DATE: 20031208

DOCKET: C39652

COURT OF APPEAL FOR ONTARIO

WEILER, GOUDGE and SHARPE JJ.A.

B E T W E E N:

AEGON CANADA INC. and TRANSAMERICA LIFE CANADA

Gerald L. R. Ranking for the (respondent/appellant)

(Applicants/Respondents)

• and -

ING CANADA INC.

J.A. Prestage for the (applicants/ respondents)

(Respondent/Appellant)

• and -

PYAR DOSSAL and JANE BENN on their own behalf and on behalf of those persons listed in Schedule "A" hereto who are members and former members of the NN Life Insurance Company of Canada Pension Plan for Employees and also past members and former of the Employees' Pension Plan of the Halifax Insurance Companies or the beneficiaries of such persons

Intervenors

Michael Mazzuca for the intervenors, Pyar Dossal and Jane Benn

Heard: November 3, 2003

On appeal from the judgment of Justice Dennis Lane of the Superior Court of Justice dated January 28, 2003.

SHARPE J.A.:

[1] The respondents, AEGON Canada Inc. and Transamerica Life Canada, allege that the vendor and appellant, ING, breached warranties arising from a share purchase agreement for the shares of NN Life Insurance Company of Canada ("NN Life") that all required contributions had been made to the NN Life Pension Plan ("the Plan"), and that the Plan was fully funded on an ongoing and solvency basis. All of the claimed breaches of warranty relate to ING's practice of taking into account an actuarial surplus in assets of a 1969 Trust ("Halifax Trust") that funded the Halifax Life Pension Plan ("the Halifax Plan") when determining the assets required to fund the Plan. Lane J. gave detailed reasons for judgment holding that the appellants had breached the warranty. As I agree with the application judge's careful analysis, I shall state my reasons for dismissing the appeal briefly.

[2] The Plan is the product of the 1989 amalgamation between the NN Life and the Halifax Life Insurance Company of Canada. At that time, the assets and liabilities of the Halifax Plan were transferred to the NN Life Plan. When the transfer occurred, the assets in the Halifax Plan were subject to the Halifax Trust. The terms of the Halifax Trust provide that: (i) upon termination, the Halifax employees are entitled to any surplus (s.6.02), and (ii) no amendment to the trust "shall authorize or permit any part of the capital or income of the Fund to be used for or diverted to purposes other than for the exclusive benefit of the Members…except as may be approved by the Minister or otherwise authorized or permitted by law" (s. 6.01(b)).

[3] In view of these provisions in the Halifax Trust, and pursuant to undertakings given by NN Life to the Pension Commission of Ontario (P.C.O.) as a condition of approval for the transfer of assets from the Halifax Plan to the NN Life Plan, NN Life maintained and administered the assets of the Halifax Trust separate from the other assets and liabilities of the Plan after the amalgamation. At times relevant to this action, the part of the Plan funded by the Halifax Trust has had assets in surplus to liabilities, while the non-Halifax part of the Plan has had liabilities in excess of assets.

[4] Despite maintaining the assets and liabilities relating to the former Halifax employees separate and apart from the rest of the Plan, NN Life decided to treat the Plan as a single entity for purposes of calculating its funding obligations. When the two funds are combined, the Plan is in surplus, and consequently NN Life took contribution holidays from the Plan. As a result, by the time of the share purchase agreement, there was a substantial deficit with respect to the non-Halifax part of the Plan that NN Life accounted for by reference to the substantial surplus in the Halifax Trust. Indeed, it was projected that if the contribution holidays continued, at some point NN Life would actually have to draw upon the Halifax Trust assets to pay the pension benefits of non-Halifax Life employees. In connection with the share purchase agreement, NN Life represented to the respondents that the NN Life Plan was in a surplus position and did not disclose any deficit in relation to the non-Halifax part of the Plan.

[5] There was conflicting actuarial evidence as to the propriety in terms of accepted actuarial and accounting practice of the contribution holidays and the representations made in relation to the share purchase agreement. The application judge found that taking into account the Halifax Trust's assets, when calculating obligations owed to non-Halifax employees, did not accord with accepted actuarial practice. I see no reason to interfere with that finding.

[6] In the end, any conflict in the evidence falls to be resolved on the basis of the correctness of the legal assumptions made by the experts. If NN Life could never call upon the assets of the Halifax Trust to satisfy the liabilities owed in the non-Halifax portion of the Plan, I agree with the application judge that NN Life was not entitled to take contribution holidays and was not entitled to have reference to the assets of the Halifax Trust when calculating its obligations towards those who are not the beneficiaries of that Trust.

[7] In my view, the clear terms of the Halifax Trust precluded any part of the capital or income of the fund from being diverted to any purpose other than the exclusive benefit of the beneficiaries of the Halifax Trust, namely the former Halifax employees. The terms of Halifax Trust were not altered by the transfer of assets to the NN Life Plan in 1989. I do not accept the submission that NN Life's rights and obligations in relation to Halifax Trust assets were somehow affected by what counsel referred to as the "merger" of the two pension plans. NN Life was obliged by the terms of the Halifax Trust and by the terms of the undertakings it gave to the P.C.O. to maintain the assets of the Halifax Trust separate and apart from the other assets and liabilities of the NN Life Plan. There was no amendment to the Halifax Trust. Nor is there anything "authorized or permitted by law" to allow NN Life to use the assets of the Halifax Trust for any purpose other than the benefit of its beneficiaries. As it was put by Newbury J.A. in Bushau v. Rogers Cable Systems (2000), 2001 BCCA 16, 83 B.C.L.R. (3d) 261 (B.C.C.A.) at para. 66: "These rights cannot be done away with by unilateral action of the employer without crystal-clear authority in the trust terms."

