T-3194-78
Vincent N. Hurd (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Dubé J. Toronto, October 11;
Ottawa, October 18, 1979.
Income tax — Income calculation — Non-residents —
Stock option issued while employee was working in Canada
but exercised only when he returned to the United States —
Whether increase in value is income earned from duties of
office or employment in Canada under s. I15(I)(a)(i) of
Income Tax Act — Whether benefit received was of a capital
nature and therefore exempt under Article VIII of the Cana-
da-U.S. Tax Convention — Income Tax Act, S.C. 1970-71-
72, c. 63, ss. 2(3), 7(1)(a) — The Canada-United States of
America Tax Convention Act, 1943, S.C. 1943-44, c. 21.
Appeal from a decision of the Tax Review Board confirming
an assessment of the Minister of National Revenue which
included in the plaintiffs income for his 1973 taxation year the
sum of $77,812.50. The plaintiff, an American citizen, worked
in Canada from September 1965 to March 31, 1971 and was
given an option by his employer to buy shares in the employer
Company. He returned to the United States on April 1, 1971
but exercised the option only on September 26, 1973. The
amount by which the value on that date of the shares exceeded
the amount paid was the amount the Minister included in the
plaintiffs income for 1973. The plaintiff claimed (1) that there
is no provision in the Income Tax Act which deems that the
plaintiff performed any duties of an office or employment in
Canada during his 1973 taxation year and (2) if there was a
benefit received by virtue of paragraph 7(1)(a), then such
benefit was of a capital nature and therefore exempt by virtue
of Article VIII of the Canada-United States of America Tax
Convention.
Held, the appeal is dismissed with costs. By virtue of para
graph 7(1)(a) of the Act the plaintiff acquired shares the
excess value of which "shall be deemed to have been received
... by virtue of his employment in the taxation year in which
he acquired the shares" and "for greater certainty" subsection
7(4) declares that subsection 7(1) shall continue to apply as
though "[he] were still an employee and as though the employ
ment were still in existence". The employment deemed to have
been continued is, of course, the one he occupied in Canada at
the time the agreement was made. Whether plaintiff actually
performed any duties of an office or employment in Canada
during his 1973 taxation year is immaterial. The plaintiff
cannot claim that the benefit is of a capital nature and there
fore exempt from taxation in Canada by virtue of Article VIII
of the Canada-United States of America Tax Convention
because the transaction was neither a sale nor an exchange of
capital assets. He acquired shares at a price previously set
under an option and thus benefited from their increased value,
a benefit taxable under the Act as having been made by virtue
of his employment in Canada. The mere fact that it was
exercised after he left Canada does not transform the taxable
benefit into something else.
INCOME tax appeal.
COUNSEL:
T. G. Heintzman and J. L. Finlay for
plaintiff.
I. MacGregor for defendant.
SOLICITORS:
McCarthy & McCarthy, Toronto, for plain
tiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
Dust J.: This is an appeal of a decision of the
Tax Review Board confirming an assessment of
the Minister of National Revenue which included
in the plaintiff's income for his 1973 taxation year
the sum of $77,812.50.
The basic issue to be resolved here is whether a
resident in the United States can be taxed in
Canada with respect to a stock option issued to
him while he was employed in Canada, but not
exercised until he returned to the United States.
Both parties filed a statement of agreed facts
identical to the one placed before the Tax Review
Board. The relevant facts are as follows:
The plaintiff is an American citizen who worked
and resided in Canada from September 1965 to
March 31, 1971 after which date he returned to
the United States. On October 4, 1967, by way of
an agreement, his employer The British American
Oil Company Limited ("the Company"), a
Canadian corporation, gave him an option to buy
2,500 shares in the Company at $37 3/8 per share.
On April 1, 1971 he returned to the United States
to work with Gulf Oil Corporation, an "affiliated
company" of his former employer. On September
26, 1973 he validly exercised his option and pur
chased 5,000 common shares (the shares were split
in the interim) at a cost of $18.69 per share. The
amount by which the value on that date of the
shares exceeded the amount paid was $77,812.50.
