T-396-86
J. Stuart Robertson (Plaintiff)
v.
The Queen (Defendant)
INDEXED AS: ROBERTSON V. CANADA
Trial Division, Dubé J.—Calgary, December 10,
1987; Ottawa, January 6, 1988.
Income tax — Income calculation — Taxable benefits —
Option to buy shares granted in 1974, exercised in 1980 —
Worth $235,500 more than amount paid — Profits taxable
only when accrued (1980).
The taxpayer worked as ranch manager for a Mr. Pierce who
was also the president of Ranger Oil (Canada) Limited. In
1974, as an inducement to remain in his employment, Pierce
granted the taxpayer an option to acquire certain shares owned
by him in Ranger Oil. The option price was equivalent to or
greater than the fair market value of the shares when the
option was granted.
In 1980, the taxpayer exercised his option and bought 6,000
shares, making a profit of $235,500. The Minister, invoking
subsection 5(1) and paragraph 6(1)(a) of the Act, reassessed
the taxpayer for his 1980 taxation year, adding the $235,500 as
a taxable benefit.
This is an action attacking that reassessment.
Held, the action should be dismissed.
Section 7 is clearly not applicable in this case since the
plaintiff is not an employee of a corporation. This case is
governed by subsection 5(1) and paragraph 6(l)(a) of the Act.
The benefit obtained was correctly included in the taxation
year in which the option was exercised rather than in the year
that the option was granted. It is true that in Abbott v. Philbin
(Inspector of Taxes), the House of Lords held that the taxable
benefit in the case of a stock option was the value of the option
at the date the option was acquired, reasoning that the increase
in value was "due to numerous factors which have no relation
to the office of the employee, or to his employment in it". That
decision was, however, based upon the wording of an English
statute which is different from the language of paragraph
6(1)(a) of the Act. That interpretation was also incompatible
with the interpretation of the words "in respect of in para
graph 6(1)(a) by the Supreme Court of Canada in R. v. Savage
which gave them the "widest possible scope".
It is a principle of income recognition that an amount must
not be taxed as income until uncertainty about the taxpayer's
entitlement (in this case the continuation of his employment)
has been removed. As Lord Denning said in his dissent in
Abbott v. Philbin, "It is not the expectation to make profits,
nor the right to make profits, which is taxable, but only the
profits themselves." The profits accrued to the plaintiff when
he exercised his option in the 1980 taxation year.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Income Tax Act, 1952, 15 & 16 Geo. 6 & Eliz. 11, c. 10,
Sch. 9, ar. 1.
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 5(1),
6(1)(a), 7(1)(a) (as am. by S.C. 1977-78, c. 1, s. 3).
CASES JUDICIALLY CONSIDERED
APPLIED:
R. v. Savage, [1983] 2 S.C.R. 428; 83 DTC 5409.
NOT FOLLOWED:
No. 126 v. M.N.R. (1953), 53 DTC 419 (App. Bd.); No.
247 v. M.N.R. (1955), 55 DTC 192 (App. Bd.); Snell v.
M.N.R. (1957), 57 DTC 299 (App. Bd.).
DISTINGUISHED:
Abbott v. Philbin (Inspector of Taxes), [1960] 2 All E.R.
763 (H.L.).
CONSIDERED:
Williams v. Minister of National Revenue (1954), 55
DTC 1006 (Ex. Ct.); Salmon v. Weight (Inspector of
Taxes), [1935] All E.R. 904 (H.L.); M.N.R. v. Rousseau
(1960), 60 DTC 1236 (Ex. Ct.); Tyrer v. Smart (Inspec-
tor of Taxes), [1979] STC 34 (H.L.).
REFERRED TO:
R. H. Cutmore et al. v. M.N.R. (1986), 86 DTC 1146
(T.C.); Waffle v. M.N.R. (1968), 69 DTC 5007 (Ex.
Ct.); T. Pellizzari v. M.N.R. (1987), 87 DTC 56 (T.C.);
T. E. Cox v. M.N.R. (1978), 78 DTC 1468 (T.R.B.); T.
T. Hnatiuk v. The Queen (1976), 76 DTC 6376
(F.C.T.D.).
AUTHORS CITED
Arnold, Brian J. Timing and Income Taxation: The
Principles of Income Measurement for Tax Purposes.
Toronto: Canadian Tax Foundation, 1983.
Sherbaniuk, Douglas J. Specific Types of Personal
Income. Royal Commission on Taxation, Study No. 16.
Toronto: University of Toronto, 1967.
