage of the assets in the pension fund that can be allocated to various permitted categories or sub-categories of investments. When the proposed investment is made, it must therefore comply with any applicable limit in this regard. In addition, the investment policy generally contains other specific requirements relating to certain categories or sub-categories of investments Such requirements may, for example, deal with the quality of the securities that can be held in respect of a category or sub-category of investments (e.g.: a minimum rating of “A” by a recognized credit rating agency) or the minimum market capitalization of a security at the time of purchase. They may also prohibit the purchase of certain securities. Any specific condition, limit or prohibition that may apply in the case of the proposed investment must be respected. Furthermore, one should also review all the types of investments permitted by the investment policy of the targeted investment fund, since, as we noted above, the pension plan administrator will not be entitled to review or approve the investments made by the fund manager in accordance with that policy. If some of the investments that can be made by the investment fund manager may potentially contravene any requirement of the pension plan’s investment policy, the plan administrator should then negotiate a bilateral collateral agreement (commonly known as a “side letter”) with the fund manager to require that it take certain protective measures to prevent any possible contravention of the pension plan’s investment policy. Such measures can, for instance, include the right to be excused from participating in certain investments. In such a case, the side letter may provide that the manager will be required to set up an alternative investment vehicle or parallel fund structured in parallel to the investment fund, to be used for the investments that have been excluded by the plan administrator, and in which the pension plan holds no interests (but in which the other investors have mirror interests to the interests they hold in the investment fund). The organizational documents of private equity and venture capital funds often permit this type of structure to be implemented. If this is not the case, it may be important to provide for it in a side letter, depending on the circumstances. Moreover, even where the investment fund’s organizational documents provide for this type of mechanism, it is standard practice for an investor, such as a pension plan administrator, to require prior notification by the manager of any intention to make any investment identified in the side letter as potentially problematic for the investor. We note that the side letter should be concluded with the fund manager at the time the plan administrator commits to the capital of the fund upon the signature of the subscription agreement, since, once it has been signed, the manager will no longer have any incentive to make any additional undertakings to the plan administrator. 3. Does the proposed investment comply with the rules and limits in the applicable legislation and regulations? The SPPA contains certain rules and limits governing investments. For example: the pension committee must endeavor to constitute a diversified portfolio in order to minimize the risk of major losses;17 the pension plan’s assets cannot be invested, directly or indirectly, in shares carrying more than 30% of the voting rights attached to the shares of a legal person.18 Under the SPPA, any person who makes an investment that is not in compliance with the law is, by that sole fact and without further proof of wrongdoing, liable for any resulting loss.19 In addition, the members of a pension committee who approved such an investment are, by that sole fact and without further proof of wrongdoing, solidarily liable for any resulting loss.20 However, such persons incur no liability if they acted in good faith on the basis of an expert’s opinion.21 According to Retraite Québec, an “expert” is any person who is able to provide a specialist’s opinion on a given subject. In addition to this liability, any person who contravenes any of the rules applicable to investments commits a penal offence and is liable to a fine of $500 to $25,000.22 The PBSA and the PBSR also contain various rules and limits pertaining to investments. Thus, section 8(4.1) of the PBSA states that the plan administrator must comply with the regulations and invest in a manner that a reasonable and prudent person would apply in respect of a portfolio of investments of a pension fund. We note that the administrator will not be found liable under this section if a contravention of the section occurred because the administrator relied in good faith either on the report of a person whose profession lends credibility to the report (including an accountant, lawyer or actuary), or on financial statements prepared by an accountant or a written report prepared by an auditor that have been represented to the administrator as fairly reflecting the financial condition of the plan.23 As for the PBSR, it primarily provides that the investment of the plan assets must be done in accordance with Schedule III of the regulations, entitled “Permitted Investments”.24 That Schedule sets out various rules and limits, including the rule that a plan administrator may not, directly or indirectly, invest moneys of the plan in any one person if 10% or more of the total market value of the plan’s assets has already been invested in the person, or if 10% or more of the total market value of the plan’s assets would be invested in the person as a result of the investment.25 According to the definitions set out in that Schedule, the word “person” includes a corporation, trust, partnership or fund or an unincorporated association or organization. Another rule contained in Schedule III provides that the plan administrator may not, directly or indirectly, invest the moneys of the plan in the securities of a corporation to which are attached more than 30% of the votes required to elect the directors of the corporation.26 We note that, like the SPPA, the PBSA provides for certain penal offences. Thus, any person who contravenes a provision of the PBSA or its regulations commits an offence and is liable, on summary conviction, to a maximum fine of $100,000 or a maximum term of imprisonment of one year (or both), in the case of an individual.27 In the case of a corporation or other body, the penalty is a maximum fine of $500,000. In the case of R. v. Christophe et al.,28 the Ontario Court of Justice held that certain investments approved by the members of an investment committee contravened one of the applicable rules under the Pension Benefits Act of Ontario and its general regulations, and convicted the members in question of a penal offence. The Court then sentenced each of the individuals to a fine of more than $22,000. Given that there can be significant consequences where investments are made in breach of the law (or regulations, as applicable), pension plan administrators therefore have every interest in ensuring the investments are compliant. In this regard, it is customary to provide a confirmation in a side letter from the investment fund manager that it will ensure that the pension plan administrator is not in breach of certain rules and restrictions as a result of any of the investments made by the fund. Such clauses are common, but, as previously noted, must be negotiated at the time the plan administrator commits capital to the fund. 4. Was a due diligence review done of the proposed investment and are the results of the review satisfactory to the plan administrator? Under the SPPA, the pension committee must notably exercise the prudence, diligence and skill that a reasonable person would exercise in similar circumstances.29 Similarly, under the PBSA, the plan administrator must exercise the degree of care in its administration of the pension plan that a person of ordinary prudence would exercise in dealing with the property of another person.30 With respect to investments, the administrator must invest the assets of the pension fund in a manner that a reasonable and prudent person would apply in respect of a portfolio of investments of a pension fund.31 Accordingly, where the pension plan administrator is considering making a particular investment, including an investment in an investment fund, it should conduct a due diligence review whose scope will vary according to the proposed investment. Indeed, where certain investments are being considered, a prior due diligence review will be simpler and easier. In the case of investments in large investment funds or complex and/or innovative financial instruments, extended and detailed reviews will usually be necessary. Some investments involve the analysis of highly technical and voluminous documentation (such as an investment in a complex master-feeder fund structure). For such investments, it is important to obtain the information and/or particulars necessary to properly identify and understand the potential benefits and risks of the proposed investment before making a decision. In this regard, it will be essential to review the offering memorandum or private placement memorandum of the fund. If the fund is not proposing to issue an offering memorandum, it may be appropriate to require that it do so to ensure that one properly understands the parameters of the investment. Indeed, at the time the plan administrator is making its commitment to the fund, the investment fund may hold very few or no assets (except for open-ended funds such as hedge funds). In such a case, the offering memorandum or private placement memorandum will be almost the only tool that can provide a proper understanding of the portfolio investments that will be made by the fund and the investment strategy that will be used by the manager. Obviously, the fund’s organizational documents must also be reviewed, since they constitute the main contract between the investors and the manager. The plan administrator will also wish to satisfy itself, in particular, that these organizational documents contain protective measures in the event the manager is caught in a conflict of interest, and also contain sufficient information disclosure requirements on the part of the fund manager. As part of its review, the plan administrator should also be able to examine the side letters concluded with all the other investors. If there is no “most favoured nation” type of provision in the fund’s organizational documents, the administrator should negotiate a side letter with the manager that includes such a clause. If the plan administrator does not have all the necessary skills to properly assess the fund’s documentation and make an informed decision on the proposed investment, it should request the assistance of qualified professionals in the field. In the report that these professionals submit to the plan administrator on the results of their analysis, they will, for instance, be able to inform the plan administrator whether the said documentation raises specific questions or problems in relation to the pension plan, or whether some provisions of the documentation differ substantially from the standard documentation generally used in the market for this type of investment. Finally, in all cases where the plan administrator decides to make an investment, it is important for it to properly document both the process followed and its final decision (including the reasons for it).32 Any analysis or report provided by professionals, as well as all the other relevant documents and correspondence leading up to the decision, should be conserved in the plan administrator’s records. According to the data collected by Preqin, 23% of the capital invested worldwide in investment funds in 2012 stemmed from public or private pension funds (source: Benoît Leleux, Hans Van Swaay and Esmeralda Megally, Private Equity 4.0 – Reinventing Value Creation, John Wiley & Sons Ltd., 2015, at p. 38). Section 168 of the SPPA. Sections 169 and 170 of the SPPA. Section 168 of the SPPA. The plan administrator administers the pension plan and pension fund as a trustee (section 8(3) of the PBSA). Sections 7.1(1) and (2) of the PBSR. Section 8(4.1) of the PBSA and sections 6(1) and 7 of the PBSR. Section 8(4.1) of the PBSA. Section 170 of the SPPA. Section 7.1(1) of the PBSR. Superior Court of Montreal, file number 500-06-000294-054. This case was settled out of court and the settlement was approved on May 26, 2015 by the Superior Court of Québec (2015 QCCS 2496). Section 5 of the Securities Act (Quebec). Section 170 of the SPPA. Section 7.1(1) of the PBSR. Unless it is reasonable in the circumstances to act otherwise (section 171.1 of the SPPA). Section 175 of the SPPA. This limit does not however apply in the cases referred to in the second paragraph of that section. Section 180 of the SPPA. Section 180 of the SPPA. Section 180 of the SPPA. Section 257 of the SPPA. Where such an offence is committed by a legal person, the fine is tripled (section 259 of the SPPA). Section 8(5.1) of the PBSA. Section 6(1)a) of the PBSR. Section 9(1) of Schedule III. However, the 10% limit does not apply to the investments listed in section 9(3) of Schedule III, which, among others, include investments in an investment fund that meet the requirements applicable to pension plans set out in Schedule III, investments in a fund that replicates the composition of a widely recognized index of a broad class of securities traded at a marketplace (index funds) and investments in securities issued or fully guaranteed by the Government of Canada, the government of a province, or an agency thereof. Section 11 of Schedule III. The expression “security”, defined in Schedule III, includes, in particular, the shares of any class of shares of a corporation and any ownership interest in the case of any other entity. The 30% limit does not apply to investments made in securities of real estate corporations, resource corporations or investment corporations, as defined in Schedule III. Sections 38(1) and (1.1) of the PBSA. 2009 ONCJ 586. Section 151 of the SPPA. It must also act with honesty and loyalty in the best interest of the plan members and avoid conflicts of interest. Section 8(4) of the PBSA. Section 8(4.1) of the PBSA. The Canadian Association of Pension Supervisory Authorities (CAPSA) stresses the importance of this practice in its Guideline no. 6 (Pension Plan Prudent Investment Practices Guideline) published in November 2011. CAPSA is a national interjurisdictional association of pension regulators whose mission is to facilitate an efficient and effective pension regulatory system in Canada. CAPSA’s Guideline no. 6 is intended to help plan administrators demonstrate the application of prudence to the investment of pension plan assets. Regarding the documenting of the plan administrator’s decisions, this guideline states the following, in particular: “Any time a key decision is made, it should be well documented, and include the reasons and circumstances that were considered.”
