T-2986-89
Placer Dome Inc. (Plaintiff)
v.
Her Majesty the Queen (Defendant)
INDEXED AS: PLACER DOME INC. V. CANADA (T.D.)
Trial Division, Denault J.—Vancouver, November
13, 1990; Ottawa, April 12, 1991.
Income tax — Income calculation — Deductions — Income
Tax Act, s. 7(1)(a) deeming amount by which fair market
value of shares on date acquired exceeds amount paid to
corporation to be employment benefit — Under taxpayer's
stock purchase plan, employees contributing portion of salary
and company making monthly cash payout equal to one half
of employee's contribution — Upon determining aggregate in
members' cash accounts each month, trustee purchasing shares
at price listed on T.S.E. — Minister disallowing deduction of
contribution as additional wages or salary under s. 5(1) —
Plan not within s. 7(1)(a) as employees paying fair market
value — Under s. 7(1)(a) value of shares when acquired must
exceed amount paid — Plan not merely scheme to issue shares
at discount — Employer may offer benefit packages not
dependent upon promotion or increased duties to attract
employees to organization — Deduction allowed as payout
remuneration taxable under s. 5.
This was an appeal from a reassessment of the plaintiff's
1985 income tax return. Under plaintiff's stock purchase plan,
employees over nineteen may contribute up to six per cent of
their salary after one year of service. A trustee administers the
Plan for the members' benefit. A cash account and a share
account are maintained for each member. The company makes
a cash payout each month equal to one half of the employee's
contribution to the employee's cash account. The trustee credits
the employee's account with employee and employer contribu
tions and any dividends or other income received on the shares.
He debits the member's account for shares purchased and any
cash distributed to him. The company's cash contributions are
stated to be an absolute benefit for the member. They are
regarded as additional compensation and taxes are withheld at
source. Upon determining the aggregate sum carried in the
members' cash accounts each month, the trustee purchases
common shares first from members who are withdrawing or
terminating and then from the company treasury. The price
paid is that listed on the Toronto Stock Exchange. The com
pany deducted its contribution as additional wages or salaries
paid to employees under the Income Tax Act, subsection 5(1).
The deduction was disallowed. Paragraph 7(1)(a) deems the
amount by which the value of the shares acquired under such
an agreement at the time they were acquired exceeds the
amount paid to the corporation to be a benefit of employment.
The issue was whether the employer contribution to the pur-
chase of treasury shares was a benefit to employees under
paragraph 7(1)(a) or remuneration under subsection 5(1).
Held, the appeal should be allowed.
The Plan did not fall within paragraph 7(1)(a). In order to
do so, the value of the shares at the time the employee acquires
them must exceed the amount paid. Under the Plan, the
employee pays for the shares at the fair market value and not at
a discounted price. The employer's contributions were ordinary
remuneration to those who qualified and who agreed to partici
pate in the program. They were deductible under subsection
5(1).
The provisions in the Plan concerning price fluctuations
between the time when the contributions were made and when
the shares were purchased demonstrated that the company
made a cash payout and that it had no control over the number
of shares that would be purchased. It also emphasized the fact
that members were paying full price for the shares. Further
more, a member may withdraw or sell his shares. That the total
amount in trust to purchase shares in a month could be used to
buy shares from withdrawing or terminating employees negated
the argument that the Plan was merely a scheme to issue shares
at a discount. In a particular month there might be no turn
around of the employer/employee contribution, but merely a
cash payout to withdrawing or terminating members, with no
issuance of company shares. Both the employer and the
employees intended that the contribution be ordinary contribu
tion and not merely a discount.
The argument, that the employer's contribution to the pur
chase of shares could not be considered remuneration since the
employees had not performed any additional service in return
for the benefit of this program, was without merit. An employer
may offer additional remuneration or benefit packages to
employees after a certain period of service, independent of
promotion or assignment of increased duties, as a means of
attracting employees to the organization.