Ward's Tax Law and Planning, Vol. 1. Davies Ward &
Beck and Brian J. Arnold. Toronto: The Carswell
Company Limited, 1983.
COUNSEL:
Orville A. Pyrcz and James A. W. Williams
for plaintiff.
Robert W. McMechan and Pierre Barsalou
for defendant.
SOLICITORS:
Ballem, McDill, Maclnnes & Eden, Calgary,
for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
Dust J.: In reassessing the plaintiff for his 1980
taxation year, the Minister of National Revenue
added as a taxable benefit the sum of $235,500
being the amount by which the fair market value
of 6,000 shares at the date of the plaintiff's acqui
sition thereof exceeded the purchase price paid
therefor by him.
The key facts in this income tax case are quite
straightforward and may be briefly summarized as
follows. At all material times the plaintiff was
employed by Mr. Jack M. Pierce ("Pierce") as
ranch manager to supervise his ranching opera
tions. As an inducement to the plaintiff to remain
in his employment, Pierce granted the plaintiff an
option in 1974 to acquire certain shares which
were owned by Pierce in Ranger Oil (Canada)
Limited of which Pierce was the president. The
option price in respect of the shares was equivalent
to or greater than the fair market value thereof at
the time the option was granted.
In 1980 the plaintiff exercised his option with
respect to a portion of the aforementioned shares.
On the date of such exercise, the fair market value
of the shares in question exceeded the purchase
price paid therefor by the plaintiff in the amount
of $235,500. The Minister based his reassessment
upon subsection 5(1) and paragraph 6(1)(a) of the
Income Tax Act [R.S.C. 1952, c. 148 (as am. by
S.C. 1970-71-72, c. 63, s. 1)] which reads as
follows:
5. (1) Subject to this Part, a taxpayer's income for a taxa
tion year from an office or employment is the salary, wages and
other remuneration, including gratuities, received by him in the
year.
6. (I) 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 (except the benefit he derives from his
employer's contributions to or under a registered pension
fund or plan, group sickness or accident insurance plan,
private health services plan, supplementary unemployment
benefit plan, deferred profit sharing plan or group term life
insurance policy) received or enjoyed by him in the year in
respect of, in the course of, or by virtue of an office or
employment;
The Minister contends that the purpose of para
graph 6(1)(a) is to extend the meaning of "income
from an office or employment" beyond the normal
concept of "salary, wages and other remuneration,
including gratuities", by including the value of
"benefits of any kind whatever" which an
employee receives or enjoys "in respect of, in the
course of, or by virtue of" an office or
employment.
In Williams v. Minister of National Revenue,' a
1954 Exchequer Court of Canada decision, Cam-
eron J., referring to paragraph 5(b)(i), the prede
cessor to the present 6(1)(a), said as follows at
page 1007:
The purpose of the subsection is to extend the meaning of
"income from an office or employment" beyond the normal
concept of "salary, wages and other remuneration, including
gratuities" by including in that term the value of board,
lodging and other benefits which an employee may receive or
enjoy in the course of, or by virtue of, his office or employment.
In R. v. Savage, 2 a 1983 decision, the Supreme
Court of Canada dealt with paragraph 6(1)(a) and
Dickson J. (as he then was) emphasized the key
words of the paragraph to be "benefits of any kind
whatever", "in respect of, in the course of, or by
virtue of an office or employment". He said as
follows at pages 440 S.C.R.; 5414 DTC:
The meaning of "benefits of whatever kind" is clearly quite
broad; in the present case the cash payment of $300 easily falls
within the category of "benefit". 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 rela
tion 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 sub
ject matters.
' (1954), 55 DTC 1006 (Ex. Ct.).
2 [1983] 2 S.C.R. 428; 83 DTC 5409.
Consequently, the Minister argues that when
the plaintiff paid $22,500 for 6,000 common
shares with a fair market value of $258,000 during
his 1980 taxation year he thus received the benefit
of $235,500 during that year. He acquired that
benefit by virtue of the inducement of his employ
er to him to remain in his employment as ranch
manager. That benefit was a "benefit of any kind
whatever" gained "in respect of' his employment
within the wide meaning attributed to those words
by the Supreme Court of Canada in the above
case.
Several instances of such benefits having been
held to be in respect of employment under para
graph 6(1)(a) have been recorded by the jurispru
dence in the matter: the cost of preparing
employees' income tax returns,' the cost of a
vacation trip by a supplier, 4 the payment of per
sonal legal expenses,' the acquisition of shares for
an amount less than their fair market value. 6
On the other hand, the plaintiff argues that the
only income tax provision which would apply to an
agreement to issue shares to an employee is section
7. Paragraph 7(1)(a) [as am. by S.C. 1977-78,
c. 1, s. 3] reads as follows:
7. (1) Subject to subsection (1.1), 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 corpora
tion 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;
The plaintiff alleges that section 7 is clearly
inapplicable because the plaintiffs employer is not
a corporation. Moreover, the plaintiff is not an
employee of a corporation. That allegation is valid.