The Minister included all of that amount in the
plaintiffs income for his 1973 taxation year.
The plaintiff reported only a portion of that
sum, or $43,606.13, which he computed by appor
tioning the total amount of $77,812.50 according
to the number of days in which he was employed
in Canada over the total number of days between
the date when he received the option and the date
when he exercised it. He worked out the calcula
tion as follows:
Calculation of taxable portion of stock option benefit
Date option granted October 4, 1967
Date option exercised Sept. 26, 1973
Date ceased to be resident
in Canada and returned to U.S. April 1, 1971
Days between grant and exercise dates:
Spent in Canada 1224 56.04
Spent in U.S.* 960 43.96
2184 100.00
Taxable portion of stock option benefit:
.5604 x 77,812.50 = $43,606.13
*Includes 51 days spent in U.S. on business between October 4,
1967 and April 1, 1971.
The option agreement carried these stipulations:
The option is exercisable only after one year's
continuous employment with the Company, or an
affiliated company. It is exercisable within ten
years, not thereafter. In the case of retirement it
becomes exercisable within six months, not later.
In case of death the option is exercisable within
twelve months. In the case of termination for other
reasons, within three months. Should the capital
stock of the Company be subdivided into a greater
number of shares, the optionee is entitled to pur
chase a proportionately increased number of
shares.
Learned counsel for the plaintiff advances two
alternative arguments: Firstly, there is no provision
in the Income Tax Act which deems that the
plaintiff performed any duties of an office or
employment in Canada during his 1973 taxation
year. Secondly, if there was a benefit received by
the plaintiff by virtue of paragraph 7(1)(a) of the
Act, then such benefit was of a capital nature and
therefore exempt by virtue of Article VIII of the
Canada-United States of America Tax Conven
tion.
He contends that the basis of taxation in
Canada is comprised of two factors: residency, or
activities carried on by non-residents within
Canada. The plaintiff being a non-resident, the
charging provision would be subsection 2(3),
which reads:
2....
(3) Where a person who is not taxable under subsection (1)
for a taxation year
(a) was employed in Canada,
(b) carried on a business in Canada, or
(c) disposed of a taxable Canadian property,
at any time in the year or a previous year, an income tax shall
be paid as hereinafter required upon his taxable income earned
in Canada for the year determined in accordance with Division
D.
He argues that taxing statutes must be strictly
construed and that tax is exigible only if the words
clearly indicate a charge of tax to the plaintiff. For
the plaintiff to be subject to Canadian tax in his
1973 taxation year he must have been employed in
Canada, or deemed to have been employed in
Canada, and his taxable income must be deter
mined in accordance with Division D. Division D,
titled "Taxable Income Earned in Canada by
Non-Residents" contains only the two sections 115
and 116. The latter section is not relevant as it
deals with the disposition by non-residents of cer
tain property.
The relevant clause, subparagraph 115(1) (a) (i)
stipulates that a non-resident's taxable income is
the amount of his "incomes from the duties of
offices and employments performed by him in
Canada". It reads:
115. (1) For the purposes of this Act, a non-resident per
son's taxable income earned in Canada for a taxation year is
the amount of his income for the year that would be determined
under section 3 if
(a) he had no income other than
(i) incomes from the duties of offices and employments
performed by him in Canada,
The plaintiff is not caught by the provisions of
that subparagraph as he performed no duties of
offices and employments in Canada during the
1973 taxation year. During that year he worked in
the United States.
The plaintiff, however, concedes that under
paragraph 7(1)(a) an employee who has acquired
shares under such an agreement, as his option,
shall be deemed to have received a benefit by
virtue of his employment, but he argues that the
paragraph only applies to the employee by virtue
of his employment in the taxation year in which he
acquired the shares. The plaintiff points out that in
1973 he performed no duties in Canada. The
subparagraph reads:
7. (1) Where a corporation has agreed to sell or issue shares
of the capital stock of the corporation or of a corporation with
which it does not deal at arm's length to an employee of the
corporation or of a corporation with which it does not deal at
arm's length,
(a) if the employee has acquired shares under the agree
ment, 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;
He therefore concludes that Parliament did not
specify that a taxpayer in his circumstances was
deemed to have performed duties of an office or
employment in Canada, and therefore that in cal
culating his taxable income pursuant to subpara-
graph 115(1)(a)(i) no amount of any benefit
deemed to be received by him pursuant to subsec
tion 7(1)(a) is to be included in his taxable
income.