Use of “private” mutual fund trusts for employee’ investments through an RRSP
An increasing number of employers are looking at the possibility of creating investment vehicles to allow their employees to make investments in the employer corporation or a portfolio managed by the employer that will qualify for inclusion in, inter alia, registered retirement savings plans (RRSP), registered retirement income funds (RRIF), registered education savings plans (RESP) and tax-free savings accounts (TFSA) (collectively referred to hereinafter as the “Registered Plans”). The following discusses the possible use of an entity that qualifies as a “mutual fund trust” (“MFT”) under the Income Tax Act (Canada) (“ITA”) for that purpose. There are multiple tax benefits that can be derived from MFT status, but the main advantage is that units of an MFT qualify for inclusion in, inter alia, the Registered Plans. This is why this structure is often used by managers of hedge funds or pooled funds that are raising capital from individuals. These conditions are summarized below. 1. Conditions for Mutual Fund Trust qualification a) The trust must be resident in Canada As a general rule, as long as the trustee(s) are resident in Canada and carry out their duties in Canada this should not be an issue. b) The trust must be a unit trust A trust can qualify as a unit trust in one of two alternate ways. First, not more than 10% of the trust’s property may be in bonds, securities or shares of one corporation and at least 80% of the trust’s property has to be in various securities, real property or royalties (closed-end unit trust). Second, interests of each beneficiary must be described by reference to units and the issued units of the trust must have conditions requiring the trust to redeem the units at the demand of the holder at prices determined and payable in accordance with the conditions. The fair market value of such units must not be less than 95% of the fair market value of all of the issued units of the trust (open-end unit trust). c) The trust’s only undertaking is the investing of its funds in property The rules for an MFT and for a unit trust restrict the trust to permitted activities. As a general rule, the trust must restrict its undertaking to investing of funds in property. The trust cannot carry on a business. A trust may own real property and is permitted to acquire, hold, maintain, improve, lease or manage real property as long as the real property is “capital property” of the MFT. d) The trust must comply with prescribed conditions relating to the number of its unitholders, dispersal of ownership of units and public trading Generally, the units must be qualified for distribution to the public or there must have been a lawful distribution of the units to the public in a province. There should be no fewer than 150 beneficiaries of the trust, each of whom hold not less than one block of units and units having an aggregate fair market value of not less than $500. A block of units normally means 100 units if a unit has a market value of less than $25, 25 if the value is between $25 and $100 and 10 units where a unit is $100 or more. e) It must be reasonable to conclude that the trust was not established primarily for the benefit of non-resident persons An additional qualification for MFT status is that it must not be reasonable having regard to all the circumstances that the trust is considered to be established primarily for the benefit of non-resident persons. It is generally accepted that the “primarily” requirement means more than 50% and the trust deed should contain provisions which allow the expulsion of non-residents if the threshold would otherwise be breached. 2. Mutual Fund Trust as investment vehicle in a private corporation The characteristics of an MFT make it an attractive vehicle to facilitate employee participation in a private corporation or in a portfolio to the extent that the number of employees interested in becoming shareholders of the employer corporation meet the minimum requirement of 150 unitholders. Since the units of an MFT qualify for inclusion in the Registered Plans, the employee may decide to invest in the private employer corporation or the portfolio through the Registered Plan. A direct equity investment in the private employer corporation or in a portfolio may not qualify for inclusion in the Registered Plans since the Income Tax Regulations (Canada) provide for strict conditions for the qualification of such an investment as a “qualified investment”. The interposition of an MFT whose units are “qualified investments” between the Registered Plans and the employer corporation or the portfolio managed by the employer would provide more comfort in that regard. An interesting question is whether each Registered Plan would count as a single unitholder for purposes of the minimum requirement of 150 unitholders described above. Since the ITA treats each Registered Plan as a trust under the ITA (and therefore as a distinct person from the beneficiary or annuitant), an argument could probably be made that each Registered Plan should count as a distinct unitholder for purposes of the 150 unitholders requirement. This position seems to be consistent with statements by the Canada Revenue Agency (“CRA”) to the effect that all qualified investments of a plan trust must be owned by the trustee of the plan trust and not by the annuitant, beneficiary or subscriber under the plan trust. In the case of a share or other security, registration of the security in the name of the trustee of the plan trust is proof of the trustee’s ownership.1 Moreover, the CRA has taken the position in the past that where a group RRSP is established and it “holds” the units of an MFT, the number of beneficiaries of the MFT will at least be equal to the number of annuitants of the group RRSP. Each participant in a group RRSP should therefore count as one unitholder. 3. Prohibited investments rules In structuring the participation of employees in the private employer corporation or the portfolio managed by the employer through an MFT, the rules governing “prohibited investments” under the ITA should be considered. Registered Plans holding prohibited investments are subject to severe penalties under the ITA. Units of an MFT will generally be “prohibited investments” for a Registered Plan to the extent that the unitholder’s interest in an MFT, either alone or together with non-arm’s length persons, is 10% or more. As a result, while each of the Registered Plans of a single unitholder could possibly count as distinct unitholders for purposes of the 150 unitholders requirement discussed above, the “prohibited investments” rules would impose a very strict set of limitations in terms of the threshold of ownership interest in units. 4. Securities Registration Requirements The employer managing the MFT must also ensure that it meets all of the registration requirements imposed by Canadian securities regulatory authorities. If the MFT will be used to invest in the employer corporation, there are likely to be circumstances allowing the employer not to have to register as an investment fund manager or adviser. However, if the employer instead offers a different portfolio for the employees to invest in (for example, a portfolio selected by it in connection with the management of the portfolio of the pension plans that are administered by it), it will likely have to register at least as an adviser and probably also as investment fund manager. Conclusion While the structuring of employees’ equity investments through the use of an MTF could be advantageous, various incidental rules must be considered in order to ensure that the units of such a “private” MFT can qualify for inclusion in a Registered Plan. Income Tax Folio S3-F10-C1, Qualified Investments-RRSPs, RESPs, RRIFs, RDSPs and TFSA.
Bill 15 decisions: where do we stand?