The Minister of National Revenue wrongly assumed that in
1985 all shares had been purchased from the company treasury
and that the employee never had a right to the employer
contribution. The shares of withdrawing members were pur
chased on a priority basis.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Canada Business Corporations Act, R.S.C., 1985, c.
C-44.
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 5(1), 7(1)(a)
(as am. by S.C. 1977-78, c. 1, s. 3; 1985, c. 45, s. 3;
1986, c. 6, s. 2; 1987, c. 46, s. 2), (3)(b), 12(1)(n) (as
am. by S.C. 1980-81-82-83, c. 48, s. 4), (n.l) (as am.
idem, c. 140, s. 4).
CASES JUDICIALLY CONSIDERED
CONSIDERED:
Morin, J-P y The Queen, [1975] CTC 106; (1975), 75
DTC 5061 (F.C.T.D.).
DISTINGUISHED:
Lowry (Inspector of Taxes) v. Consolidated African
Selection Trust, Ld., [1940] A.C. 648 (H.L.); Kaiser
Petroleum Ltd. v. Canada, [1990] 1 C.T.C. 62; (1989),
90 DTC 6034 (F.C.T.D.); revd by [1990] 2 C.T.C. 439;
(1990), 90 DTC 6603 (F.C.A.).
AUTHORS CITED
Krishna, Vern "Stock Option Plans" Canadian Current
Tax (1986), Vol. 1, No. 36, C-177.
COUNSEL:
W. J. A. Mitchell, Q.C. and R. E. Levine for
plaintiff.
Terrance I. McAuley and W. Yoshida for
defendant.
SOLICITORS:
Thorsteinssons, Mitchell, Little, O'Keefe &
Davidson, Vancouver, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
DENAULT J.: This is an appeal from a reassess
ment by Revenue Canada of the plaintiff's corpo
rate income tax return. It involves a deduction
made by the plaintiff corporation respecting its
contribution to an employee stock option plan. The
issue is whether the employer contribution to the
plan is compensation to employees under subsec
tion 5(1) or a benefit to employees under para
graph 7(1)(a) of the Income Tax Act [S.C. 1970-
71-72, c. 63] (the "Act"). If the plan falls under
the provision of section 7 [as am. by S.C. 1977-78,
c. 1, s. 3; 1985, c. 45, s. 3; 1986, c. 6, s. 2; 1987, c.
46, s. 2], then the employer's contribution is not
deductible.
FACTS
The plaintiff is an amalgamated corporation
incorporated under the Canada Business Corpora
tions Act [R.S.C., 1985, c. C-44], effective August
13, 1987 on the amalgamation of Placer Develop
ment, Dome Mines Limited and Campbell Red
Lake Mines Limited. On February 13, 1973 Placer
Development Limited ("Placer") approved the
Placer Development Limited Stock Purchase Plan
(the "Plan"). By resolution of the Board of Direc
tors of Placer (the "Board") dated June 15, 1973,
the Board resolved that all shares purchased by the
trustee pursuant to the Plan shall be purchased on
the market. The Board later resolved that effective
September 1, 1975 all shares purchased pursuant
to the Plan shall be purchased from the company
treasury as original shares.
Under the Plan, employees, over the age of
nineteen, who have been with the company, or one
of the affiliated companies can contribute up to six
per cent of their salary for the year, after one year
of service. The plaintiff company and affiliated
companies will contribute an amount equal to one
half of the employee contribution.
In 1985, 84,106.5412 shares were purchased, of
which 40,794.7412 were purchased from the
accounts of other members in the Plan and 43,304
were acquired from the plaintiff's treasury. The
plaintiff's contribution pursuant to the Plan was
$282,076.
In the 1985 taxation year, the plaintiff deducted
the $282,076 from its income as additional wages
or salary for the plaintiff's employees. This was
disallowed as a deduction by Revenue Canada by a
notice of reassessment dated July 7, 1989 for the
plaintiff's 1985 taxation year. The form T7WC
attached to the notice of reassessment stated "Dis-
allowed employer contributions to Employee Stock
Purchase Plan $282,076.00". By notice filed on
July 20, 1989, the plaintiff objected to the said
reassessment. By notification dated December 13,
1989, the Minister of National Revenue confirmed
the reassessment. The plaintiff appealed this
reassessment.
