[1993] 1 F.C. 3
T-44-88
Arthur Clemiss (Plaintiff)
v.
Her Majesty the Queen (Defendant)
Indexed as: Clemiss v. Canada (T.D.)
Trial Division, Reed J.—Vancouver, September 9; Ottawa, September 16, 1992.
Income tax — Income calculation — Company purchasing industrial plant, paying partly cash, partly own shares — President and CEO, Chairman, another director, lawyer, accountant charged with theft, conspiracy to defraud corporation — Taxpayer, president and CEO, receiving option on publicly traded shares of company — Seeking determination from British Columbia Superintendent of Brokers to ensure tradeable — Superintendent declining to give ruling pending trial of charges against taxpayer, other corporate executives — Taxpayer purporting to exercise option, tendering payment February 23, 1978, but no money or share certificates changing hands — Board resolving, August 30, 1979, to issue non-trading shares at option price — Shares becoming freely trading upon determinations by Superintendent issued between 15 October 1979 and February 20, 1980 — Share value increasing from $4.25 on February 23, 1978 to $8.80 on August 30, 1979 — Taxpayer expending some $150,000 in legal fees defending criminal charges — All accused acquitted — Company’s constitution providing for indemnification — Shareholders voting to reimburse — When shares acquired for purpose of valuing benefit — Whether reimbursement of legal fees taxable benefit — Beneficial ownership of shares not acquired upon purported exercise of option — Condition that shares be free-trading not waived by taxpayer — Ownership acquired with transfer of rights represented by share certificate — Moneys for legal fees not reimbursement of sums expended to carry out job as president — Benefit received in respect of employment within Act, s. 6(1)(a).
Contracts — President and CEO of corporation receiving option on shares specified to be free-trading, exercisable until February, 1978 — Seeking to exercise option, tendering payment, in February, 1978 — Provincial Superintendent of Brokers refusing, pending disposition of fraud charges against management team, to give determination necessary for sale of shares — Company distributing shares at option price in August, 1980 — Shares only becoming tradeable as determinations received between October, 1980 and July, 1981 — Whether optionee having waived condition that shares be free-trading — Waiver constituted by acquiescence by party in change for benefit of other party — Not altering terms of contract — Variation changing, by mutual consent, terms to extent of variation — Contract having been varied to permit later sale of shares expected to become tradeable — Shares acquired in August, 1980.
This was an appeal from a Tax Court of Canada decision confirming reassessments for the taxation years 1979 and 1980.
The taxpayer is President and Chief Executive Officer of B.X. Developments Ltd., and a director of the company. B.X. is a publicly traded company. B.X. purchased a lime plant, and paid with a combination of cash and shares. As a result of this transaction, in January of 1977, the taxpayer, the Chairman, another director, the company’s accountant and its lawyer were charged with theft of company property and conspiracy to defraud. On March 1, 1977, the taxpayer and the company entered into a stock option agreement, exercisable up to the end of February, 1978, for 60,000 freely trading shares at $1.64. In February of 1978, when the plaintiff sought to exercise his option, the British Columbia Superintendent of Brokers declined, pending the conclusion of the criminal proceedings, either to give the plaintiff a determination that sale of the shares by him would not be a distribution to the public or to give the company a like determination on the option agreement. The plaintiff tendered payment, but no money changed hands and no share certificates were issued. The company informed the Vancouver Stock Exchange of the exercise of the option as of that date, and informed the shareholders in its Annual Report. On August 30, 1979, 60,000 shares were issued to the plaintiff at the option price, but they were not tradeable until the Superintendent issued determinations on October 15, 1979 (15,000 shares), February 20, 1980 (20,000 shares) and July 31, 1980 (25,000 shares). In insider trading reports, the date at which the plaintiff became owner of the shares is given as August 30, 1979. No entry for a share benefit was made in his 1978 income tax return. The taxpayer and the other members of the management team were acquitted on the criminal charges on November 9, 1979. Between February 23, 1978 and August 30, 1979, the shares in the company increased in value from $4.25 to $8.80. Paragraph 7(1)(a) of the Act provides that the value of the benefit received by an employee under a stock option plan is the difference between market value of the shares when he acquired them and the option price. The Minister assessed the taxpayer on the August 30, 1979 market value. The constitution of the company provided that the company was to indemnify a director for costs of any civil, criminal or administrative proceeding arising out of actions taken in good faith on behalf of the company, subject to court approval under the British Columbia Company Act. The shareholders approved reimbursing the plaintiff for the costs of successfully defending the criminal charge against him, and the reimbursement was made after being approved by the Supreme Court of British Columbia. The Minister assessed on the basis that this constituted a benefit received in respect of an office or employment.
Held, the appeal should be dismissed.
The issuance of share certificates is not determinative of the date at which shares are acquired. The plaintiff’s acceptance, in February, 1978, of the offer of freely trading shares contained in the option agreement could not constitute a binding agreement when no such shares existed. That the shares were to be free-trading was a condition of the agreement, and the evidence does not support the inference that that condition was waived by the plaintiff. Waiver occurs when one party to a contract acquiesces in a change of the terms to the benefit of the other party; the original rights and duties of the parties, however, remain unchanged. Where variation of an agreement occurs the original contract is, to that extent, entirely changed. Here the parties varied, in practice, the contract to permit a later distribution of shares which were anticipated to become free-trading. The benefit under the option agreement was acquired when the taxpayer obtained the bundle of rights which shares represent. The taxpayer did not pay for the shares on February 23, 1978. He did not declare the benefit in his income for the year. The company passed no resolution to allot shares before August 30, 1979. It was then that the plaintiff acquired the attributes of share ownership, such as the right to vote the shares.
