Scott v. The Queen, 91 DTC 5268, [1991] 1 CTC 395 (FCTD), varied 94 DTC 6193 (FCA)

Walsh, J.:—This is a tax case in which plaintiff seeks to have his assessment for income tax for the 1983 taxation year varied to reduce his taxable income by $23,128 and accordingly to reduce the tax payable by him. Similarly, he seeks to have his assessment for the 1984 taxation year varied to reduce the taxable income in respect to that year by $176,571 and with a corresponding reduction in tax payable.

The statement of claim alleges that for a number of years until the summer of 1985 plaintiff was a full-time employee of Delsco Realty Ltd., an Ontario corporation, herein referred to as Delsco. Delsco had an understanding with the law firm of DelZotto, Zorzi (hereinafter referred to as DZ) pursuant to which certain services were to be rendered by Delsco and performed by plaintiff as an employee of Delsco under the direction of DZ. Periodically, Delsco received fees in consideration for the services rendered by Delsco and performed by plaintiff which fees were more than the remuneration Delsco paid plaintiff. The statement of claim further alleges that until the early 1980s most of plaintiff’s work related to real estate matters but in the early 1980s DZ directed plaintiff to provide various managerial and administrative services to Night Hawk Resources Ltd. (hereinafter referred to as Night Hawk Canada), a British Columbia corporation, and to Saxton Industries Ltd., another British Columbia corporation (hereinafter referred to as Saxton Canada). Night Hawk Canada, through its subsidiary Night Hawk Resource Corporation (hereinafter referred to as Night Hawk U.S.), a Texas corporation, and Saxton Canada, through its subsidiary Saxton Petroleum Corporation (hereinafter referred to as Saxton U.S.), a Texas corporation, carry on oil and gas exploration and production activities in the United States and were investors in interests in certain oil and gas properties there. Night Hawk U.S. was only an investor but Saxton was also an operator of the properties. Night Hawk U.S. had no responsibility for day to day management of the drilling and exploration being carried out by the operator.

Plaintiff became a director and corporate secretary of Night Hawk Canada and Night Hawk U.S. in 1980, his work involving the normal work of a corpo- rate secretary, such as advising directors of meetings, taking minutes and preparing various resolutions for the board of directors.

Until about 1983, Night Hawk U.S. was not actively pursuing the exploitation of the properties and since its lease on its major property was to expire in October 1983 unless a specified number of wells were drilled by that time, the investors including Night Hawk U.S. arranged to have the required drilling carried out by Saxton U.S. as the operator.

In his capacity as an employee of Delsco, under the direction of DZ, the plaintiff performed various managerial services for Night Hawk U.S. including negotiations with Saxton U.S. to arrange a drilling program for the properties and negotiations to obtain financing for Night Hawk U.S.'s shares. Night Hawk Canada was invoiced by DZ for these services performed by the plaintiff. From 1980 until mid-1984, Night Hawk Canada had no employees or payroll of its own and no fees were paid to its directors for their services as such.

On September 2, 1983, Night Hawk Canada granted stock options to its directors including plaintiff who was granted options to acquire 26,670* shares of Night Hawk Canada at an exercise price of $1.20 per share. This was allegedly the market price of the share at the time of the grant of the options, so the options themselves had no value at that time. In 1983, plaintiff exercised his options to acquire 4,710 shares for an aggregate consideration of $5,652 at which time the fair market value of the shares was $11 per share. In 1984, he exercised options to acquire 22,000 shares for aggregate consideration of $26,400 at which time the fair market value of the shares was $10.875 per share.

In 1983, plaintiff disposed of 4,700 of the shares for aggregate proceeds of disposition (net costs of disposition) amounting to $52,925.24, thereby making a gain of $47,285.24 and he included the amount of $23,642.62 (one half of the gain so realized) in his income for 1983. Similarly, in 1984, plaintiff disposed of 12,000 shares for aggregate proceeds of disposition of $103,168.27 and in computing his income, recognized a gain of $94,168.27 on this disposition including $44,084.14 (one half of the gain so realized) in his income for 1984.*

The Minister issued a notice of reassessment to the plaintiff in respect to his 1983 taxation year, including $46,158 (an amount equal to the difference between the option exercise price and the fair market value of the shares at the time of the exercise of the options) in plaintiff's income for purposes of the Act as a benefit from employment pursuant to subsection 7(1) of the Act, and reduced the taxable capital gain recognized by the plaintiff by $23.030.