PLAINTIFF'S ARGUMENT
The thrust of the plaintiff's argument is that
Placer's contribution under the Plan is no different
from the contribution by the employee. It is com
pensation to the employee and taxable under sub
section 5(1) of the Act which includes as income
salary, wages and other remuneration. The fact
that the member does not actually receive the cash
in hand does not change the nature of the money.
In support of this submission it relies on Morin,
J-P y The Queen' which held that an employee
does not have to receive physically the cash in
order for it to be taxable remuneration.
Essentially, the Plan is a contractual relation
ship between the plaintiff and its employees. The
intention of the parties under this agreement is
that the employer's contribution constitutes remu
neration. The Plan is a cash scheme whereby the
employee can choose to contribute up to six per
cent of his/her salary to purchase the shares, and
Placer Dome will correspondingly pay cash equal
to one-half of the employee's contribution.
The trustee is appointed for the benefit of the
members from whom the members can demand at
any time the payment of cash and/or shares which
it holds for them. Moreover, the plaintiff company
does not have any control over the cheques it
writes to the trustee on or before the 6th of each
month. The plaintiff does not know what propor
tion of the cheque it writes each month goes
towards the purchase of shares since a portion of
the monies is paid to terminating members. Nor
does the plaintiff know how much of the money
goes to purchase shares from other members'
accounts, that being a priority under the Plan.
In summary, it is the plaintiff's submission that
the Plan does not fit under the provision of para
graphs 7(1)(a) and 7(3)(b) since it is not a scheme
to issue shares at less than fair market value with
no cash payout by the employer. The employer
writes a cheque each month on the employee's
1 [1975] CTC 106 (F.C.T.D.), at p. 110.
behalf and shares are purchased at fair market
value.
DEFENDANT'S ARGUMENT
In contrast, the defendant's submission is that
the plaintiff's payout to the employee cannot be
considered remuneration. The employees are not
performing any additional work in order to belong
to the Plan and receive the plaintiff's contribution.
There is no specific criterion to receive the shares.
They performed no additional service to receive
the benefit apart from working for the plaintiff
corporation for one year and being over the age of
nineteen. All that an employee must do is fill out a
form and give it to the corporation specifying the
per cent of the payroll deduction. The deduction
continues in an automatic fashion until an altera
tion is made by the employee which can either be a
change in the percentage withholding or alterna
tively a termination of participation in the Plan.
The employer will then contribute to the Plan at
the employer's percentage rate, withholding
income tax at source. It is submitted that the
definition of salary in the Plan supports the
defendant's characterization of the payment:
Salary means the base salary paid to an employee by a par
ticipating company for personal services rendered by him as an
employee as such a participating company including vacation
pay and payments under Placer Development Limited annual
incentive plan but not including bonuses, commissions, overtime
pay, living or other allowances, reimbursements or special
payments or any contributions or benefits under this or any
other plan of current or deferred compensation adopted by a
participating company.
The Plan is an agreement by the corporation to
issue shares to the employee through financial
assistance. The end result is that the employee
receives shares at a discounted rate from the fair
market value and the contribution made by the
plaintiff is a turnaround.
The Plan fits squarely within paragraph 7(1)(a)
which is an employee benefit. It is the defendant's
position that the scheme correspondingly fits
within paragraph 7(3)(b) which precludes corpo
rations from deducting their contributions to share
purchase.
Therefore, the Plan is not essentially cash in
nature. While the member can instruct the trustee
to give him the cash out of his cash account, he
can only do this twice in a ten-year period (Article
VII A). This is also evidenced by the statement of
objectives of the Plan which is to provide a means
whereby employees can accumulate Placer shares
through payroll deductions. Regarding the position
of the trustee, the trust agreement requires the
trustee to administer the Plan and the Plan ensures
that the trustee will purchase shares. On this point,
the defendant directs the Court to subsection 7(6)
of the Act which provides that where a trustee is
involved, the rights of the employer and the obliga
tions flow through the trustee.