The broad wording in the Act captures all benefits received “in respect of” an office or employment. Reimbursements of sums employees are required to expend, such as moving expenses, have been held not to be a personal benefit to the employee. Here, however, the money was not spent by the plaintiff in order to do his job as president, but to answer criminal charges laid against the taxpayer personally. The corporation was not a co-accused, but the victim of the alleged offence.
STATUTES AND REGULATIONS JUDICIALLY CONSIDERED
Company Act, R.S.B.C. 1979, c. 59, s. 152(1)(a),(b),(2).
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 6(1)(a) (as am. by S.C. 1980-81-82-83, c. 48, s. 1), 7(1)(a) (as am. by S.C. 1977-78, c. 1, s. 3).
Securities Act, 1967, S.B.C. 1967, c. 45, s. 56.
CASES JUDICIALLY CONSIDERED
DISTINGUISHED:
Steen (W.R.) v. The Queen, [1988] 1 C.T.C. 256; (1988), 88 DTC 6171; 86 N.R. 165 (F.C.A.); affg Steen v. Canada, [1987] 1 F.C. 139 [1986] 2 C.T.C. 394; (1986), 86 DTC 6498; 6 F.T.R. 179 (T.D.); Grant v. The Queen, [1974] 2 F.C. 31 [1974] CTC 332; (1974), 74 DTC 6252 (F.C.T.D.); Reynolds, PM v The Queen, [1975] CTC 85 (F.C.T.D.); Falconer v. Minister of National Revenue, [1962] S.C.R. 664; (1962), 34 D.L.R. (2d) 721; [1962] C.T.C. 426; 62 DTC 1247; Ransom, Cyril John v. Minister of National Revenue, [1968] 1 Ex.C.R. 293; [1967] C.T.C. 346; (1967), 67 DTC 5235; McNeill v. Canada, [1987] 1 F.C. 119 [1986] 2 C.T.C. 352; (1986), 86 DTC 6477; 5 F.T.R. 133 (T.D.); Greisinger v. M.N.R. (1986), 15 C.C.E.L. 29; [1986] 2 C.T.C. 2441; 86 DTC 1802 (T.C.C.); Phillips (W.R.) v. M.N.R., [1990] 1 C.T.C. 2372; (1990), 90 DTC 1274 (T.C.C.); Splane (R.O.J.) v. Canada, [1990] 2 C.T.C. 199; (1990), 90 DTC 6442; 36 F.T.R. 35 (F.C.T.D.); Huffman v. Canada (1990), 71 D.L.R. (4th) 385; [1990] 2 C.T.C. 132; 90 DTC 6405; 112 N.R. 78 (F.C.A.).
CONSIDERED:
R. v. Clemiss, Judge McGivern, judgment dated November 9, 1979, B.C. Prov. Ct., not reported; Rendell v. Went (1963), 41 Tax Cas. 641 (Ch. D.); varied [1963] 3 All E.R.; (1963), 41 Tax Cas. 650 (C.A.); affd [1964] 2 All E.R. 464; (1963), 41 Tax Cas. 654 (H.L.); Pellizzari (T.) v. M.N.R., [1987] 1 C.T.C. 2106; (1987), 87 DTC 56 (T.C.C.); R. v. Savage, [1983] 2 S.C.R 428; [1983] C.T.C. 393; 83 DTC 5409; 50 N.R. 321; R. v. Poynton, [1972] 3 O.R. 727; (1972), 29 D.L.R. (3d) 389; 9 C.C.C. (2d) 32; [1972] CTC 412; 72 DTC 6329 (C.A.).
REFERRED TO:
Turney v. Zhilka, [1959] S.C.R. 578.
AUTHORS CITED
Fridman, G. H. L. The Law of Contract in Canada, 2nd ed., Toronto: Carswell Co. Ltd., 1986.
Welling, Bruce Corporate Law in Canada: The Governing Principles, 2nd ed., Toronto: Butterworths, 1991.
APPEAL from a Tax Court of Canada decision ([1987] 2 C.T.C. 2275; (1987), 87 DTC 569) dismissing the taxpayer’s appeal from reassessments. Appeal dismissed.
COUNSEL:
Leslie M. Little, Q.C. for plaintiff.
Margaret Clare for defendant.
SOLICITORS:
Thorsteinssons, Vancouver, for plaintiff.
Deputy Attorney General of Canada for defendant.
The following are the reasons for judgment rendered in English by
Reed J.: This is an appeal by way of trial de novo from a decision of the Tax Court dated September 9, 1987 [[1987] 2 C.T.C. 2275]. That decision upheld the Minister of National Revenue’s assessment of the income tax payable by the plaintiff for the 1979 and 1980 taxation years.
The plaintiff claims, with respect to the 1979 taxation year, that a taxable stock option benefit he received should be valued at $104,400 and not $286,400 as asserted by the Minister. With respect to the 1980 taxation year, he claims that $146,533.37 which he received as reimbursement for legal expenses he incurred defending criminal charges should not be treated as income to him.
Facts — Stock Option
The plaintiff was at the relevant time president and chief executive officer of B.X. Developments Ltd. (“B.X.”). He was also a member of the Board of Directors of that corporation.
In 1974, the Chairman of the Board, Murray Pezim, saw an opportunity to purchase what is referred to as the Paul Lime Plant. That plant was eventually acquired by B.X. through a wholly owned subsidiary Can-AM Lime Inc. The purchase price was approximately 2.2 million. Approximately $900,000 of this was paid in cash, the rest was paid in shares of B.X. The plaintiff played a significant role in this purchase including finding financing for the purchase.
Consequent upon those efforts a stock option agreement was entered into by B.X. and the plaintiff. This agreement was dated March 1, 1977. It granted the plaintiff:
… the sole and exclusive right and option to purchase Sixty Thousand (60,000) fully paid and non-assessable freely trading shares of the capital of the Company at a price of one dollar sixty-four cents ($1.64) per share, such option to be exercisable at any time up to and including the 28th day of February, 1978. … [Underlining added.]