The Act to Foster the Financial Health and Sustainability of Municipal Defined Benefit Pension Plans (“Bill 15”) was passed on December 5, 2014. The subject of much debate during the parliamentary sessions before its passing, much has been written about Bill 15 since it has come into force. It has also been the subject of multiple constitutional challenges filed before the Superior Court of Québec by many unions. In addition, the courts have been seized of a number of disputes regarding the interpretation of some provisions of Bill 15, including those relating to the jurisdiction of the arbitrators named to render decisions regarding amendments to the pension plans. In this article, we will summarize some decisions dealing with these issues. St-Jean-sur-Richelieu (Ville de) v. Fraternité des policières et policiers de Saint-Jean-sur-Richelieu inc.1 In this case, the City of St-Jean-sur-Richelieu (the “City”) was seeking, among other things, an interlocutory injunction ordering the Fraternité des policières et policiers de Saint-Jean-sur-Richelieu inc. (the “Fraternité”) to make itself available to immediately commence the process of negotiating and restructuring the police officers’ pension plan. Given that the collective agreement had been expired since December 31, 2011, the City was of the view that the plan was not in a situation where the deferral of the negotiation and restructuring process was possible. In light of the fact that one of the conditions for deferral (i.e.: the existence of an agreement in effect on December 31, 2013 and still in effect on December 5, 2014) was not satisfied, the negotiations had to be commenced no later than February 1, 2015, in accordance with the general rules provided under Bill 15. The Fraternité disagreed with this position, arguing that a clause in the collective agreement had the effect of extending the agreement until it was renewed and as a result, all of the conditions for deferral had been fulfilled. In its decision dated September 21st, the Superior Court first noted that at the stage of the interlocutory injunction, it did not have to render a decision on the merits as to whether the conditions for deferral were entirely satisfied in this case.2 The Court then assessed the three criteria applicable to interlocutory injunctions, namely, the colour of right, the existence of serious or irreparable harm and the balance of convenience. In this respect, the balance of convenience criterion proved to be a determining factor for the Court, which concluded that it did not favour the City. The Court mentioned that if the negotiations needed to begin by February 1, 2015, the reference actuarial valuation which should be used for the purposes of the negotiations would be the valuation prepared with the data as of December 31, 2013. In contrast, if a deferral was granted pursuant to section 26 of Bill 15, the reference actuarial assessment would instead be the valuation prepared with the data as of December 31, 2014, in accordance with section 60 of Bill 15. In the opinion of the Court, to order the Fraternité to undertake a negotiation process at this stage, without knowing which reference actuarial valuation must be used for the purposes of this process would raise a significant difficulty, not mentioning the cost and effort associated with conducting negotiations based on an actuarial valuation which may prove not to be relevant depending on what decision is rendered on the merits. The Court therefore refused the City’s motion for an interlocutory injunction. Sherbrooke (Ville de) v. Syndicat canadien de la fonction publique, section locale 2729 et al.3 This case also deals with a debate between the parties as to the date on which the negotiation and restructuring process was required to commence. It must be noted that one of the conditions for deferring the beginning of the process is that the actuarial valuation demonstrate that the current service contribution does not exceed 18% of the overall payroll of the active members and 20% of that of firefighters and police officers. In this case, the pension plan covered various groups of employees. The service contribution of the firefighters’ group was less than 20% while that of the other participants exceeded 18%. The City of Sherbrooke (the “City”) argued that this meant that the conditions for deferral had not been satisfied and therefore that the negotiation process should have begun on February 1, 2015. By contrast, the unions were of the view that deferral was possible since it is enough that the service contribution limit is respected as it pertains to one of the groups, in this case, the firefighters. The City went before the Superior Court, seeking, among other things, an order that the unions come to the negotiating table. In response to the proceedings filed by the City, the union filed grievances and argued that the Superior Court should decline jurisdiction on the grounds that the issue to be decided fell under the exclusive jurisdiction of the grievance arbitrator. In its decision dated February 5, 2016, the Superior Court concluded that the dispute was rooted in the collective agreement and that the grievance arbitrator has the necessary authority to grant the remedies sought. The Court therefore declined jurisdiction. A grievance arbitrator4 heard the parties in April 2006 and in a decision issued on June 13th last,5 dismissed the union’s grievances. After analysing many provisions of Bill 15, the parliamentary debates and a guideline published by Retraite Québec, the arbitrator concluded, among other things, that Bill 15 expresses a pressing and even imperative desire to act with respect to the restructuring of defined benefit pension plans in the municipal sector. Moreover, the arbitrator concluded that section 26 of Bill 15, which allows for the deferral of the negotiation and restructuring process in certain cases, is an exception which must be interpreted restrictively. The arbitrator added that nothing in this section can be reasonably interpreted to support the contention that the legislator intended to split the active members of a plan in two hermetic groups in the manner suggested by the unions. He was of the view that section 26 requires, as a condition to deferral, that the service contribution does not exceed 18% for all groups and exceptionally, 20% for police officers and firefighters. This rule applies for all active members of a plan and since the limit was not respected for all the active members, the conditions for deferral set out in section 26 were not entirely satisfied in the case under review. An application for judicial review of this decision has been filed by the unions. Arseneault v. Québec (Procureure générale)6 Section 62 of Bill 15 provides that members in a plan who have begun receiving a pension or who have filed an application to receive a pension “between 1 January 2014 and 12 June 2014” are considered to be members who are retired as of December 31, 2013. On June 12, 2014, that is on the same day Bill 37 was introduced, 35 members of the Association des pompiers professionnels de Montréal informed their employer of their decision to retire immediately. Through a motion for a declaratory judgment, these 35 firefighters and their Association sought to have the Superior Court declare that they qualified as retirees within the meaning of section 62 of Bill 15 on December 31, 2013. Retraite Québec and the Attorney General contested the motion. In their view, the application for retirement had to have been made prior to June 12, 2014 for the firefighters to be considered retirees on December 31, 2013. Moreover, Retraite Québec had published a directive according to which a member was required to have filed an application to receive a pension prior to June 12, 2014 to be considered as a retiree within the meaning of section 62. In its decision dated March 7, 2016, the Superior Court ruled that the 35 firefighters were retirees on December 31, 2013, for the purposes of the application of Bill 15. 8 The Court was of the view that the wording of section 62 appeared to be clear and the ordinary meaning of the words used by the legislator caused no problem. The wording of the Act is a determining factor in the communication between the legislator and the public and to agree with Retraite Québec and the Attorney General, the word “avant” (“before”) should be added to the wording of section 62 such that it would read “[…] between 1 January 2014 and before 12 June 2014”. The Court concluded that in the context of the analysis it was not necessary to rely on other methods of interpretation of statutes so as to alter what the legislator had written at section 62. This decision has not been appealed. Ville de Montréal and Fraternité des policiers et policières de Montréal and Procureure générale9 In this matter, the arbitrator appointed by the parties in accordance with Bill 15 was seized of a preliminary motion brought by the Fraternité des policiers et policières de Montréal (the “Fraternité”). More precisely, the Fraternité sought to have the arbitrator stay the proceedings regarding the restructuring of the pension plan due to the procedures undertaken by the Fraternité before the Superior Court, including one contesting the constitutionality of Bill 15. According to the Fraternité, even if the arbitrator had jurisdiction to rule on the constitutionality of Bill 15, it was in the interests of justice and the parties that the arbitration be stayed pending the decisions of the Superior Court. The Ville de Montréal (the “City”) and the Attorney General contested this motion. The arbitrator first concluded that he had neither the jurisdiction to decide on an issue of law or to rule on the constitutionality of Bill 15. He then expressed the view that he had jurisdiction to grant a stay of the hearing as requested by the Fraternité and that the criteria applied in the Metropolitan Stores10 case had to be used to determine whether the stay sought should be granted. It must be mentioned that these criteria are similar to those applicable to an interlocutory injunction, that is, colour of right, the existence of serious or irreparable harm and the balance of convenience. As for colour of right, the arbitrator noted that neither the Attorney General nor the City contested that the proceedings filed before the Superior Court by the Fraternité raised serious issues. As for the serious or irreparable harm, the arbitrator mentioned, among other things, that to commence and complete the arbitration may cause serious harm or create a situation that a final decision on the issue of the constitutionality of Bill 15 could not remedy. Finally, according to the arbitrator, the balance of convenience favoured the Fraternité. In his view, there could be many drawbacks for the Fraternité if the arbitration was to proceed despite the proceedings before the Superior Court. The arbitrator concluded that the interests of the parties, and of justice, would be better served by not moving forward with the arbitration pending the decisions of the Superior Court regarding the proceedings filed by the Fraternité. Therefore, he granted the application of the Fraternité and stayed the arbitration under Bill 15 pending the decisions of the Superior Court regarding the proceedings filed by the Fraternité. An application for judicial review in respect of this decision has been filed with the Superior Court. Ville de Montréal and Syndicat des professionnelles et professionnels municipaux de Montréal11 Less than a month after the arbitrator issued his decision in the Ville de Montréal case discussed above, another arbitrator appointed in accordance with the provisions of Bill 15 rendered a decision in respect of a similar stay application filed by several unions. This second arbitrator also concluded that he did not have the jurisdiction to decide either on an issue of law or on the constitutionality of Bill 15. However, in contrast to his colleague, this second arbitrator expressed the opinion that he lacked the jurisdiction under Bill 15 to grant a stay such as the one requested by the unions. In his view, such an application does not constitute a simple issue of case management akin to a postponement, particularly due to the unavoidable effects that such a stay would have on the application and objectives of Bill 15. The arbitrator stressed that the proceedings on the constitutionality of Bill 15 before the Superior Court will not begin before the fall of 2007 at the earliest and are estimated to last between 60 and 135 days. He added, among other things, that if the stay was granted, the unions’ application would paralyze the application of Bill 15 for at least two years despite the fact that the legislator has created a mechanism which requires expediency. The arbitrator indicated that the unions’ application was instead more akin to a provisional measure such as a stay of proceedings and that he had lacked the jurisdiction to grant it. The arbitrator also mentioned that even if he had jurisdiction, he would have had to analyze the unions’ application in the light of the criteria set forth in the Metropolitan Stores case. However, he was of the view that the evidence did not reveal that the denial of their application would cause the unions irreparable harm. Moreover, the arbitrator concluded that the balance of convenience did not favour the unions since the public interest requires that the objectives of Bill 15 be accomplished. Indeed, the time limits to complete the restructuring process are an integral part of the objectives set by the legislator. As a result, the arbitrator dismissed the unions’ application for a stay of proceedings. An application for judicial review has also been filed with the Superior Court in respect of this decision. Conclusion As appears from the foregoing, the debates regarding Bill 15 are far from over. In addition to the cases discussed above, it appears that negotiation process provided for under Bill 15 has resulted in few agreements being reached12 and as a result, the mandatory arbitration under the Act will be necessary in many cases. It will be interesting to follow the evolution of case law regarding this legislation. 2015 QCCS 4350. This issue would have to be decided at the stage of the permanent injunction. 2016 QCCS 676. Me Serge Brault. Ville de Sherbrooke et Syndicat des pompiers et pompières du Québec, section locale Sherbrooke et al., 2016 CanLII 39704 (QC SAT). 2016 QCCS 917. Which, once passed, became Bill 15. Mr. Justice Yergeau also ruled that Retraite Québec’s guidelines were in breach of section 62 of the Act. Arbitration award of arbitrator Claude Martin dated June 1, 2016 (2016 CanLII 39703). Manitoba (A.G.) v. Metropolitan Stores Ltd.,  1 S.C.R. 110. Arbitration award of arbitrator René Beaupré dated June 17, 2016 (2016 CanLII 39705). In cases where the negotiations were required to commence no later than February 1, 2015, the negotiation period will expire on July 31, 2016, at the latest.