3 R. H. Cutmore et al. v. M.N.R. (1986), 86 DTC 1146
(T.C.).
° Waffle v. M.N.R. (1968), 69 DTC 5007 (Ex. Ct.).
5 T. Pellizzari v. M.N.R. (1987), 87 DTC 56 (T.C.).
6 No. 126 v. M.N.R. (1953), 53 DTC 419 (App. Bd.); No.
247 v. M.N.R. (1955), 55 DTC 192 (App. Bd.); Snell v.
M.N.R. (1957), 57 DTC 299 (App. Bd.) and T. E. Cox v.
M.N.R. (1978), 78 DTC 1468 (T.R.B.).
The Minister, however, does not rely on section 7
but on paragraph 6(1)(a).
In the alternative, the plaintiff contends that if
paragraph 6(1) (a) is applicable, then the value of
any benefit obtained by the plaintiff should have
been included in his income for the taxation year
during which the option was granted (1974) and
not for the taxation year in which the option was
exercised (1980). For that proposition he relies
mostly on three decisions' of Mr. Fordham of the
then Income Tax Appeal Board, decisions largely
based on Salmon v. Weight (Inspector of Taxes), 8
a 1935 House of Lords decision.
In Salmon, the managing director of a company
was entitled to a yearly salary and in addition,
under resolution each year, was given the privilege
to apply for and take up at par, certain unissued
shares of the company which were at all times of a
value considerably in excess of par. The Court held
that the advantage to the director of receiving the
allotments was "profits" from "having or exercis
ing an office or employment of profit" within the
English Income Tax Act. Thus, in that case, the
taxpayer's request to purchase shares at less than
the market price was taxable upon receipt of the
shares. Lord Atkin said as follows (at page 910):
It is to be observed that while the board have expressed their
willingness to entertain an application for these shares, nobody
was bound and no right was given and no profit was received of
any kind by the appellant until the application had been
accepted and the shares in question had been allotted to him.
At that moment he received from the company 2,500 shares on
which there was no clog whatever and he was entitled to go on
the market and sell those shares, for which he had paid £1, and
he would at once be in a position to receive £3 or £4 or £5, as
the case might be.
In the above case, the Court held that the
special privilege to buy shares at a price lower than
their market value was clearly given in respect of
services rendered by the appellant. The privilege,
though in itself not indeed money, was money's
worth. The plaintiff contends that in the instant
case, the taxpayer was given a legally enforceable
' No. 126 v. M.N.R.; Snell v. M.N.R. and No. 247 v.
M.N.R., supra, note 6.
8 [1935] All E.R. 904 (H.L.).
right in the nature of a share purchase option as
opposed to the simple privilege of purchasing the
shares at the discretion of the Board of Directors
as in Salmon: the date of taxation would therefore
be determined by the date this legally enforceable
right was granted i.e. the date the share purchase
option was granted.
With reference to a legally enforceable right to
purchase shares under a stock option, the plaintiff
relies on Mr. Fordham's third decision, No. 247 v.
M.N.R. In that case the taxpayer received an
option in 1951 to purchase shares of his employer's
company at a price which was less than the current
fair market value of the shares in question. The
option was received by the taxpayer prior to the
enactment of the predecessor to section 7 of the
Income Tax Act. The taxpayer exercised his
option in 1952. Mr. Fordham confirmed the Min
ister's decision to assess a benefit for the year in
which the option was granted (not the year in
which the option was exercised).
The plaintiff relies also on Abbott v. Philbin
(Inspector of Taxes), 9 a decision of the House of
Lords wherein the taxpayer received from his
employer an option to purchase shares at the
existing market price. The option was exercisable
within a ten-year period. The taxpayer exercised
his option in the subsequent year when the shares
in question were worth more than the option price.
The majority of the House of Lords held that the
exercise of the taxpayer's option did not give rise
to a taxable transaction and that the taxable ben
efit was the value of the option at the date the
option was acquired. Viscount Simonds said this
(at page 767):
But I do not find it easy to say that the increased difference
between the option price and the market price in 1956 or, it
might be, in 1964 in any sense arises from the office. It will be
due to numerous factors which have no relation to the office of
the employee, or to his employment in it.