Time was expressed to be of the essence in the agreement.
On January 17, 1977, shortly before the issuance of this option, the plaintiff, two other directors, the accountant and the lawyer of B.X. were charged with three counts of conspiracy to defraud B.X. and one count of theft of the property of B.X. These charges related to the acquisition of the Paul Lime Plant. It was alleged that the share portion of the purchase price was a “sham” and that the plaintiff and his co-accused had arranged to carry out the transaction to the detriment of B.X. and its shareholders. B.X. was a publicly traded company; its shares were listed on the Vancouver Stock Exchange.
In early 1978, the plaintiff decided to take up the stock option he held for the purchase of the B.X. shares. On January 5, 1978, counsel for the plaintiff, Mr. George Scott wrote on the plaintiff’s behalf to the Superintendent of Brokers (British Columbia’s Securities Commission) requesting a section 56 determination to allow the plaintiff to trade 15,000 of the option shares. Section 56 of the British Columbia Securities Act, 1967 [S.B.C. 1967, c. 45] states:
56. (1) Where doubt exists whether a trade proposed or intended to be made in a security would be in the course of primary distribution to the public of the security, the Commission may, upon the application of an interested party, determine whether the proposed or intended trade would be in the course of primary distribution to the public of the security and rule accordingly, and the ruling is final and there is no appeal therefrom.
(2) Where the Commission determines under subsection (1) that a proposed or intended trade would not be in the course of primary distribution to the public of the security, the Commission may rule that registration is not required in respect of the trade.
(3) Where doubt exists whether a primary distribution to the public of any security has been concluded or is currently in progress, the Commission may determine the question and rule accordingly, and the ruling is final and there is no appeal therefrom. [Underlining added.]
On January 12, 1978 a reply was sent to the plaintiff’s request for a section 56 determination to allow the plaintiff to trade the 15,000 shares, stating that such a determination would not be given because a section 56 determination had not been given covering the granting of the option by the company to the plaintiff. The letter asked whether the company, B.X., intended to apply for this prior determination.
The plaintiff’s lawyer at that time, Mr. Scott, was called as a witness and explained that he had been of the view that the position the Superintendent of Brokers was taking was wrong and he had so informed the Superintendent: the stock option in question was an employee stock option and therefore exempt from the need to obtain a section 56 determination. He also notes that the plaintiff as a director and chief executive officer of the company had no need of the safeguards which the public disclosure of information in conjunction with share issues is designed to ensure.
In any event, the position being taken by the Superintendent of Brokers delayed the possibility of a section 56 determination being given with respect to the trading of the option shares. On January 19, 1978 counsel for B.X., Lawrence Page, wrote to the Superintendent of Brokers on behalf of that company seeking a section 56 determination with respect to the grant of the stock option to the plaintiff as well as with respect to the grant of a stock option to the Chairman of the Board.
On February 1, 1978 a reply was received:
In as much as Messrs. Pezim and Clemiss are involved in criminal proceedings with respect to the acquisition of the Paul Lime Plant we are not prepared to consider a Section 56 determination covering the issuance of stock options to them until the outcome of the criminal proceedings has been determined.
Any determination issued prior to the completion of the criminal proceedings would of necessity be unfavourable.
The request for a section 56 determination for the issuance of the stock options was withdrawn. No section 56 determination allowing trading of the option shares had been given. Thus as of the date of the expiry of the option, B.X. was not in possession of and could not deliver to the plaintiff “freely trading shares” as required by the terms of the option agreement.
The plaintiff gave evidence that, in any event, in order to exercise his option and on the advice of his lawyer, he tendered a certified cheque to the company in the amount of $98,400. The plaintiff says he did this through his lawyer and that it was done on February 23, 1978. His counsel at that time says that his usual practice in such circumstance is to see that the cheque is delivered in person and that a receipt is obtained. There is no documentary record of this transaction. The cheque would not appear to have been cashed. No cancelled cheque is in evidence. No receipt for the cheque was available.
On July 13, 1978, a filing statement was prepared by B.X. and filed with the Vancouver Stock Exchange. It referred to the option agreement with the plaintiff and stated:
On February 23rd, 1978, Clemiss exercised his option pursuant to the provisions of the Clemiss Option Agreement by tendering to the Company the sum of $98,400.00 and requested delivery of 60,000 shares of the capital of the Company. The Company acknowledged receipt of notice of exercise of the option and tender of moneys and has not yet issued, allotted nor delivered the shares to Clemiss.
Clemiss has entered into an Agreement with Mr. Isadore Rotterman (“Rotterman”), a Director of the Company, agreeing to sell to Rotterman 20,000 shares acquired by Clemiss pursuant to his exercise of the option contained in the Clemiss Option Agreement at a price of $1.64 per share. The Agreement with Mr. Rotterman has not yet been accepted for filing with the Vancouver Stock Exchange and may also be subject to obtaining a favourable Section 56 determination from the Superintendent of Brokers. [Underlining added.]
On July 31, 1978, B.X. issued its Annual Report together with notice of the annual general meeting and an information circular. The information circular showed the plaintiff as holding “NIL” shares of the company. The circular also stated:
On February 23, 1978, Clemiss exercised his option pursuant to the provisions of the Clemiss option Agreement by tendering to the Company the sum of ninety-eight thousand, four hundred dollars ($98,400) and requested delivery of the sixty thousand (60,000) shares of the capital of the Company which are by the terms of the Clemiss option Agreement to be issued as “freely trading shares”. The Company acknowledged receipt of notice of exercise of the option and tender of monies and has not yet issued, allotted nor delivered the shares to Clemiss pending clarification of the need to qualify the issuance of such shares from treasury and, further, the obligation of the Company to qualify the shares as “freely trading shares” for distribution to the public.