Pension plans, the charter and disparity in treatment clauses the Court of Appeal issues its judgment in the Groupe Pages Jaunes case
The financial burden and the risks inherent in defined benefit supplemental pension plans sometimes weigh heavily on employers. In the last few years, many employers have taken measures and made changes in order to lower the costs related to these plans. Some employers have also decided to make certain changes to other pension benefits offered to their employees. In this respect, some employers have decided, among other things: to implement a defined contribution plan for their new employees1 (with current employees, for their part, continuing to accumulate rights in a defined benefit plan); and/or not to offer other benefits to their new employees upon retirement or to provide them with less generous benefits. In the Groupe Pages Jaunes Cie case, the Syndicat des employées et employés professionnels et de bureau, section locale 574, SEPB, CTC-FTQ (the “Union”) argued that these changes violated: section 87.1 of the Act Respecting Labour Standards (the “ARLS”), which prohibits disparities in treatment based solely on one’s date of hire; sections 10, 16 and 19 of the Charter of Human Rights and Freedoms ( the “Charter”), which among other things, provide that no one may practise discrimination in the determination of a person’s conditions of employment or in the establishment of categories or classes of employment (section 16) and that an employer must, without discrimination, provide equal salary or wages for equivalent work (section 19). In April 2011, Arbitrator Harvey Frumkin, faced with two grievances filed by the Union, concluded that such changes did not violate these legislative provisions. In December 2012, the Superior Court of Quebec dismissed the Union’s motion for judicial review. On May 27, 2015, the Court of Appeal of Quebec dismissed the Union’s appeal.2. THE FACTS In November 2002, Groupe Pages Jaunes Cie (the “Employer”), which until then was a subsidiary of Bell Canada, became an independent public corporation. At the time the transaction took place, the 200 employees represented by the Union were participating in a defined benefit pension plan as well as a benefit program in which the employees of Bell Canada also participated. It was then agreed that the employees of the Employer would continue to receive these benefits until July 1, 2005, at the latest, at which time the Employer would be required to have implemented its own benefit plans. The Employer and the Union signed a first collective agreement on May 28, 2004, which was in effect from January 1, 2003 to June 30, 2005. One of the letters of agreement included in this first collective agreement provided for an undertaking that the Employer maintain the benefits set out in some specifically listed plans, including the pension plan and the health insurance plan, for the duration of the collective agreement. This letter of agreement also stipulated that the Employer would not modify the benefits provided under these plans without the consent of the Union, who could not refuse to provide such consent without a valid reason (the “Letter of Agreement”). In March 2005, the Employer met with the Union to present both the benefit programs and the pension plan it intended to implement beginning on July 1, 2005. Among the main modifications proposed by the Employer to the Union were the following: Employees hired on or after July 1, 2005 will no longer receive benefits upon retirement; Employees hired on or after January 1, 2006 will be enrolled in a defined contribution pension plan rather than a defined benefit plan (hereinafter referred to as the “Modifications”). Following the Union’s refusal to accept the Modifications, the Employer decided nevertheless to move forward with its plans. The Union subsequently filed two grievances, which were dealt with by Arbitrator Frumkin. THE DECISION OF ARBITRATOR FRUMKIN Arbitrator Frumkin concluded that the Union had no “valid reason” to oppose the Modifications. According to him, the new employees covered by the Modifications did not benefit from the protection of the Letter of Agreement. For the arbitrator, the meaning and scope of the Letter of Agreement were clear: the purpose was to ensure that the benefits that the employees had, up until that point, been entitled to under the plans specifically listed would not be modified to their detriment. He added that in light of the context in which the Letter of Agreement was signed, the Employer’s undertaking to preserve the status quo had to be interpreted restrictively. Given the Employer’s situation and the circumstances that preceded that situation, the Union could not reasonably expect that the Employer’s undertaking could be interpreted as also protecting future employees, that is, those hired after the expiry of the first collective agreement. Accordingly, Arbitrator Frumkin was of the view that Employer’s undertaking only applied to employees already employed at the time the collective agreement was signed in May of 2004 and those hired during the term of the collective agreement, that is, prior to July 1, 2005. The arbitrator also dismissed the Union’s argument that, contrary to section 87.1 of the ARLS, this amounted to a disparity of treatment solely based on hiring date. According to the Union, an employee’s pension plan and benefits are included in the concept of “salary”. Section 87.1 ARLS prohibits any disparity of treatment in respect of an employee’s salary which is based solely on one’s hiring date. The first paragraph of section 87.1 ARLS reads as follows: 87.1. No agreement or decree may, with respect to a matter covered by a labour standard that is prescribed by Divisions I to V.1, VI and VII of this chapter and is applicable to an employee, operate to apply to the employee, solely on the basis of the employee’s hiring date, a condition of employment less advantageous than that which is applicable to other employees performing the same tasks in the same establishment. (Emphasis added) Arbitrator Frumkin concluded that the notion of “salary” set out at section 87.1 ARLS only includes the “salary paid in cash” and not all benefits with a monetary value, such as benefits and pension plans. These benefits and pension plans form part of one’s “remuneration”, but are not encompassed by the definition set out at Section I of Chapter IV (which is entitled “Wages”). Finally, the arbitrator summarily dismissed the Union’s argument based on sections 10, 16 and 19 of the Charter as he was of the view that granting more benefits in an insurance plan to employees with more years of service on the basis of that service did not constitute illegal discrimination under the Charter. THE DECISION OF THE SUPERIOR COURT ON JUDICIAL REVIEW Before the Superior Court sitting in judicial review, the parties raised the same arguments they had made before the arbitrator. Moreover, the Union also argued that the arbitrator had violated the rules of natural justice in holding that the protection granted by the Letter of Agreement was limited to employees hired prior to July 1, 2005 despite the fact that neither of the parties had proposed such an interpretation in their arguments. The Superior Court dismissed this additional argument raised by the Union and concluded that the arbitrator had not violated the rules of natural justice. The Court also expressed the view that the arbitrator’s decision was reasoned, transparent, intelligible and rational and therefore did not justify judicial review. THE DECISION OF THE COURT OF APPEAL Madam Justice Savard, writing for the Court, dismissed all of the Union’s arguments on appeal. Regarding the Union’s argument based on the application of section 87.1 ARLS, the Court of Appeal held that the Superior Court Justice was justified in not interfering with the arbitrator’s conclusion that section 87.1 did not apply to working conditions such as benefit and pension plan entitlements. According to the Court, this conclusion of the arbitrator was reasonable. The Court of Appeal noted that, given the fact that in different contexts, the ARLS distinguishes between wages and benefits, Arbitrator Frumkin could reasonably conclude that the same principle applies for the purposes of section 87.1, which refers even more restrictively to Section I of Chapter IV. The Court also made reference to the parliamentary debates, which demonstrate a desire not to extend the protection granted in section 87.1 to pension plans and other benefits. With respect to the Union’s argument that the Modifications violated sections 10, 16 and 19 of the Charter, the Court of Appeal also held that the arbitrator’s decision to dismiss that argument was reasonable both in fact and in law. In particular, the Court held as follows: [TRANSLATION]  In the present case, the Union alleges that there is disparity of treatment based on age. In support of this argument, it refers to the report prepared by the Employer’s expert, in which we find the following passage: 096. Finally, with r espect to the evolution of the employer’s contributions, by introducing the plan only in respect of the new employees who are generally younger, the Corporation does create no harm to current employees who are older. Moreover, as mentioned by the Union, the employees who leave the Corporation prior to retirement will generally benefit from the DC plan. A significant advantage when one considers the fact that a very small percentage of current employees will spend their entire career with the same employer. […]  The Union’s evidence regarding the existence of discrimination ends there. In my opinion, such evidence is insufficient. The Employer’s report, prepared in March 2006, does not contain any data regarding the age of the employees, whether they were hired prior to or after either July 1, 2005 or even January 1, 2006. The expert expresses himself in general terms, without it being possible to identify the basis of his remarks. The file on appeal does not contain the transcript of the testimonies given before the arbitrator; as a result, I do not know whether he elaborated further on this subject. The fact that new employees may be younger does not conclusively establish the existence of discrimination based on age.  Therefore, since the evidence does not allow us to conclude that the differential treatment is the result of a form of discrimination set out in section 10, the arbitrator could reasonably conclude that there was no violation of the Charter. COMMENTS In light of these decisions, it would appear that pension plans and other benefits do not constitute “wages” for the purposes of section 87.1 ARLS and that an employer may therefore offer different programs/plans (including a defined contribution plan) to its new employees hired after a given date. With respect to the Union’s Charter argument, the arbitrator indicated that he was of the view that the distinction made between current and new employees was based on years of service and not on age and that there was no illegal discrimination. For its part, the Court of Appeal’s decision was largely based on the fact that the Union failed to prove the alleged discrimination. It remains to be seen whether, in the future, such evidence could be provided. 1 Some employers decided instead to add a defined contribution section to their defined benefit pension plans. 2 Syndicat des employées et employés professionnels et de bureau, section locale 574, SEPB, CTC-FTQ c. Groupe Pages Jaunes Cie, 2015 QCCA 918.