At trial, the defendant withdrew its alternative
argument that the Plan would be an employee
trust or an employee benefit plan under para
graphs 12(1)(n) [as am. by S.C. 1980-81-82-83, c.
48, s. 4] or 12(1)(n.1) [as am. idem, c. 140, s. 4] if
the Court found that it did not fall within section 7
of the Act. Therefore, the issue before this Court is
to decide whether the Plan falls under the provi
sions of section 7 of the Act.
FINDINGS
It is not in dispute that the employees of Placer
receive a taxable benefit. The Plan contemplates
and ensures that the employer contribution will be
taxable income for the employee. It is also agreed
that the Plan fits under the definition of agreement
to issue shares pursuant to subsection 7(1) of the
Act which 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,
The defendant also concedes that the plaintiff
receives a deduction for the amounts that it did not
receive back from the trustee for the purchase of
treasury shares. This amount represents the cash
withdrawals by the members. Accordingly, the
issue is the nature of the employer contribution to
the purchase of treasury shares on behalf of the
member. The dispute centres around paragraph
7(1)(a), which reads as follows:
7. (1) ...
(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;
If the employer's contributions to the Plan fall
within the definition set out in paragraph 7(1)(a),
the plaintiff cannot claim a deduction for its con
tributions to the employee purchases of company
shares according to paragraph 7(3)(b). If on the
other hand, the employer contribution is remuner
ation under subsection 5(1) of the Act, the plain
tiff can claim a deduction for its contribution.
I have examined the mechanics of the Plan, as
well as the intention of the employer and
employees, and I find as a fact it does not fall
within paragraph 7(1)(a). In order for an
employee stock option plan to fall within para
graph 7(1)(a), the value of the shares at the time
the employee acquires the shares must exceed the
amount paid. This is not the case under the Placer
Dome Stock Option Plan because the employee
pays for the shares at the fair market value and
not at a discounted price. It is instructive to review
the method in which shares are purchased.
The Board of Directors of Placer (the "Board")
appoints a trustee who is responsible for holding
the monies contributed by the participating
employee as well as the employer. Once an
employee becomes a member of the Plan, the
amount he/she contributes is placed into an
account under the stewardship of the trustee who
maintains a cash account and a share account for
each member (Article V A). Counsel for the
defendant submits that nothing turns on the fact
that the trustee is in the middle. The trustee is
simply a conduit and the rights and obligations of
the employer and employee flow through the trus
tee. However, I find as a fact the trustee is
appointed to administer the Plan for the benefit of
the members. It is not holding money for the
company. It ensures that the intentions of the
employer and employees are carried out pursuant
to the Plan.
The participating company makes a cash payout
each month which corresponds to one half of the
employee's contribution. The participating com
pany will pay into the employee's cash account an
amount equal to one half of the member contribu
tion within six days after the close of the calendar
month (Article IV F).
The trustee will credit the employee's account
with any contribution made by him and any con
tribution made by the employer as well as any
dividends or other income received on Placer
Common Shares held for his account and any net
proceeds from the sale of Placer Common Shares
for his account (Article V B). The trustee will
correspondingly debit the member's account for
shares purchased and any cash distributed to him
or his legal representative. Cash contributions by
the participating company are stated to be an
absolute benefit for the member. The contribution
by the participating company is regarded as addi
tional compensation and taxes are withheld at
source (Article IV F).
The trustee determines the aggregate sum car
ried in the cash accounts of the members on the
close of the 10th day, except for the accounts
which it has been instructed to sell all of the Placer
common shares. The trustee credits the cash
account of the member who instructs him to sell
the Placer shares pursuant to Article VII C. The
trustee then debits his share account for the
number of Placer shares or fractions being sold for
his account.