[8] Simply put, as NN Life cannot call upon the assets of the Halifax Trust to satisfy liabilities owed to the non-Halifax employees, it follows that there was no basis for NN Life to refer to the Halifax Trust's surplus in determining its service costs to account for actuarial liabilities in relation to the non-Halifax employees. The Halifax Trust obligation prevents the assets of that trust from ever being used to pay the benefits of non-Halifax employees. There is therefore no actuarial or legal basis for NN Life to have regard to the Halifax surplus in determining its funding obligation for the non-Halifax employees.

[9] The appellant submits that since the former Halifax employees have no present entitlement to any surplus in the Halifax Trust, and as any entitlement to that surplus would arise only upon termination, it was open to NN Life to refer to the surplus in calculating its overall funding obligations. The appellant relies on the following passage from the reasons of Cory J. in Schmidt v. Air Products of Canada Ltd., 1994 104 (SCC), [1994] 2 S.C.R. 611 at para. 86:

The former Catalytic employees successfully argued before the chambers judge that to permit a contribution holiday is to permit an encroachment upon the trust fund of which they are the beneficiaries. I do not agree. As noted earlier, the trust property usually consists of all the monies contributed to the pension fund. To permit a contribution holiday does not reduce the corpus of the fund nor does it amount to applying the monies contained in it to something other than the exclusive benefit of the employees. The entitlement of the trust beneficiaries is not affected by a contribution holiday. That entitlement is to receive the defined benefits provided in the pension plan from the trust and, depending upon the terms of the trust to receive a share of any surplus remaining upon termination of the plan.

[10] I do not accept the submission that Schmidt supports the appellant's position. At issue in Schmidt was whether a contribution holiday per se reduced the corpus of the trust. The issue here is whether NN Life is entitled to cross-subsidize its obligations towards the non-Halifax employees by using the assets of the Halifax Trust. I see nothing in Schmidt or in any of the other authorities cited to us that would support the argument that NN Life is entitled to use the assets of the Halifax Trust for any purpose other than those specified in the Halifax Trust. The fact that the former Halifax employees have no present entitlement to the surplus provides no justification for the use of that surplus for a purpose contrary to the terms of the Trust.

[11] In addition, Schmidt is distinguishable from the case at bar because both plans in Schmidt were in surplus. The application judge properly distinguished Schmidt in at paragraph 46 of his reasons:

…Cory J. was not dealing with facts such as are before me. In Schmidt, both plans were in actuarial surplus at the time of their merger and at the time of wind-up. Further, he made it clear, at p. 664, that the employer's obligation to fund the plan is to be determined upon accepted actuarial principles. As will appear later, such principles do not permit the inclusion as relevant assets, of assets which are not in fact available to meet the relevant liabilities.

[12] The appellant also relies on the decision of the Financial Services Tribunal in Baxter v. Ontario (Superintendent of Financial Services), (2003) 33 C.C.P.B. 43. Baxter involved an appeal from a decision of the Superintendent made pursuant to the Pensions Benefits Act, R.S.O. 1990, c. P.8, s. 81, to consent to the transfer assets from a plan in surplus to a plan in liability. The applicants, members of the plan in surplus, argued that the decision approving the transfer was contrary to s. 81(5) requiring the Superintendent to refuse consent "to a transfer that does not protect the pension benefits and any other benefits of the members". The appeal was dismissed. There is certainly language in the majority decision that could be taken to support the position taken by the appellants in the case at bar. However, it is not binding here and there are several significant distinguishing features. First, the main ground for dismissing the appeal was that the Financial Services Tribunal had no jurisdiction to entertain it. Second, as it exercises purely statutory jurisdiction, to the extent that it did deal with the merits, the Tribunal's decision turned entirely on the language of s. 81(5) rather than upon general principles of trust law. Third, there was no explicit finding of a trust and the Tribunal proceeded on the assumption that the assets of the surplus plan were impressed with a trust. Fourth, the provisions of the surplus plan at issue were significantly different from the case at bar as they allowed the employer to use divert funds amassed prior to a merger if "all liabilities have been fully met". In any event, to the extent that the reasoning in Baxter is inconsistent with that of the application judge in the case at bar, I have no hesitation in saying that I prefer that of the application judge.

[13] The appellant also relies on the obiter comments of Grange J.A. in Heilig v. Dominion Securities Ptifield Ltd. (1989), 1989 4284 (ON CA), 67 O.R. (2d) 577 at 582 regarding the effect of the merger of two pension plans. That case posed a very different issue and Grange J.A. was not addressing the question we have to answer in the case at bar. His comments are of no assistance here.

[14] Accordingly, I would dismiss the appeal. The appellant concedes in its written costs submissions that if the respondent is successful, it is entitled to costs, on a substantial indemnity scale, in the amount claimed of $45,792.25 and I would fix the costs in that amount.

"Robert J. Sharpe J.A."

"I agree S.T. Goudge J.A."

"I agree K.M. Weiler J.A."

Released: December 8, 2003```