Does the federal pension deemed trust outrank a perfected security interest in the context of CCAA proceedings? The Superior Court of Québec weighs in
In the last few years, pension deemed trust issues have been a subject of debate before the courts. The Supreme Court of Canada itself addressed some of these issues in the Indalex case.1 On November 20, 2013, the Honourable Justice Mark Schrager of the Superior Court of Québec rendered an important judgment in Aveos addressing whether the federal pension deemed trust outranks a perfected security interest in the context of proceedings under the Companies’ Creditors Arrangement Act (the “CCAA”)2.THE FACTSIn 2007, the debtor company, Aveos Fleet Performance Inc. (“Aveos”), established a defined benefit pension plan in favour of its non-unionized employees (the “Plan”) which was registered with the Office of the Superintendent of Financial Institutions (“OSFI”) and governed by the federal Pension Benefits Standards Act (the “PBSA”). On March 18, 2012, Aveos ceased the operations of its Airframe Division and informed all of its employees not to report to work the following day. On March 19, 2012, Aveos made an application under the CCAA and an Initial Order was issued granting a stay of all proceedings against Aveos. In addition, the Initial Order suspended the making of special payments to the Plan (to amortize the Plan’s deficits) but permitted Aveos to make normal cost contributions. The next day, Aveos ceased the operations of its two other divisions and terminated the employment of all but a select few employees.In April 2012, a divestiture process was approved by the Court. In accordance with this process, virtually all of Aveos’ assets were subsequently sold.In May of 2012, OSFI was informed that accruals would cease with respect to the Plan effective May 19, 2013.The Superintendent of Financial Institutions (the “Superintendent”) filed a motion before the Superior Court of Québec for declaratory judgment under which it mainly claimed that the deemed trust created by Section 8 of the PBSA required Aveos to pay to the Plan, in priority to Aveos’ secured lenders, an amount of $2,804,450 which represented the special payments due the Plan for the period of February to December 2012 (Aveos’ last special payment having been made for the month of January 2012).3 According to the Superintendent, once the Plan was terminated, the balance of the prescribed special payments for 2012 became due pursuant to Section 29(6) of the PBSA and these payments were protected by the PBSA deemed trust and, as such, ranked in priority to Aveos’ secured lenders. The Superintendent added that since almost all Aveos’s assets had been sold pursuant to the divestiture process, there had been a “liquidation” within the meaning of Section 8(2) of the PBSA which provides for the following:8(2) In the event of any liquidation, assignment or bankruptcy of an employer, an amount equal to the amount that by subsection (1) is deemed to be held in trust shall be deemed to be separate from and form no part of the estate in liquidation, assignment or bankruptcy, whether or not that amount has in fact been kept separate and apart from the employer’s own moneys or from the assets of the estate.The Superintendent argued that the CCAA is silent on the issue of the PBSA deemed trust and as such, Section 8(2) of the PBSA continues to apply in CCAA proceedings. The Superintendent also argued that the PBSA deemed trust priority exists notwithstanding the date on which it was created or the date of perfection of the security lenders’ charges.Independent of any considerations of rank, the Superintendent also requested that paragraph 19 of the Initial Order, which suspended the making of special payments, be retroactively amended and that Aveos be ordered to make such payments. More specifically, the Superintendent argued that insofar as the underlying rationale of such suspension is to provide an employer with the “breathing room” necessary for it to move forward with its restructuring plans, this underlying rationale was no longer present once Aveos decided to cease its business activities.Aveos’ secured lenders contested the Superintendent’s motion. Significant sums of money were owed to them by Aveos and fixed charges on all present and future moveable and personal property had been granted in six provinces and one territory, each one having been perfected in accordance with applicable legislation. Registration dates confirmed that, with the exception of the security interest registered in the Northwest Territories in August 2011, all of the charges were perfected in March 2010.The secured lenders took the position that the PBSA deemed trust was subordinated to their charges insofar as all of Aveos’ property was subject to their security at the time the PBSA deemed trust came into existence and therefore, either the assets were not subject to the PBSA deemed trust or there was a prior charge in their favour. The secured lenders relied, by analogy, on the Supreme Court of Canada’s decision in Royal Bank of Canada v. Sparrow Electric Corp.4 in which it was held that property subject to a fixed charge cannot be subsequently impressed with the deemed trust under Sections 227(4) and 227(5) of the Income Tax Act. Furthermore, the secured lenders in Aveos argued that the Supreme Court in Sparrow had also made it clear that a deemed trust will only be given effect in the context of insolvency proceedings to the extent that the applicable insolvency legislation explicitly provides as such.As for the Superintendent’s argument that the suspension of special payments should be reversed and Aveos should be ordered to retroactively pay the special payments claimed, the secured lenders indicated that it was not open to the Court, at this point, to grant such an order.The secured lenders argued that the Superintendent had ample opportunity to request an amendment to the Initial Order and that it failed to do so. Consequently, it would be unfair, at this stage, to retroactively amend the Initial Order in this way. More specifically, the stay of proceedings contained in the Initial Order was extended six (6) times and there have been twelve (12) asset sales and four (4) distributions of funds produced by these asset sales. Despite all of these proceedings, the Superintendent failed to make any application to the Court seeking the amendment of the Initial Order. According to the secured lenders, faced with a timely application to amend the Initial Order, they might have strategized differently and may simply have provoked a bankruptcy.THE DECISIONTHE PRIORITY ISSUEJustice Mark Schrager begins his analysis by addressing the issue of the priority afforded to the PBSA deemed trust in insolvency proceedings and with a review of the Supreme Court’s decision in Sparrow. In this judgment, the Supreme Court held that property validly encumbered by a security interest was not subject to the deemed trust under Sections 227(4) and 227(5) of the Income Tax Act.Following the Sparrow judgment, these provisions of the Income Tax Act were replaced so as to grant priority to the deemed trust in respect of property that is subject to a security interest regardless of whether the security interest was perfected before the deemed trust came into effect. Justice Schrager notes that while similar amendments were made to other statutes, no such amendment was made to Section 8(2) PBSA following the decision in Sparrow.Justice Schrager noted that the fixed charges in this case were created and perfected in 2010 and 2011 while the PBSA deemed trust arose later on. As a result, the Court held that since Aveos’ assets were already charged with the secured lenders’ security interests, the PBSA deemed trust was, at best, subordinate to such charges.Justice Schrager also agreed with the secured lenders’ position that the PBSA deemed trust is not effective in CCAA proceedings where secured creditors hold prior perfected security interests or charges which are not paid in full. The Court cited the Supreme Court of Canada’s decision in Century Services Inc. v. Canada (Attorney General)5 in which Justice Deschamps stated that where the intention is to protect the rank of deemed trust claims in insolvency matters, Parliament clearly expresses such intent. In the absence of such explicit statutory basis, no such protection exists in an insolvency context.Justice Schrager adds that, while Century Services dealt specifically with source deductions in favour of the Crown, the Supreme Court’s reasoning in that case was not limited to such deemed trusts and Justice Deschamps was clear that there exists a “general rule that deemed trusts are ineffective in insolvency.”6In response to the Superintendent’s question of what exactly would be the use of the deemed trust provided under Section 8(2) of the PBSA, Justice Schrager states that such deemed trust “is useful for the protection of special payments but only vis-à-vis creditors who do not hold security over the assets of the debtor company which was perfected prior to the deemed trust attaching to the assets”.7Finally, citing the Supreme Court’s judgment in Indalex, Justice Schrager notes that in Ontario, section 30(7) of the Personal Property Security Act subordinates security interests to the deemed trust created by the Ontario Pension Benefits Act. There is no similar or equivalent provision in the PBSA or in Quebec provincial law that would give priority to the PBSA deemed trust.THE SUSPENSION OF SPECIAL PAYMENTS ISSUEJustice Schrager stated that judges should be very hesitant to retroactively amend the Initial Order after such a long period of time and after various sales, vesting orders and distributions already occurred. The Court found that given the circumstances, the Superintendent’s delay in seeking to retroactively amend the Initial Order was unreasonable and the Superintendent was estopped from seeking such an amendment. The other parties, including the secured lenders, relied in good faith on the Initial Order.No appeal of Justice Schrager’s decision was filed.CONCLUSIONThis decision shows that the question of whether, in a CCAA context, a specific pension deemed trust has priority over a security interest perfected prior in time to the deemed trust’s creation must be answered by analysing the language used in the legislative provisions which create the pension deemed trust or which are related thereto. Ultimately, Justice Schrager concluded that neither Section 8(2) nor any other provision of the PBSA or Quebec provincial law contains the language required to grant such priority to the federal pension deemed trust._________________________________________1 Sun Indalex Finance, LLC v. United Steelworkers, 2013 SCC 6 (Indalex).2 Aveos Fleet Performance Inc./Avéos Performance aéronautique inc. (Arrangement relatif à), 2013 QCCS 5762.3 As for the Plan wind-up deficit of $29,748,200, the Superintendent took the position that it is an unsecured claim which is not protected by the PBSA deemed trust.4  1 SCR 411.5  3 SCR 379 (Century Services).6 Ibid at para 45.7 Aveos, supra note 2 at para 83.