In the same circular, notice of a proposed ordinary resolution to be presented at the annual general meeting on Friday, September 29, 1978 was given:
There is no material contract to be presented to the meeting other than considering and adopting with or without amendment the following Ordinary Resolution:
Resolved as an Ordinary Resolution that the Company do amend those stock option Agreements granted to employees to provide that there be included in such Agreements the covenant of the Company that unless waived by the employee, payment of the purchase price for the optioned shares be conditional upon the Company first qualifying the shares for distribution to the public or, in the alternative, obtaining a trading exemption for the employee or a determination pursuant to section 56 of the Securities Act, British Columbia, that a proposed or intended trade by such employee would not be in the course of a primary distribution to the public of the security.
On December 1, 1978, a filing statement filed by the management of the company with the Vancouver Stock Exchange explained the then current state of affairs:
Payment by Mr. Clemiss for the shares being purchased by him pursuant to the exercise of his option is conditional upon the Company first qualifying such shares for distribution to the public or, alternatively, obtaining a determination from the Superintendent of Brokers for British Columbia pursuant to section 56 of the Securities Act, British Columbia, that trades in such shares would not be trades in the course of a primary distribution to the public.
The company had not at this date been able to secure the necessary qualification or section 56 determination with respect to these shares.
In an information circular dated December 19, 1978 which accompanied a notice of a general meeting of the company, management for the company again described the status of the matter:
The members of the Company at its annual general meeting held on September 29, 1978 approved an Ordinary Resolution further clarifying the Clemiss option Agreement by providing that there be included in the Clemiss option Agreement the covenant of the Company that unless waived by Clemiss, payment of the purchase price for the optioned shares be conditional upon the Company first qualifying the shares for distribution to the public or, in the alternative, obtaining a trading exemption for him or a determination pursuant to section 56 of the Securities Act (British Columbia) that a proposed or intended trade by him would not be in the course of a primary distribution to the public of the security.
On August 30, 1979 the directors of B.X. passed a resolution to issue 60,000 fully paid and non-assessable shares to the plaintiff:
and that the Secretary of the Company be and she is hereby authorized to deliver the executed Treasury Order to the Transfer Agent with instructions to deliver to Mr. Clemiss or his order share certificates in his name representing the 60,000 shares of the Company in exchange for a certified cheque or bank draft payable to the Company in the amount of $98,400.
On the same day the treasury order was executed, the plaintiff was registered by the transfer agent on the registry of the company as the shareholder of the 60,000 shares and share certificates were issued to the plaintiff.
I would note that the shares which were issued on August 30, 1979 were not free trading. It was only later on October 15, 1979 that a section 56 determination was given with respect to 15,000 of those shares and on February 20, 1980 with respect to 20,000 shares, which were being conveyed to Mr. Rotterman, and lastly on July 31, 1980 with respect to the remaining 25,000 shares.
The plaintiff and his co-accused were acquitted of the criminal charges on November 9, 1979 [Judge McGivern, judgment dated November 9, 1979, B.C. Prov. Ct., not reported].
In the various insider trading reports which the plaintiff filed with the Vancouver Stock Exchange between March 14, 1977 and August 1979, he did not list himself as owner of any of the 60,000 shares. In the insider trading report filed on September 5, 1979, he indicated that he had become the owner of 60,000 shares on August 30, 1979. The plaintiff did not declare any stock benefit with respect to the shares in his 1978 tax return. His accountant-tax adviser gave evidence that the status of the shares vis-à-vis the plaintiff had been discussed but because of the uncertainty surrounding whether or not the benefit would in fact arise it was decided that it was not appropriate to include any amount with respect thereto in the taxpayer’s return for the 1978 taxation year. The benefit was declared in the 1979 tax return.
Date Shares Acquired—Value of Stock Option Benefit
Paragraph 7(1)(a) of the Income Tax Act [S.C. 1970-71-72, c. 63 (as am. by S.C. 1977-78, c. 1, s. 3)] as it read in 1979 states:
7. (1) … where a corporation has agreed to sell or issue shares of the capital stock of the corporation …
(a) if the employee has acquired shares under the agreement, a benefit equal to the amount by which the value of the shares at the time he acquired them exceeds the amount paid or to be paid to the corporation therefor by him shall be deemed to have been received by the employee by virtue of his employment in the taxation year in which he acquired the shares. … [Underlining added.]
The plaintiff asserts that he acquired the 60,000 shares on February 23, 1978 because on that date a binding agreement was formed which gave him the right to require the company, if he so wished, to deliver the shares. The Minister argues that the shares were acquired on August 30, 1979 when the shares were allotted, apparently paid for, transferred to the plaintiff and share certificates issued.
On February 23, 1978 the market value of the shares was $4.25 per share. On August 30, 1979 the market value was $8.80 per share. Thus on February 23, 1978 the market value of 40,000 of the 60,000 shares was $170,000. On August 30, 1979 it was $352,000. The cost of the shares to the plaintiff was $65,600. Thus, if the acquisition date is February 23, 1978, the stock option benefit to the plaintiff is $104,400. If the acquisition date is August 30, 1979 the benefit is $286,400. Only 40,000 and not 60,000 shares are involved because the plaintiff transferred 20,000 to a Mr. Rotterman at the plaintiff’s cost in accordance with the agreement which existed between them.