On the next business day following the 10th day
of each calendar month, the trustee purchases
Placer Common shares for the accounts of the
members according to the procedure set out in
Article VI A. The trustee will purchase shares first
from members who are withdrawing or terminat
ing. Thereafter, shares are purchased from the
company treasury. The price paid by the trustee
for the shares is "the price per share of the last
sale of Placer Common Shares on the Toronto
Stock Exchange on the 10th day of the calendar
month following the calendar month in which the
contributions were made by the members" (Article
VIA (2)).
There is a time lag between when the contribu
tions are made and the 11th business day on which
the trustee will purchase the shares. During this
time, the price of Placer shares will typically fluc
tuate. The Plan provides for this. If the shares
decrease, the trustee will place the surplus funds
into the members' cash accounts. Conversely if the
share prices increase, the trustee shall determine
the amount of shares to be sold and that may be
purchased for the accounts of the other members
by (i) subtracting from the net contributions an
amount equal to the issued price multiplied by any
fractional interest in a share to be sold and (ii)
dividing the balance by the issued price. The trus
tee then purchases the fractional interest and cred
its the members' share accounts (Article VII C
(1)). This procedure demonstrates that the com
pany makes a cash payout and that it has no
control over the number of shares that will be
purchased. It also underscores the fact that mem
bers are paying full price for the shares.
The Plan is fashioned in such a way that a
member may withdraw or sell his shares. A
member may direct the trustee either to transfer
all or any part of the Placer Common Shares
carried in his share account into his name and
deliver it to him or to sell all of the Placer shares
and fractions and remit the balance in his cash
account (Article VI A).
The fact that the total amount in trust to pur
chase shares for a given month could be used to
buy shares from withdrawing or terminating mem
bers negates the defendant's argument that the
Plan is merely a scheme to issue shares at a
discount. In one such month, there would be no
turnaround of the employee/employer contribu
tion. Rather, this would be a cash payout to with
drawing or terminating members, with no issuance
of company shares.
It is the intention of both the employer and the
employees that the contribution be ordinary con
tribution and not merely a discount. The Plan
outlines the stated purpose as follows: "to enable
Employees to acquire Placer Common Shares
through payroll deductions with financial assist
ance provided by the Participating Company"
(Article II). Financial assistance does not imply
that the shares will be sold at a discount rate. To
the contrary, the employees are paying the full
price for the shares on the date of purchase.
From the above analysis of the Plan, I find that
paragraph 7(1)(a) does not apply as there was no
"benefit equal to the amount by which the value of
the shares at the time he [the purchaser] acquired
them exceeds the amount paid" since the market
value of the shares at the time the employee
acquired them was equal to the amount paid.
Counsel for the defendant has submitted that
the employer contribution to the purchase of
shares cannot be considered remuneration since
the employees have not performed any additional
service for the benefit of this program. I find this
argument to be without merit. An employer may
offer additional remuneration or benefit packages
to employees after a certain period of service with
the company. This practice does not mean that an
employee must receive a promotion or perform
additional services. An employee may be attracted
to an organization on the basis of a favourable
remuneration package after a certain period of
service. I find no distinction between the plaintiff's
eligibility requirements for the Placer Develop
ment Limited Stock Purchase Plan and other ben
efit packages.
The employer's contributions according to the
Plan, are ordinary remuneration to those who
qualify and who agree to participate in the pro
gram. Therefore, the provisions of section 7 do not
apply to the plaintiff's Plan.
The Minister of National Revenue wrongly
assumed that in 1985, all shares were purchased
from the company treasury and that the employee
never had a right to the employer contribution.
The procedure which I have just outlined indicates
that the priority purchase of shares is from with
drawing members.
JURISPRUDENCE
Counsel for the defendant has referred me to a
number of authorities which he submits support
the conclusion that the employer contribution
amounts to the selling of shares to employees at a
discounted rate.
The House of Lords held in Lowry (Inspector of
Taxes) v. Consolidated African Selection Trust
Ld. 2 that the respondent company had not trans
ferred money to its employees, and therefore, the
amount in question could not be treated as a
disbursement or a deductible expense in calculat
ing the corporate income. In that case, the
respondent company allotted 6,000 shares to its
employees at their face value of 5s, while the
market value of the shares was 1£ 18s 9d. The
company claimed a deduction in the computation
of its income tax for the year in question.