Professor Douglas J. Sherbaniuk in a study for
the Royal Commission on Taxation entitled Spe
cific Types of Personal Income offered these com
ments regarding the majority decision in Abbott v.
Philbin (at pages 143-144):
9 [1960] 2 All E.R. 763 (H.L.).
Canadian courts, on similar facts, would very likely reach the
same result as did the majority. A legally enforceable contrac
tual right would seem clearly to fall within the elastic concept
of "benefit" in section 5(1)(a) and, when granted in circum
stances similar to those in Abbott v. Philbin, also within the
words "in respect of, in the course of or by virtue of the office
or employment". Furthermore, although Canadian courts have
not yet come to grips with interpreting these latter phrases, it
seems probable that they would follow a line of reasoning
similar to that taken by the majority and hold that increases in
the value of stock that were attributable to factors such as
retention of profits and expansion of business could not be said
to have been received "in respect of, in the course of or by
virtue of the office or employment". In summary, then, the
employee would be taxed in respect of the value of the option,
less what he paid for it, in the year of the grant of the option.
Reference is also made to Ward's Tax Law and
Planning, Volume 1 wherein it is stated (at page
3-67):
In the absence of special provisions in the Act relating to
stock options, the second type of contract results in taxable
income being received by the employee under section 5 or
section 6(1)(a) at the time the option is granted rather than at
the time of exercise. The measure of the taxable benefit would
be the difference between the option price and the fair market
value of the stock at the date the option is granted: Salmon v.
Weight, [1935] All E.R. 904, 19 T.C. 174 (H.L.); No. 126 v.
M.N.R., 53 D.T.C. 419, 9 Tax A.B.C. 241. See also Abbott v.
Philbin, [1960] 2 All E.R. 763, [1961] A.C. 352 (H.L.).
And it is further stated (at pages 3-75 and
3-76):
Stock option benefits to which section 7 does not apply (e.g.
benefits received under agreements made on or before March
23, 1953) are taxable to the employee in the year in which the
option is granted. If the option price is equal to the value of the
stock when the option is given, no benefit is considered to be
received at that time. With respect to the tax consequences of
the exercise of the option, see Abbott v. Philbin, [1960] 2 All
E.R. 763, [1961] A.C. 352 (H.L.).
Consequently, the plaintiff in this case argues
that he obtained an enforceable right during the
1974 taxation year to purchase shares and the
purchase price was equal to or greater than the
fair market value of the shares at the time the
option was granted. Accordingly, the plaintiff did
not receive any benefit within the meaning of
paragraph 6(1)(a) by virtue of the initial grant of
the option in 1974. However, if the conferral of the
option did create a benefit to the plaintiff in 1974,
having regard to the fair market value of the
option, the benefit in that year was nominal at
best, according to the plaintiffs submission.
In conclusion, the plaintiff further submits that
there are no charging provisions in the Act which
would render him liable to include in income any
amount with respect to the exercise of the option
during the 1980 taxation year: section 7 is inopera
tive in this case, and paragraph 6(1)(a) is inappli
cable because in view of the Abbott v. Phiibin
decision, such increase in value was not realized by
the plaintiff "in respect of, in the course of or by
virtue of' his office or employment during the
1980 taxation year.
In answer to the plaintiffs position the Minister
alleges that prior to the plaintiffs 1980 taxation
year no portion of the $235,500 benefit had been
"received or enjoyed by him in the year" within
the meaning of paragraph 6(1)(a) of the Income
Tax Act. In support of that proposition the Minis
ter relies on a 1960 Exchequer Court decision,
M.N.R. v. Rousseau 10 wherein Fournier J. said (at
page 1238):
As a rule, it is the income paid or received that is taxed.
Fournier J. held that since the taxpayer did not
in fact receive the salaries and rentals credited to
him, they were not taxable in that year. He point
ed out that if the legislator had wanted to tax
amounts receivable it would have said so in clear
terms, as otherwise the general rule is that
amounts must have been received before they con
stitute income.
In the instant case, prior to the plaintiffs acqui
sition of the shares in 1980, his right was always
conditional upon the continuation of his employ
ment. In other words, until the plaintiff actually
exercised his option in 1980, it could not be ascer
tained whether that central condition of the agree
ment would be fulfilled: it is a principle of income
recognition that an amount must not be taxed as
income until uncertainty about the taxpayer's en
titlement to it has been removed.
10 (1960), 60 DTC 1236 (Ex. Ct.).