Quebec Government Tables Bill to Implement its Pension Plan Action Plan
In our January 2014 bulletin, we provided an overview of the Quebec government’s action plan aimed at [Translation] “correcting and restoring the situation of pension plans”. Also in that bulletin, we noted that in February 2014, the government was planning to introduce the first bill designed to set up the restructuring process for municipal pension plans.The government made good on its promise. On February 20, 2014, the Minister of Employment and Social Solidarity, Agnès Maltais, tabled Bill 79 in the National Assembly entitled An Act to Provide for the Restructuring of and Make Other Amendments to Municipal Defined Benefit Plans. The Bill essentially sets out the parameters for the restructuring of certain municipal defined benefit plans. As mentioned in the Bill, the purpose of the restructuring process is to allow, exceptionally and for a limited period of time, for the review of some of the rules of these plans with the goal of placing them on more sound financial footing and ensuring their stability.MANDATORY RESTRUCTURINGGENERAL REMARKSAccording to the Bill, the restructuring process is only mandatory for certain plans in the municipal sector, namely: Plans which, according to an actuarial valuation for the period ending on December 31, 2013, are funded at less than 85%; Plans that offer a subsidy for early retirement before the age of 55.An actuarial valuation will be necessary in order to determine whether or not the funding level of a given plan is less than 85% as of December 31, 2013. The valuation will have to be sent to the Régie des rentes du Québec no later than June 30, 2014.In situations where the restructuring process is not mandatory, the municipal body may nonetheless undertake such a process where the body and the active members of the plan submit to the process voluntarily.The objectives of the parties to the restructuring process must be to ensure the sound financial footing and the stability of the plan. To that end, the parties must negotiate measures aimed at: Attaining a minimum funding level of 85%; Abolishing the subsidy for early retirement before the age of 55; Providing for equal cost sharing for current service; Abolishing the additional pension benefit provided for in the Supplemental Pension Plans Act (the “SPPA”).The Bill sets out certain rules regarding the implementation of the measures mentioned in points 2 and 3 above.The Bill states that cost sharing of any past deficits may be negotiated by the parties, along with the amendment or abolition of any benefit provided for in the plan, with the exception of the normal pension.Pensions granted to retirees and beneficiaries cannot be reduced. However, indexation of those pensions may be suspended or their indexation formula amended. To make such a change (suspension or modification of the indexation), retirees and beneficiaries must first be consulted and no change can be made if 30% or more of the retirees and beneficiaries are opposed to it.The Bill also sets out other important rules in the case of plans for which the restructuring process is initiated (regardless of whether the process is mandatory or voluntary), including the following: Negotiations must begin and continue diligently and in good faith; Surplus assets of the plan cannot be used by the municipal body to take a contribution holiday unless a fiscal rule requires it to do so; Any additional obligation arising from an amendment to the plan must be paid in full on the day following the date of the actuarial valuation determining the value of the additional obligation.THE THREE PHASES OF THE RESTRUCTURING PROCESSThe three phases of the restructuring process correspond to those mentioned in the government’s action plan (see our January 2014 bulletin). The Bill therefore provides for a negotiation phase, a conciliation phase and ultimately the settlement of the dispute by the Commission des relations du travail (the “Commission”). The way in which each phase of the process must be carried out is clearly indicated in the Bill.The total duration of the restructuring process also corresponds to what was announced in the action plan. A six month period is provided for each phase of the process, although certain administrative delays stemming from the transition between each phase should be expected (for example, between the end of the negotiation period and the appointment of the conciliation officer or between the end of the conciliation period and the transmission of the conciliation officer’s report to the Commission).THE PARTIES TO THE RESTRUCTURING PROCESSIn a unionized setting, the parties to the restructuring process are the municipal body and the union(s) representing the active members of the plan. In particular, the Bill states that the existence of a collective agreement does not preclude the parties from undertaking the restructuring process and that the signing of an agreement in connection with the process, as well as any decision made by the Commission, has the effect of amending the collective agreement.A municipal body must take the necessary measures to allow non-unionized active members of a pension plan to submit their observations on the proposed amendments to the plan. If 30% or more of the active members oppose the proposed amendments, they cannot be adopted, unless a decision of the Commission so authorizes.REQUIRED AMENDMENTSPension plans in the municipal sector that are not subject to the restructuring process summarized above are nonetheless covered by Bill 79, which provides that such plans must be amended to: Include equal cost sharing for current service; Abolish the additional pension benefits provided for in the SPPA.The Bill sets out rules regarding the implementation of such amendments. It appears that in unionized setting, the amendments must be negotiated with the union(s).PROVISION FOR ADVERSE VARIATIONSIn addition to the foregoing, every pension plan in the municipal sector must, according to the Bill, be amended to include a provision to protect it against adverse variations. The provision is made up of a reserve or stabilizing fund and is funded by means of an additional current service contribution. The Bill contains special rules regarding both the negotiation of the provision for adverse variations and its implementation. The Bill would allow this new requirement to come into effect progressively. At the end of the implementation period, an annual contribution equivalent to 20% of the current service contribution will have to be paid to the reserve or fund.CONCLUSIONThe election called in February 2014 means that Bill 79 died on the order paper and will have to be reintroduced by the new government if it wishes to move ahead with it. Ultimately, it will be interesting to see what impact the election will have on the government’s action plan and the first concrete steps taken to implement it.