The question then is when did the plaintiff acquire the shares as that term is used in paragraph 7(1)(a) of the Income Tax Act. It is agreed that the date of the issuance of share certificates is not itself determinative. See for example, Welling, Corporate Law in Canada: The Governing Principles (1991) at page 602 for a description of the distinction between a share and a share certificate. A share certificate is merely evidence of the bundle of property rights which a share constitutes. The fact situation in this case however is not one in which the shareholder became an owner of the share at a different time from the issuance of the share certificate. More than just the issuance of the share certificates happened on August 30, 1979.
Counsel for the plaintiff argues that the shares were acquired on February 23, 1978 because on that day the plaintiff accepted the offer set out in the company’s option agreement and the company was thereupon obligated to issue the shares. Counsel for the defendant argues that while the plaintiff accepted the company’s offer on that date, the plaintiff did not acquire the shares on that date. What he acquired was the right to the shares and since they did not exist (that is free-trading shares did not exist) there was a fundamental breach upon which the plaintiff could have elected to sue for damages. Specific performance would have been difficult to obtain given the non-existence of the subject-matter of the contract.
It is argued that the plaintiff’s acceptance of the company’s offer, set out in the option agreement, could not constitute a binding agreement when the subject-matter of the contract was not in existence. The plaintiff’s acceptance of the company’s offer does not mean that the plaintiff acquired the shares as a result of that acceptance. I agree with that legal analysis of the fact situation.
Counsel for the plaintiff argues that the offer and acceptance evidenced by the option agreement and the plaintiff’s notification on February 23, 1978 that he intended to exercise that option, comprises two promises: the promise to issue 60,000 shares and the promise that they be free-trading. He notes that the shares which were issued on August 30, 1979 were not free-trading and that the company was in a position to issue non-free-trading shares on February 23, 1978. He argues that the condition that the shares be free-trading was an obligation of the company which the plaintiff could waive and that the Court should interpret his conduct as implicitly demonstrating a waiver. With respect to conditions precedent the decision in Turney v. Zhilka, [1959] S.C.R. 578 was cited.
Counsel also cited Fridman, The Law of Contract in Canada (2nd ed., 1986), at pages 415-419, and with respect to waiver at pages 510-511:
Two important methods of changing the original duty to perform created by a contract are by variation of the contract and waiver of rights arising thereunder. These two methods must be carefully distinguished. In cases of variation what happens is that, by mutual agreement, for the benefit or convenience of both parties, there is a later alteration of an original agreement. Where waiver is alleged to have occurred, however, the change is for the benefit or convenience of one party only, and the other party is said to acquiesce in such change in the original terms of their contract …. Where waiver is alleged, the suggested alteration is, at the most, implicit from what has occurred. Furthermore, where the original agreement has been varied by the later one, then, to the extent to which such variation is operative, the first agreement must now be considered to have been completely changed in respect of the variation in question. If waiver is alleged, however, the original rights and duties of the parties remain unchanged .…
It is argued that from February 23, 1978 the plaintiff had a binding enforceable right to 60,000 shares whether free-trading or not. I cannot draw that conclusion from the facts. There is nothing around the February 23, 1978 date or for the seventeen months thereafter which can lead to a conclusion that the plaintiff was interested in having the shares if they were not free-trading. There is nothing that indicates prior to August 30, 1979 that the plaintiff waived the condition that the shares be free-trading. Indeed even as of that later date, it seems clear from subsequent events, that acquisition of the shares occurred with the full expectation that they would become free-trading.
Counsel argues that the Tax Court judge erred because he thought that the shares issued on August 30, 1979 were free-trading when they were not [at page 2284]:
… the appellant chose to wait until B.X. was in a position to secure a favourable ruling from the Superintendent of Brokers. He refused to treat the breach of the contract as a discharge of it and the parties tacitly extended the time for performance by B.X. of its obligation. As soon as B.X. received a favourable ruling the freely trading shares were delivered. That happened in August of 1979. There is, therefore, no basis for saying that the appellant acquired the shares prior to August of 1979. The appellant therefore fails on this issue as well.
While that decision contains a factual error this does not affect the result. Indeed, I understand that the Tax Court judge did not have all the information in front of him which was filed in this Court. It is clear that the plaintiff decided on August 30, 1979 to accept shares which were not free-trading. There is no evidence as to why this occurred but this does not support a conclusion that the plaintiff had been ready to do so on February 23, 1978 or at some time prior to August 30, 1979. When the company was unable on February 23, 1978 to deliver free-trading shares, the parties simply delayed doing anything. They in effect eventually varied the contract. I could not conclude that the plaintiff on February 23, 1978, had waived the requirement that the shares be free-trading. All the facts lead to the conclusion that the shares were acquired on August 30, 1979.
The decision in Steen (W.R.) v. The Queen, [1988] 1 C.T.C. 256 (F.C.A.) does not assist the plaintiff. While in that case the Court held that the shares were acquired at the time the option was exercised, there was no dispute that some later date was relevant. The issue was whether the shares should be valued as of the date the option was issued or as of the date the option was exercised. It is in the context of that argument that the Federal Court of Appeal decision must be read. The Trial Judge’s decision, [1987] 1 F.C. 139reads at page 149:
Thus the key factor … was not the date on which the shares were fully paid nor the date on which the share certificates were issued but the date on which the taxpayer established a binding proprietary right in the legal ownership of the shares.
…
… I am satisfied that a taxpayer is deemed to have received a benefit, if any, at the moment he obtains legal ownership or the incidence of legal ownership in and to the shares subscribed.
In the present case all the incidence of legal ownership flowed to the plaintiff on August 30, 1979, not before.