The present facts are different from the Lowry
situation. Here, the company makes a monthly
cash payout to eligible employees who choose to
participate in the Plan. The participating members
pay the full market price for the stocks that they
purchase each month. Moreover, it is an ongoing
plan and not a single issuance of shares to
employees at a discounted rate.
The defendant referred also to Kaiser
Petroleum Ltd. v. Canada' which involved a sale
of shares to the plaintiff company, while the
employees of the vendor had an option to purchase
shares over a period of years. The plaintiff under
took to offer to pay employees a sum of money in
lieu of the outstanding stock options. This was
accomplished under the terms of a takeover agree
ment, through which the plaintiff had acquired the
controlling shares of the corporate taxpayer. The
plaintiff paid out over two million dollars pursuant
to this agreement. The Minister had disallowed the
deduction of this amount as an expense. Joyal J.
allowed the appeal on the basis that the payment
was made in fulfilment of a term and condition of
the employees' employment. Accordingly, it was a
2 [1940] A.C. 648 (H.L.).
3 [1990] I C.T.C. 62 (F.C.T.D.); revd by [1990] 2 C.T.C.
439 (F.C.A.).
taxable compensation to those employees in lieu of
a taxable benefit by way of stock option which
they would have otherwise enjoyed. Kaiser
Petroleum was reversed on appeal on the issue of
capital versus income.
Counsel for the defendant submits that Kaiser
Petroleum is authority for the proposition that if
the money in question had simply turned around to
the corporation, there would be no deductible
expense. At page 70, Joyal J. characterized the
payment in the following manner:
There is little doubt that without that undertaking, the
plaintiff would not have incurred the expense. Upon the exer
cise of their several options, the employees would have been
issued shares producing a benefit to the employees but at no
cost to the plaintiff. What transpired, however, is that the
plaintiff did bear a cost which, according to generally accepted
accounting principles, was an expense properly charged against
revenue.
I do not disagree that if there is a turnaround of
monies paid out by a corporation in the offer to
employees to purchase of shares, there is not a
deductible expense. The present case, however, is
distinct from Kaiser Petroleum for several reasons.
Here, there is not a single cash payout in lieu of
payment of stocks, but an ongoing benefit pro
gram, through which the employees of Placer can
purchase Placer Dome stocks. Additionally, the
plan in Kaiser Petroleum allowed for a favourable
purchase price and I have found as a fact that the
employees pay the full market price for the pur
chase of Placer shares. Ultimately the question in
Kaiser Petroleum was decided on the question of
income versus capital. However, in the present
case, the question is limited to the interpretation of
section 7 of the Act.
While the authorities submitted were helpful in
understanding how various employee stock option
plans operate, the present case concerned the inter
pretation of section 7 of the Act. I have found as a
fact that Placer Development's Limited Stock Pur
chase Plan does not fall within the scope of
section 7. Instead, the payout made by the plaintiff
company is remuneration pursuant to subsection
5(1) of the Act. Accordingly, the plaintiff is per
mitted to use its cash payout to the employees as a
deduction.
Finally, counsel for the defendant referred to an
essay written by a leading tax scholar, Vern Krish-
na. At page C-179, Mr. Krishna described the
effect of stock option plans on employers:
The employer is not allowed to deduct as an expense any of the
costs that are associated with the stock option plan. The
employer does not incur any outlay or expense by issuing its
shares at less than their market value; it merely foregoes capital
proceeds which it would have received had it issued the shares
at their fair market value. 4
In the present case, employees purchase stocks at
the fair market value and the employer makes a
cash payout to assist in the purchase of the shares.
Therefore, the plaintiff does incur a cash outlay.
CONCLUSION
This appeal is allowed with costs and the Minis
ter is ordered to vary the reassessment in order to
allow the deduction of the $282,076.
° Vern Krishna, "Stock Option Plans" Canadian Current
Tax (1986), Vol. 1, No. 36, C-177, at p. C-179.
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.