Pension Plans and Class Actions: the Vivendi case
On January 16, 2014, the Supreme Court of Canada1 affirmed the Court of Appeal of Québec2 judgment which authorized the class action brought against Vivendi Canada Inc. (“Vivendi”). This important decision confirms, among other things, that the rules for authorizing class actions in Quebec are more liberal than those in the common law provinces.THE FACTSSeagram Ltd. (“Seagram”), which was established in 1857, is a producer of wine and spirits. Its head office and principal place of business are in Montreal.In 1977, Seagram set up a supplemental health insurance plan for its management and non-unionized employees (the “Plan”). The Plan covers eligible employees both while employed and after they retire.In 1985, Seagram unilaterally amended the terms of the Plan, adding a clause pursuant to which it reserved its right to modify or suspend the Plan at any time.In December 2000, Vivendi S.A. acquired Seagram, which had over 700 employees at the time.In December 2001, Seagram’s assets relating to the production of wine and spirits were sold to Pernod Ricard and Diageo, and Seagram ultimately became Vivendi.In September 2008, Vivendi advised the retirees and beneficiaries that it would be making several amendments to the Plan which would take effect on January 1, 2009 (the “Amendments”): the annual deductible retirees and beneficiaries had to pay would be substantially increased; only prescription drugs on the list of drugs for the province of residence of retirees or beneficiaries would henceforth be reimbursed; a lifetime maximum of $15,000 for all coverage under the Plan would be introduced whereas there was none before.In 2009, Michel Dell’Aniello applied to the Superior Court of Québec for authorization to institute a class action and asked it to ascribe to him the status of representative of the following persons:“[TRANSLATION] All retired officers and employees of the former Seagram Company Limited who are eligible for post-retirement medical care under Vivendi Canada Inc.’s health care plan (“Plan”) and eligible dependents within the meaning of the Plan (“beneficiaries”), as well as, with regard to the damages claimed, the successors of any such officers, employees or beneficiaries who have died since January 1, 2009.” In his action, Mr. Dell’Aniello sought, among other things, a declaration that Vivendi illegally amended the Plan, and to have the Amendments cancelled and the Plan reinstated as it was before the Amendments. The proposed class includes some 250 retirees or surviving spouses of retirees who worked in six provinces—134 in Quebec, 82 in Ontario, 3 in Alberta, 16 in British Columbia, 2 in Saskatchewan and 13 in Manitoba.THE SUPERIOR COURT OF QUÉBEC DECISION3On August 3, 2010, the Superior Court of Québec dismissed Mr. Dell’Aniello’s motion for authorization to institute a class action. Contrary to what Vivendi had argued, Justice Mayer held that, pursuant to article 3148 (3) C.C.Q., Quebec authorities have jurisdiction to hear the action provided the class action is authorized. He found, among other things, that it is easier and more convenient to institute the class action in Quebec since over half the potential group members, i.e. 53.7%, live in Quebec.However, the judge refused to authorize the class action, finding that it was a range of individual recourses and that the requirement that there be similar or related questions of law or fact set out in article 1003 a) C.C.P. was not met. In his view, the class action is therefore not the most appropriate procedural vehicle. He was of the opinion that if the action was authorized, the judge would have to conduct a detailed review of a multitude of individual circumstances, which would constitute a multitude of mini-trials. Because the right to insurance benefits crystallizes at the time of retirement, the intention of the parties with respect to the vesting of rights must be determined as of that time. Hence, the contract together with the communications between the employer and each class member must be examined to determine whether any rights have vested.The judge also examined the situation of certain subgroups of retirees and beneficiaries and said that their right to post-retirement insurance benefits did not crystallize, since the unilateral amendment clause added in 1985 is inconsistent with an intention to confer a vested right.Lastly, the judge added that the diversity of the legislative schemes applicable to individual claims, which stems from the fact that the retirees had worked in six different provinces, shows the lack of homogeneity of the proposed group and supported a refusal to authorize the class action.THE COURT OF APPEAL OF QUÉBEC DECISION2On February 29, 2012, the Court of Appeal of Québec quashed the judgment in first instance and authorized Mr. Dell’Aniello to institute a class action. Justice Léger, writing for the Court, held that at the authorization stage, the court’s analysis must be limited to whether there is a prima facie case. According to the Court of Appeal, the motion judge ruled on the merits of the case in determining that the right of certain retirees and beneficiaries to post-retirement insurance benefits had not crystallized. This showed that he conducted an in-depth analysis of individual questions rather than a preliminary analysis. The Court of Appeal was of the opinion that the authorization stage is a mere screening mechanism and that, accordingly, the motion judge overstepped the bounds of this function.After examining the applicable criteria and the allegations in Mr. Dell’Aniello’s motion, the Court of Appeal held that there was in fact a common question at the heart of the class action, namely the validity or legality of the Amendments made to the Plan. The Court held:[Translation] “ In this particular context, I believe that the main question at issue is whether the 2009 Amendments, which apply to all members of the Class, are valid or lawful. That issue can obviously be broken down in turn into specific questions which together constitute the following related questions which the appellant has identified in this motion for authorization. Accordingly, if the analysis is based on the questions actually at issue rather than on factual differences that are not relevant at the preliminary stage, it is inappropriate to create subgroups in order to decide the motion.” The Court added that the multitude of legal principles which could apply to each group member was not the core of the dispute but involved the existence of vested rights.The Court of Appeal held that the common question raised in Mr. Dell’Aniello’s application for authorization to institute a class action is related for all the group members and that the subsequent questions the Court will have to decide if the action is authorized cannot be examined at the authorization stage.THE SUPREME COURT OF CANADA DECISION1The Court affirmed the Court of Appeal judgment and held that the Superior Court judge should have authorized the class action pursuant to the criteria set forth in article 1003 C.C.P.Firstly, the Court of Appeal was justified in intervening and amending the authorization judgment. It is not up to the authorization judge to rule on the merits of the case. By acting as he did, the motion judge committed an error in assessing the relatedness criterion of article 1003 a) C.C.P.For a question to be common in a class action, success for one member of the class does not necessarily have to lead to success for all the members. However, success for one member must not result in failure for another.Thus, and particularly in Quebec, the relatedness requirement set out in the Code of Civil Procedure must be interpreted liberally. The Supreme Court warns against importing common law principles into the analysis of the tests set out in the Code of Civil Procedure and states:“ Second, if art. 1003(a) is compared with the legislation of the common law provinces, it can be seen that the wording used to establish the commonality requirement is different in the latter. For example, the requirement is expressed in broader and more flexible terms in Quebec’s C.C.P. than in Ontario’s legislation, which requires the existence not merely of similar or related questions, but of “common issues”: Class Proceedings Act, 1992, S.O. 1992, c. 6, s. 5(1)(c). Moreover, the wording of the Ontario statute is used in the legislation of all the other common law provinces of Canada that have legislated with respect to class actions: Class Proceedings Act, S.A. 2003, c. C 16.5, s. 5(1)(c); Class Proceedings Act, R.S.B.C. 1996, c. 50, s. 4(1)(c); The Class Actions Act, S.S. 2001, c. C 12.01, s. 6(1)(c); Class Proceedings Act, C.C.S.M. c. C130, s. 4(c); Class Proceedings Act, S.N.S. 2007, c. 28, s. 7(1)(c); Class Proceedings Act, R.S.N.B. 2011, c. 125, s. 6(1)(c); Class Actions Act, S.N.L. 2001, c. C 18.1, s. 5(1)(c).”(emphasis added)and further on:“ Thus, the Quebec approach to authorization is more flexible than the one taken in the common law provinces, although the latter provinces do generally subscribe to an interpretation that is favourable to the class action. The Quebec approach is also more flexible than the current approach in the United States: Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011). As Professor Lafond says, [TRANSLATION] “Quebec procedure surpasses in this regard the procedure of the other Canadian provinces, and of England and the United States, which struggle with the rigid concepts of 'same interest' or 'common interest', and of 'predominance of the common issues'”: Le recours collectif comme voie d’accès à la justice pour les consommateurs, at p. 408.”In short, authorization judges should not place undue emphasis on the fact that several individual questions might have to be analyzed. Instead, they should ask themselves whether the person who wishes to bring a class action has established the presence of an identical, similar or related question that can serve to advance the resolution of all the class members’ claims and that could ultimately have an effect on the outcome of the case.According to the Supreme Court, the diversity of the legislative schemes that could apply to the individual claims also does not constitute a sufficient basis for refusing to authorize the class action.The Supreme Court also points out that the principle of proportionality set out in article 4.2 C.C.P. is not a separate fifth criterion to be considered in assessing the authorization of a class action. Although the principle of proportionality may be used in assessing each of the criterion of article 1003 C.C.P., they are exhaustive. Where the authorization judge is of the opinion that the four criteria of article 1003 C.C.P. are met, he must authorize the class action without asking whether it is the most appropriate procedural vehicle.The Supreme Court therefore held that the questions raised in Mr. Dell’Aniello’s motion are sufficiently related and similar to justify a class action.CONCLUSIONThis decision reminds us firstly that the conditions for authorizing a class action are more liberal in Quebec than elsewhere in Canada, as the Supreme Court also recently noted in Infineon4. Although decisions involving the commonality requirement rendered by common law courts may sometimes be used as a guide, they must be analyzed with caution. In the United States, the courts apply the concept of the predominance of the common issues. In Quebec, it need only be shown that there is a common issue which is relevant and significant enough for all the class members, as the Court of Appeal pointed out in Suroît5. Furthermore, in our opinion, some class actions which raise intrinsically individual questions (such as misrepresentation in contractual matters) should not meet the requirements for authorizing an action.________________________________1 Vivendi Canada Inc. v. Dell’Aniello, 2014 SCC 1, LeBel, Abella, Rothstein, Cromwell, Moldaver, Karakatsanis and Wagner, JJ. (reasons drafted by LeBel and Wagner, JJ.). 2 Dell’Aniello v. Vivendi Canda Inc., 2012 QCCA 384 (Jacques Chamberland, André Rochon and Jacques A. Léger, JJ.). 3 Dell’Aniello v. Vivendi Canada Inc., 2012 QCCS 3416 (Paul Mayer, J.). 4 Infineon Technologies A.G. v. Option consommateurs, 2013 CSC 59. 5 Collectif de défense des droits de la Montérégie (CDDM) v. Centre hospitalier régional du Suroît du Centre de santé et de services sociaux du Suroît, 2011 QCCA 826.