The decision in Grant v. The Queen, [1974] 2 F.C. 31is of no assistance to the plaintiff. In that case there was a binding completed agreement with respect to the sale of the shares. That case dealt with an employee benefit plan under which employees offered to purchase a certain number of shares. A resolution was passed approving of the plan. The Court held that while the plaintiff did not pay for the shares until a later date (one year later) the acquisition of the shares had really occurred at the earlier date [at page 38]:
The Company held his application which contained an enforceable promise to pay for the shares. If the shares had fallen in value, plaintiff could not have repudiated his promise and the Company had no right to cancel its agreement because the shares had appreciated in value. In accordance with the intention of the Company and the employees, the latter acquired the shares they had applied for when the directors passed the resolution confirming the plan on July 25, 1968.
And on page 36, it was said:
There are no rigid formalities required to create a contract. If the parties intend to enter into a binding agreement and arrive at a consensus ad idem, the Court will give effect to it. The whole transaction, both words and conduct of the parties, will be looked at and it is immaterial when the various steps leading to a consensus took place if from all the facts it can be determined that a contract was intended. The Company decided to make available 1,267 shares to its senior employees and then carried out its plan in two stages. The terms of the plan were set out in the resolution of the Executive Committee passed on July 11, 1968. At its meeting on July 25, 1968, the Board of Directors received the employees’ applications for shares made pursuant to the plan and confirmed their sale. It was on that date that plaintiff acquired 835 shares and it was the market value of the shares on that date which is to be considered.
In the present case the conduct of the parties demonstrates that a binding contract for the purchase of the shares was not entered into until August 30, 1979. The plaintiff did not pay for the shares on the February 23rd date. He did not consider himself to be a shareholder with respect to those shares on that date. He did not include the taxable benefit in his tax return for the 1978 year because he was uncertain as to whether, in fact, he would end up getting the shares. Prior to August 30, 1979, no resolution had been passed by the company allotting the shares, the plaintiff did not describe himself in the insider reports as a shareholder of the company, the parties were not acting as though the plaintiff was a shareholder of the company. It was not merely a question of the purchase price not having been made but a completed contract having been agreed upon. In the present case, agreement with respect to the plaintiff’s potential purchase of the shares was simply held in abeyance until August 1979.
Counsel for the plaintiff also relies on Reynolds, PM v The Queen, [1975] CTC 85 (F.C.T.D.); and Falconer v. Minister of National Revenue, [1962] S.C.R. 664. A passage in the Reynolds case, at page 87, describes paragraph 85A(1)(a) [R.S.C. 1952, c. 148] (now paragraph 7(1)(a)) as referring to a situation where the employee “has exercised his option to purchase shares from a corporation”. It would be drawing too much from that passage to treat it as a considered interpretation dispositive of the present case. Mr. Justice Gibson was merely paraphrasing the import of the section in a general way. The issue of the paragraph’s application in a situation such as the present was not before him.
The Falconer case dealt with an appellant who was a member of a syndicate of four persons who acquired an interest in a farmout agreement with respect to certain oil lands. The syndicate of four members sold 75% of their interest in the farmout, and then agreed to form a company to take over their remaining interest. The four members agreed, at that time, that the consideration for the transfer of their rights under the farmout to the company would be 748,000 fully paid shares of the company. The appellant was to receive 166,000 of those shares. In May of 1985, the shares were not issued, nor was any formal agreement signed relating to the transfer of the property and issuance of the shares. However, on September 25, 1951, a formal agreement was signed which was stated to be “effective from June 15, 1951”, which was the date the parties had said their interest in the farmout agreement was transferred to the company in consideration for shares. In the interim, the company had gone public and the farmout agreement proved to be a success. The value of the shares of the company had therefore increased substantially between June 15, 1951 and September 25, 1951. The shares were not actually “allotted or issued” by the company to the four members of the syndicate until September 25, 1951.
The Supreme Court came to the conclusion, in a majority decision, that a binding agreement had been entered into on June 15, 1951 and that that was when the shares had been acquired. In coming to this decision, the majority placed heavy emphasis on the finding of fact that the company in question obtained possession of the assets and rights of the syndicate on June 15, 1951 and discharged the syndicate’s obligations under the farmout agreement from that date. The Court indicated that if specific performance had been sought to obtain issuance of the shares, it would have been granted. The decision held that the subsequent formal documentation of the transaction simply had lagged behind the actual agreement which was already in existence.
For the reasons given above I cannot draw the conclusion, in the present case, that a completed agreement was in existence on February 23, 1978 with respect to the purchase of non-free-trading shares. As I have noted, what the plaintiff wanted to acquire was shares he could sell. When he gave notice that he wanted to exercise the option on February 23, 1978, he knew the company could not provide free-trading shares. He did not pay for the shares at that point. He did not assume any of the incidences of ownership such as the right to vote the shares. He did not describe himself as a shareholder of those shares. The company did not describe him as a shareholder of the shares. As I have already indicated, my conclusion on the basis of the facts is that the shares were acquired by the shareholder on August 30, 1979.
Facts — Reimbursement of Legal Fees
As has been noted, the plaintiff and others were charged with several counts of conspiracy to defraud B.X. and one count of theft. The facts giving rise to these charges were outlined in the judgment of Judge H.L. McGivern of the Provincial Court of British Columbia:
In a simplified form, the case for the Crown may be summarized as follows: Pezim (Chairman of the Board of B.X.) in the spring of 1974, saw the opportunity to acquire a lime plant known as the Paul Lime Plant in Arizona. Pezim started to discuss the matter with one Sherwood Owens who, in turn, knew the trustee in bankruptcy of a company known as Homestake. The Paul Lime Plant was eventually acquired by Owens from the trustee and sold to a subsidiary company of B.X. Developments Ltd. The acquisition price consisted of cash, the assumption of certain debts and shares of the parent company, B.X. Developments Ltd. The Crown submits that the share portion of the consideration was a “sham” from the beginning or became a “sham” when Pezim and his co-accused arranged to receive approximately 350,000 shares of B.X. Developments Ltd. from Owen [sic]. The Crown submits that an agreement existed among the accused to carry out the transaction to the detriment of B.X. Developments and/or its shareholders.