Learned counsel, of course, is not unaware of
subsection 7(4) of the Act which declares that
subsection (1) shall continue to apply "as though
the person were still an employee and as though
the employment were still in existence". He argues
that by virtue of subsection 7(4) the plaintiff may
be deemed to have continued in employment, but
not in employment in Canada. In other words, he
says that subsection 7(4) does not apply to non
residents. In the year 1973 the plaintiff was not a
resident in Canada and was not employed in
Canada; if he is to be deemed so to be, that can
only be effected by clear unambiguous language.
Subsection 7(4) reads:
7....
(4) For greater certainty it is hereby declared that, where a
person to whom any provision of subsection (1) would other
wise apply has ceased to be an employee before all things have
happened that would make that provision applicable, subsection
(1) shall continue to apply as though the person were still an
employee and as though the employment were still in existence.
As to the calculation obtained by apportioning
the excess amount as between days spent in
Canada and days spent in U.S. during the relevant
period between the grant of the option and its
exercise, we are referred to subparagraph
115(1)(a)(v). However, counsel for the plaintiff
admits that his client incorrectly used the provi
sions of that subparagraph which do not apply in
his case: He is not a non-resident person as
described in subsection 115(2).
Unfortunately for the plaintiff, I cannot accept
his first proposition.
The aforementioned subsection 2(3) of the Act
clearly applies to a non-resident who "was
employed" in Canada at any time in the year, "or
a previous year". He may be charged even if he
was not employed in Canada in the taxation year.
By virtue of paragraph 7(1)(a) the plaintiff
acquired shares the excess value of which "shall be
deemed to have been received ... by virtue of his
employment in the taxation year in which he
acquired the shares". And "for greater certainty"
subsection 7(4) declares that subsection 7(1) shall
continue to apply as though "[he] were still an
employee and as though the employment were still
in existence". The employment deemed to have
been continued is, of course, the one he occupied in
Canada at the time the agreement was made. It
cannot be any subsequent or previous employ
ments. It has to be the employment which yielded
the agreement and which is deemed under subsec
tion 7(4) to continue as though it were still in
existence when the profit was reaped.
Whether plaintiff actually performed any duties
of an office or employment in Canada during his
1973 taxation year is immaterial. In my view,
under the combined provisions of section 7, the
non-resident plaintiff received by virtue of his
employment in Canada, actually terminated in
1971 but deemed to have been continued to 1973,
a benefit which is taxable in that taxation year.
Alternatively, plaintiff contends that if the ben
efit were taxable income pursuant to the provisions
of section 7, then such benefit is of a capital nature
and therefore exempt from taxation in Canada by
virtue of Article VIII of the Canada-United States
of America Tax Convention, which reads:
ARTICLE VIII
Gains derived in one of the contracting States from the sale
or exchange of capital assets by a resident or a corporation or
other entity of the other contracting State shall be exempt from
taxation in the former State, provided such resident or corpora
tion or other entity has no permanent establishment in the
former State.
Plaintiff submits that the purchase of shares
exercised under the option was "an exchange of
capital assets". He claims that at common law the
stock option agreement was a capital asset which
he exchanged in 1973 for shares in Gulf Canada
Limited.
That submission is not valid. Plaintiff's transac
tion was neither a sale nor an exchange of capital
assets. He acquired shares at a price previously set
under an option and thus benefited from their
increased value, a benefit taxable under the Act as
having been made by virtue of his employment in
Canada. The mere fact that he only exercised his
option after he had left Canada does not transform
the taxable benefit into something else.
The appeal therefore must be dismissed, with
costs.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.