The Quebec Government's Action Plan for Making Pension Plans Equitable and Sustainable
Last December, the Minister of Employment and Social Solidarity unveiled the Quebec government's action plan with the goal of [translation] "correcting and restoring the situation of pension plans". In this document, the government made the following main announcements: that the proposal for a longevity pension presented in the expert committee's report published in April 2013 (more commonly known as the D’Amours Report) will be discussed during federal, provincial and territorial meetings on the coverage of public pension plans; that it will study potential enhancements to the Quebec Pension Plan; that different funding solutions will have to be developed for both private sector and public sector (i.e. municipalities and universities) pension plans; that, for public sector pension plans, it will make 50/50 cost sharing between employers and active members mandatory for future service; that a process for restructuring defined-benefit pension plans (hereinafter "DB Plans") will be developed based first and foremost on the principle of negotiation between the employer and plan members.THE WORKING FORUMSThe action plan published by the government also provides for the creation of three working forums, one for the private sector, one for municipalities, and one for the university sector. Within 24 hours following the publication of the action plan, the mayors of Montreal and Quebec City, as well as the Union of Quebec Municipalities, indicated that they did not want such a working forum and requested an accelerated process for the municipalities' DB Plans. Despite these demands, the three working forums were maintained and they have already started their work. Indeed, the work of the municipal sector forum started on January 21, the university sector forum on January 22, and the private sector forum on January 24.The mandate of these forums is primarily to: determine the most efficient measures to be used for funding of DB Plans; propose the parameters to be used as the framework for the negotiations between the employers and members in the restructuring process; determine the criteria that will guide the decisions of the Commission des relations du travail (the "CRT") when it is required to resolve a dispute at the final stage of the restructuring process.Each forum is comprised of employers’ and union representatives from the sector concerned. The action plan also indicates that representatives of young workers and retirees will be associated with the discussions.The work of these forums should help the government draft the bills it intends to present to implement its reform. It plans to introduce the first bill in February 2014 aimed at setting up the restructuring process explained above for the municipalities' pension plans. A bill for the same purpose, but for the university sector and private sector pension plans, should be presented in the spring of 2014. Finally, according to the action plan, another bill will be introduced in the fall of 2014 concerning the new funding rules for DB Plans. Some of the measures proposed by the D’Amours Report, and which were recommended for adoption by the Committee on Public Finance in September 2013, will be included in this bill. According to the government's announcement, each of these bills should be subject to public consultations.DB PLANS RESTRUCTURING PROCESSThe restructuring process contemplated by the government should extend over a total period of two years. In light of the information presented in the action plan, it seems that this process should only apply to pension plans negotiated between employer and union, although the action plan is not totally clear on this point.Once the parameters of this process have been determined, the affected parties will be allowed a six-month period of negotiation from July 1 to December 31, 2014. Failing an agreement between the parties by the end of this period, a conciliator reporting to the Ministry of Labour will be appointed for another period of six months (January 1 to June 30, 2015). If the parties are still unable to reach an agreement by the end of this period, the CRT would be tasked with finding a solution to the dispute. As part of the CRT’s new role, it would call upon the Régie des rentes du Québec to validate the chosen proposals. A final six-month period (from July 1 to December 31, 2015) would be allowed if this last phase of the restructuring process is necessary.Some parties are strongly opposed to giving the CRT the role of final arbiter of the disputes in the event of the failure of the negotiations. Until now, the Minister of Employment and Social Solidarity has maintained the CRT as the government's choice for this role.DB PLANS FUNDINGAccording to the government's action plan, an adjusted version of the "enhanced funding" method proposed by the D’Amours Report will be chosen for the DB Plans of the private sector. The action plan does not address the issue of the adjustments that are to be made to this new funding method, so they will likely be discussed during the working forums.As for the DB Plans of the public sector, the government intends to maintain the current funding rules, while consolidating them.Thus, contrary to the recommendations of the D’Amours Report, which proposed that one funding method should henceforth be used for both the private and public sector plans (i.e. the " enhanced funding" method), the government seems to want to maintain separate funding rules for these two sectors.CONCLUSIONEven though several aspects of the government's action plan still need to be clarified, or even developed per se, the positions announced by the government have sparked a lot of interest from the various actors and stakeholders in the pensions sector. It is worth noting that, in its report from September 2013, the Committee on Public Finance recommended that several measures proposed in the D’Amours Report should be analyzed or studied in greater depth. Few believed that the government would react so quickly and in this fashion.The proposed restructuring process should, in principle, permit the revision or suspension of certain vested rights, allowing for a reduction in the costs of a pension plan. The Minister of Employment and Social Solidarity has not ruled out the option of enacting legislation that would also bring retirees into the restructuring process (thereby casting doubt on some of their entitlements):[translation] If this is the means the parties come up with to solve their problems, we have the duty, during this exceptional period, because it will be lasting two years, to consider all options.We will, of course, continue to carefully follow further developments at the various stages of the action plan, and keep you informed.
Québec solidaire MNAs Table a Bill to Prohibit “Grandfather Clauses” with respect to Pension Plans and Group Insurance Plans
On December 4, 2013, Québec solidaire MNAs Amir Khadir and Françoise David tabled a bill (Bill 499) in the National Assembly which seeks to amend the provisions of the Act Respecting Labour Standards (ARLS) dealing with clauses which provide for differential treatment based solely on one’s date of hire (commonly referred to as “grandfather clauses”). This Bill provides for the addition of a new provision whereby an “agreement” may not, solely on the basis of an employee’s date of hire, have the effect of providing him or her with a supplemental pension plan, a group insurance plan or an employee benefit which is less advantageous than that which is provided to other employees performing the same tasks in the same establishment.The word “agreement” is defined in section 1 ARLS as an individual contract of employment, a collective agreement or any other agreement relating to conditions of employment, including a Government regulation giving effect thereto.We will monitor this situation closely and keep you informed of any further developments as they pertain to this Bill.
New Developments Regarding Pension Plans: Relief Measures Extended and the Passing of Bill 39 on Voluntary Retirement Savings Plans
RELIEF MEASURES EXTENSIONOn November 27, 2013, the Government of Québec published the Regulation Providing New Relief Measures for the Funding of Solvency Deficiencies of Pension Plans in the Private Sector (the “New Regulation”), which will come into effect on December 31, 2013.The New Regulation seeks mainly to extend the relief measures which had been provided for in the Regulation Providing Temporary Relief Measures for the Funding of Solvency Deficiencies1 (the “2012 Regulation”) and which are set to expire by the end of 2013, for an additional two years.An employer may decide to avail itself of one or many of the relief measures discussed below by sending written instructions to this effect to the plan’s pension committee. As was the case with the 2012 Regulation, the New Regulation does not require the employer to obtain the consent of pension plan members in order to avail itself of the relief measures. Furthermore, an employer may elect to employ the relief measures even if it availed itself of one or more of the measures set out in the 2012 Regulation.The relief measures set out in the New Regulation are similar to those included in the 2012 Regulation and allow for the following:1- Asset Smoothing on a Solvency BasisAsset smoothing, which mainly consists of assessing assets by allocating the fluctuations of their value over a certain period, can be used for the purpose of evaluating the plan’s assets on a solvency basis. The smoothing method chosen must be set out in the written instructions provided by the employer to the pension committee and the smoothing period elected may not exceed five years. If the employer availed itself of asset smoothing under the 2012 Regulation and wishes to do so under the New Regulation, the smoothing method chosen must be the same as the one used in accordance with the 2012 Regulation.Notwithstanding this relief measure, the assets used for the purpose of establishing the solvency ratio of the pension plan must be taken at their liquidation value and therefore, without asset smoothing. It should be noted that some provisions of the Supplemental Pension Plans Act (the “SPPA”) and its regulations refer to the solvency ratio of a pension plan or require the use thereof for a number of purposes. For instance, when paying out the benefits of a member who requests the transfer of the value of his benefits out the pension plan, the SPPA provides that if the plan is not fully solvent at that time (i.e. if the solvency ratio is less than 100%), the value of the benefits can only initially be paid out in proportion to the solvency ratio of the plan.2- Consolidation of Solvency DeficitsThe New Regulation allows for the consolidation of all previous solvency deficits, that is to say it allows for the grouping of these previous deficits into a single solvency deficit. The 2012 Regulation did not permit the consolidation of a deficit related to an amendment made after December 30, 2008. This restriction was not included in the New Regulation.3- Extension of the Amortization Period of the Solvency Deficit over a Maximum Period of 10 YearsThe solvency deficit determined as of the date of the first actuarial valuation after December 30, 2013 (in most cases, as of December 31, 2013) may be amortized over a period ending, at the latest, 10 years after the date of its determination rather than over a five-year period. The same is true with respect to the solvency deficit determined as of the date of the actuarial valuation following the one referred to above.The choice to use or not to use the relief measures provided under the New Regulation must be made at the time of the first actuarial valuation of the plan occurring after December 30, 2013. Finally, pursuant to the New Regulation, application of the new relief measures will end on the earlier of the following dates: The date of the first actuarial valuation showing that the plan is solvent; The end date of the plan’s first fiscal year beginning after 31 December 2014; The date set out in the written notice sent by the employer to the pension committee. This date must mark the end of the plan’s fiscal year.It should be noted that the New Regulation does not apply to pension plans in the municipal and university sectors. These plans are instead addressed by another regulation, which was also published on November 27, 20132 and which will come into effect on December 31, 2013. This regulation essentially provides for the extension of a relief measure for the pension plans in these sectors which has already been implemented, but with some modifications.THE PASSING OF BILL 39Bill 39 - Voluntary Retirement Savings Plans Act was passed by the National Assembly on December 3, 2013. However, as of the drafting of this article, the Bill has not yet received Royal Assent.Many amendments were made to this Bill during the detailed review conducted by the Commission des finances publiques. According to the amendments attached to the Commission’s report, it would appear that most of the provisions of the Act will come into effect on July 1, 2014 and that the deadline for employers to subscribe to a voluntary retirement saving plan (VRSP) will depend on the number of people they employ on a given date. Thus, an employer with 20 employees or more on June 30, 2016 will be required to subscribe to a VRSP no later than December 31, 2016 while an employer with between 10 and 19 employees on June 30, 2017 will have until December 31, 2017 to subscribe to such a plan. An employer with between 5 and 9 employees will be required to subscribe to a VRSP as of the date determined by regulation, but which cannot be earlier than January 1, 2018.________________________________1 This Regulation was published on May 30, 2012.2 That is, by the Regulation to Amend the Regulation Respecting the Funding of Pension Plans of the Municipal and University Sectors.