The Crown further submits that a second conspiracy consisted which dealt with a fraud on B.X. Developments Ltd. of $50,000. This allegation, which is count #4 in the Information, concerns two payments of $25,000 to Shillingford Investments Ltd. which were “covered up” and treated as acquisition costs of the Paul Lime Plant. The Crown’s theory is that the accused, Clemiss, Pezim and Rotterman agreed to acquire these funds in an illegal fashion for their own use and benefit and that they were assisted by the accused, Leverant.
Thus, in the first count the plaintiff was charged with conspiracy with others to defraud B.X. of 350,000 shares of its capital. In the second count the plaintiff was charged with conspiring to defraud the shareholders of the company with respect to the 350,000 shares. In the third count the plaintiff was charged with conspiring to steal 350,000 shares of the company from the company. Finally, in the fourth count the plaintiff was charged with conspiring to defraud the company of $50,000 paid to Shillingford Investments.
As has also been noted on November 9, 1979 the plaintiff and his co-accused were acquitted.
Article 117 of B.X.’s constitution states:
INDEMNIFICATION AND PROTECTION OF DIRECTORS, OFFICERS, EMPLOYEES AND CERTAIN AGENTS
117. The Company shall indemnify any person who was … a party … to any completed action or proceeding, whether or not brought by the Company or by a corporation or other legal entity or enterprise as hereafter mentioned and whether civil, criminal or administrative by reasons of the fact that he is or was a director, … of the Company or is or was serving at the request of the Company as a director … of another corporation, …, against all costs, charges and expenses, including legal fees and any amount paid to settle the action or proceeding or satisfy a Judgment, if he acted honestly and in good faith with a view to the best interests of the corporation or other legal entity or enterprise as aforesaid of which he is or was a director, … as the case may be, and exercised the care, diligence and skill of a reasonably prudent person, and with respect to any criminal or administrative, action or proceeding, he had reasonable grounds for believing that his conduct was lawful; and provided that no indemnification of a director … of the Company, or director or former director of a corporation in which the Company is or was a shareholder, shall be made except to the extent approved by the Court pursuant to the Company Act or many other statute. The determination of any action, suit or proceeding by judgment, order, settlement, conviction or otherwise shall not, of itself, create a presumption that the person did not act honestly and in good faith and in the best interests of the Company and did not exercise the care, diligence and skill of a reasonably prudent person and, with respect to any criminal action or proceeding, did not have reasonable grounds to believe that his conduct was lawful.
Section 152 of the British Columbia Company Act [R.S.B.C. 1979, c. 59] states:
152. (1) A Company may, with the approval of the court, indemnify a director or former director of the company or a director or former director of a corporation of which it is or was a shareholder …, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment actually and reasonably incurred by him, including an amount paid to settle an action or satisfy a judgment in a civil, criminal or administrative action or proceeding to which he is made a party by reason of being or having been a director, including an action brought by the company or corporation, if
(a) he acted honestly and in good faith with a view to the best interests of the corporation of which he is or was a director; and
(b) in the case of a criminal, or administrative action or proceeding, he had reasonable grounds for believing that his conduct was lawful.
(2) The Court may, upon the application of a company, director or a former director, make an order approving an indemnity under this section, and the Court may make any further order it considers appropriate.
On March 24, 1980, a notice was issued for the purpose of calling an extraordinary meeting of the shareholders. The purpose of that meeting was to authorize reimbursement to the plaintiff for the legal fees he had incurred in defending the criminal charges. Management recommended reimbursement pursuant to article 117 of the company’s constitution and section 152 of British Columbia’s Company Act. The information circular which accompanied this notice stated:
Three of the individuals claiming indemnification, namely, Messrs. Pezim, Clemiss and Rotterman, are currently directors of the Company and, accordingly, it was a decision of the Board of Directors that before indemnification of these directors could be considered, the matter should first be referred to shareholders for approval or direction. …
Messrs. Pezim and Clemiss have advised that they have instructed counsel on their behalf to apply under section 151 of the Company Act for approval of the Court to payment of the indemnification requested by them. Both Mr. Pezim and Mr. Clemiss have agreed, however, to withhold their proposed application to the Court until the Company has had an opportunity to seek the approval or direction of its shareholders at an extraordinary general meeting to be called for such purpose.
…
Should any or all of the claims not be approved by the shareholders and, in the case of Messrs. Pezim and Clemiss not be approved by the Court, then the Board of Directors will deny the claims and the claimants may then seek redress through the Courts. In any event, it is not the intention of the directors to approve payment of any of the claims until such time as the claims of Messrs. Pezim and Clemiss have been considered by the Court and a decision rendered concerning such claims.
At the extraordinary general meeting of shareholders on May 5, 1980 reimbursement of the plaintiff was approved:
It was resolved that the Directors be authorized to approve payment to Arthur Clemiss of the sum of $146,555.37 and to pay such sum in satisfaction of his claim against the Company for indemnity, subject to approval of the British Columbia Supreme Court.
Court approval of this payment was obtained from the Supreme Court of British Columbia on June 13, 1980.
Reimbursement of Legal Fees — Benefit from Office or Employment
Subsection 6(1) of the Income Tax Act [as am. by S.C. 1980-81-82-83, c. 48, s. 1] provides:
6. (1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:
(a) The value of board, lodging and other benefits of any kind whatever … received or enjoyed by him in the year in respect of, in the course of, or by virtue of an office or employment. … [Underlining added.]
The Minister characterized the $146,533.37 as a benefit received by the plaintiff falling under the terms of paragraph 6(1)(a). The plaintiff argues that no benefit was received because the payment was a reimbursement for expenses he had incurred and there was no net benefit to him.