In a paper prepared for the Canadian Tax Foun
dation, entitled Timing and Income Taxation,"
Professor B. J. Arnold deals with the principles of
income measurement for tax purposes. As a gener
al principle, he states (at page 78) that:
For income tax purposes, taxpayers using the cash method
generally report revenue items in the year in which they are
actually received.
He further notes (at page 80) that:
The Act requires the use of the cash method of accounting
with respect to the following types of income: income from
office or employment ....
A notation at the bottom of that page reads as
follows:
Subsection 5(1) and paragraph 6(1)(a). Income from
employment includes not only salary and wages, but also a wide
variety of cash and in-kind fringe benefits.
Under "Income from Office or Employment"
(at pages 81 and 82) he notes:
Noncash benefits, such as board and lodging, allowances, direc
tor's fees, employment bonuses, and payments pursuant to a
covenant not to compete, are included in a taxpayer's income
only if they are received in the year.
•
At the bottom of page 82 the following notation
appears:
Paragraphs 6(1)(a), 6(1)(b), 6(l)(c) and subsection 6(3).
Paragraph 6(1)(a) refers to benefits "received or enjoyed" by
the taxpayer in the year.
Further on (at page 84) he deals with the gener
al concept of receipt as follows:
Under the cash method of accounting, an amount is included in
the computation of a taxpayer's income only if it is received by
the taxpayer and has the quality of income. The mere right to
receive an amount does not constitute income.
One final quote bears reproduction (at page
122):
The Act includes many other specific timing provisions. For
example, subsection 6(1) requires an officer or employee to
include in his income from office or employment only amounts
that he has actually received.
" Timing and Income Taxation: The Principles of Income
Measurement for Tax Purposes, (1983), Canadian Tax Foun
dation, B. J. Arnold.
In my view, the benefits received by the plaintiff
in 1980 are indeed benefits taxable in that year. I
do not consider Abbott v. Philbin to be authority
for the proposition that in Canada such benefits
would be taxable in the year the option was award
ed and not in the year in which the option has been
exercised. This 1960 House of Lords decision is
based upon the wording of an English statute
which is different 12 from the language of para
graph 6(1)(a) of the Canadian Income Tax Act.
Secondly, such an interpretation is incompatible
with the interpretation of the words "in respect of"
by the Supreme Court of Canada in its 1983
Savage decision which gives them "the widest
possible scope". Thirdly, the English decision is
subject to two dissenting judgments, including
Lord Denning's and his famous pronouncement (at
page 777) that "A bird in the hand is taxable, but
a bird in the bush is not." Fourthly, the House of
Lords in a more recent decision (1978) Tyrer v.
Smart (Inspector of Taxes)" held that the gain
which accrued to a taxpayer between the date of
his application for shares and his acquisition of the
shares was attributable to his employment and not
to "numerous factors which have no relation to the
office of the employee, or to his employment in it"
as said by Viscount Simonds in Abbott v.
Philbin. 14 And, obviously, I am not bound by the
Income Tax Appeal Board decisions.
In conclusion, what the plaintiff got in 1974 was
the expectation of making a profit. The very
nature of an expectation connotes an element of
uncertainty. An option is a volatile instrument. Its
value will vary along with the fluctuations of the
market and/or the intrinsic value of the shares
which the option may purchase. As Lord Denning
so well said (at page 778): "it is not the expecta
tion to make profits, nor the right to make profits,
12 The British text reads as follows: "Tax under Sch. E shall
be annually charged on every person having or exercising an
office or employment mentioned in Sch. E ... in respect of all
salaries, fees, wages, perquisites or profits whatsoever there
from for the year of assessment ...", r. I of Schedule 9 of the
Income Tax Act, 1952 [15 & 16 Geo. 6 & Eliz. II, c. 10].
13 [1979] STC 34(H.L.).
"As quoted at p. 150 of these reasons.
which is taxable, but only the profits themselves."
The profits only accrued to the plaintiff when he
exercised his option in the 1980 taxation year.
Under the circumstances, it is not necessary for
me to deal with the Minister's final argument that
the plaintiff is now estopped from taking the posi
tion that the benefit should have been taxed in
1974 as he reported no benefit for that year in
respect of the option to purchase the shares. The
1974 taxation year is now statute-barred. The
defendant argued that the plaintiff's alternate sub
mission amounted to what Mahoney J. described
in T. T. Hnatiuk v. The Queen'' (at page 6377) as
"a text-book example of estoppel by representa
tion". Neither is it necessary for me to canvass the
American jurisprudence submitted by the defen
dant.
For all those reasons the action is dismissed with
costs.
15 (1976), 76 DTC 6376 (F.C.T.D.).
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.