Counsel for the plaintiff referred to the decision in Ransom, Cyril John v. Minister of National Revenue, [1968] 1 Ex.C.R. 293, where it was held that the paying of moving expenses for an employee was not a benefit. It was held that reimbursement of an employee by an employer for expenses or losses incurred by reasons of employment was neither remuneration as such, nor a benefit “of any kind whatsoever”. The payment was money disbursed by reason of but not in the course of employment and it “puts nothing in the pocket but merely saves the pocket”.
A number of cases have been cited in which the reimbursement of expenses incurred as a result of moving at the behest of an employer, were held not to be a paragraph 6(1)(a) benefit. The reimbursement of such expenses was dealt with in: McNeill v. Canada, [1987] 1 F.C. 119(T.D.); Greisinger v. M.N.R. (1986), 15 C.C.E.L. 29 (T.C.C.); Phillips (W.R.) v. M.N.R., [1990] 1 C.T.C. 2372 (T.C.C.); Splane (R.O.J.) v. Canada, [1990] 2 C.T.C. 199 (F.C.T.D.). See also Huffman v. Canada (1990), 71 D.L.R. (4th) 385 (F.C.A.) for a case in which a clothing allowance was held not to be income. The Court held that there was no element of economic “benefit” to the taxpayer involved. The employer was merely restoring the taxpayer to the economic situation he had been in before he was required by the employer to incur the clothing expenses.
In Rendell v. Went (1963), 41 Tax Cas. 641 (Ch. D.) varied page 650 (C.A.) [[1963] 3 All E.R. 325] affirmed page 654 (H.L.) [[1964] 2 All E.R. 464], a taxpayer was held to have received a benefit when his employer paid legal fees which arose as a result of the taxpayer having been charged with causing the death of another by reckless or dangerous driving. At the time in question the employee was driving the company car in the course of his employment. The legal fees were not paid as a reimbursement to the taxpayer but not much turns on that fact. The company simply took over the employee’s defence and paid the fees directly. It allegedly spent more for legal services than the employee would himself have done. It was held that the amount spent was a benefit to be treated as income in the hands of the employee. Counsel for the plaintiff argues that the Rendell case is of limited value because it was decided by reference to the Income Tax Act of the United Kingdom and that that Act uses a broader category of “benefits” than applies under our law.
In any event, for the purpose of Canadian jurisprudence, the question is whether the legal fees paid by the plaintiff were losses incurred by reason of his employment or his office of director or whether they were expenses of a predominantly personal nature. In Pellizzari (T.) v. M.N.R., [1987] 1 C.T.C. 2106 (T.C.C.) it was held that the reimbursement of legal expenses which a taxpayer incurred defending criminal charges associated with the business activities of the company, of which she was a director and an employee, constituted a paragraph 6(1)(a) benefit. It was held that the payment of the legal fees had been personal expenses of the taxpayer and consequently that their reimbursement by the corporation constituted a benefit to her. The company had also been charged and both charges were subsequently withdrawn. Counsel seeks to distinguish this decision on the ground that the taxpayer in that case was acting for herself and therefore did not refer the court to the reimbursement type cases.
The Tax Court decision in the present case placed considerable reliance on the decisions in R. v. Savage, [1983] 2 S.C.R. 428 and R. v. Poynton, [1972] 3 O.R. 727 (C.A.), at page 738. In the Savage case it was said [at page 440]:
Our Act contains the stipulation, not found in the English statutes referred to, “benefits of any kind whatever … in respect of, in the course of, or by virtue of an office or employment”. The meaning of “benefits of whatever kind” is clearly quite broad; … Further, our Act speaks of a benefit “in respect of” an office or employment. In Nowegijick v. The Queen, [1983] 1 S.C.R. 29 this Court said, at p. 39, that:
The words “in respect of” are, in my opinion, words of the widest possible scope. They import such meanings as “in relation to”, “with reference to” or “in connection with”. The phrase “in respect of” is probably the widest of any expression intended to convey some connection between two related subject matters.
In Poynton the following interpretation was given [at page 738]:
I do not believe the language to be restricted to benefits that are related to the office or employment in the sense that they represent a form of remuneration for services rendered. If it is a material acquisition which confers an economic benefit on the taxpayer and does not constitute an exemption, e.g., loan or gift, then it is within the all-embracing definition of s. 3.
I find the reasoning in the Pellizzari, Savage and Poynton cases convincing. In the reimbursement cases there is a nexus between the expense and the requirements of the job. In the present case the expenses were incurred by the plaintiff not in order to do the job but to answer criminal charges laid against him personally. The charges did not even involve charges against the company. The company was alleged to have been the victim. While the actions which gave rise to the criminal charges took place in the context of the plaintiff’s employment with the company and his membership on the Board of Directors I could not find that there is the close nexus between their outlay and the plaintiff’s position as an employee and director of the corporation, in order to conclude that they were incurred by reason of that employment or directorship. Reference to the Rendell case is useful. In that case while the employee may have been required to drive the car in the place where the accident occurred for the purposes of his employment, he was not required to do so in a careless or reckless manner. The expenses incurred in defending the charges against him were not incurred by reason of his employment but were in the nature of personal expenses. For the reasons given, in this case, the $146,533.37 was properly included in the plaintiff’s income.
Conclusion
The plaintiff acquired the 40,000 shares of B.X. on August 30, 1979. Accordingly the taxable benefit he received was $286,400. The reimbursement of the legal fees he paid defending himself against the criminal charges which arose out of the dealings with the Paul Lime Plant constituted a paragraph 6(1)(a) benefit and therefore was properly included as income. The plaintiff’s appeal is accordingly dismissed and the defendant shall have her costs of the action.