Similarly, the Minister issued a notice of reassessment to the plaintiff in respect of the 1984 taxation year, including $212,850 (an amount equal to the difference between the option exercise price and the fair market value of the shares at the time of the exercise of it) in plaintiff's income for the purposes of the Act as a benefit from employment pursuant to subsection 7(1) and reducing the taxable capital gain recognized by the plaintiff by $36,279.

In the defence, the Minister contends that at all material times plaintiff was a director and secretary of Night Hawk Resources Ltd. and acquired the shares of the company in respect of, in the course of or by virtue of his employment with the company and that he received benefits during his 1983 and 1984 taxation years upon the exercise of his options to acquire the shares of the company calculated as set out above. Defendant relies on sections 3, 5, 6 and 7 of the Act, the latter 3 dealing with income from an office or employment, amounts to be included in it and agreements to issue shares to employees. Sections 38, 39 and 40 dealing with capital gains are also invoked as well as the definition in subsection 248(1).

♦There is apparently an error in these figures in the statement of claim.

The basic issue is whether plaintiff realized a capital gain for the years in question as he contends or whether the said amounts constituted income as a result of his having exercised stock options which he had received in respect of, in the course of or by virtue of his employment, at a time when the value of the shares exceeded the amount which he paid therefor, thereby obtaining a benefit pursuant to section 7 of the Act.

The pertinent paragraphs of section 7 read as follows:

7. (1) Subject to section (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

(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.

Subsection (1.1) reads:

Where after March 31, 1977 a Canadian-controlled private corporation (in this subsection referred to as "the corporation") has agreed to sell or issue a share of the capital stock of the corporation or of a Canadian-controlled private corporation with which it does not deal at arm's length and at the time immediately after the agreement was made the employee was dealing at arm's length with

(a) the corporation,

(b) the Canadian-controlled private corporation, the share of the capital stock of which has been agreed to be sold by the corporation, and

(c) the Canadian-controlled private corporation of which he is an employee,

in applying paragraph 1(a) in respect of the employee's acquisition of the shares, the reference in that paragraph to “the taxation year in which he acquired the shares” shall be read as “the taxation year in which he disposed of or exchanged the shares".

According to plaintiff's evidence, he had been corporate secretary and a director of Night Hawk Canada and Night Hawk U.S. since 1980. Night Hawk Canada became public some time in 1984, the date not being in evidence. In fact, the evidence in this is confused, Scott stating at one time that it went public before the share options were granted. No minutes of meetings nor a copy of the supplementary letters—patent were produced which would give the date precisely, possibly because this may not be relevant. There is no firm evidence as to its share distribution or who controlled it, although it would appear that the law firm DZ directed its operations. Scott did testify that before it went public, the eight or ten shareholders owned 1,500,000 shares, and that the president was Zorzi, one of the law firm's partners. After it became public in 1984 (according to him), Delsco bought some of its shares.

While the evidence as to whether at the time the options were granted Night Hawk Resource Ltd. (Night Hawk Canada) was a Canadian-controlled private corporation is not as clear as it might be, in view of the sometimes confusing evidence of Scott, so as to apply subsection 7(1.1), this appears to be the case, and this was not disputed by the parties.

Plaintiff himself was dealing at arm's length with Night Hawk Canada, whose options he received. While the options were granted in 1983, he only exercised 4,710 of them in that year and sold 4,700 shares in the same year, so there was no need to apply subsection 7(1.1) for that year. In 1984, he exercised the remaining 22,000 options but only sold 12,000 of the shares acquired in that year, so the application of subsection 7(1.1) becomes pertinent for that year and any subsequent years not in issue in the present proceedings.

Alternatively, defendant submits that the said sums of $46,158 in the 1983 taxation year and $212,850 in the 1984 taxation year should be included in plaintiff's income as the value of benefits received or enjoyed by him in respect of, in the course of, or by virtue of an office or employment held in Delsco, DelZotto Zorzi, or Night Hawk Resources Ltd., within the meaning of subsection 5(1) and paragraph 6(1)(a) of the Act. The said subsection 5(1) reads:

Subject to this Part, a taxpayer's income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by him in the year.

The said paragraph 6(1)(a) of the Act reads:

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, except any benefit.

(The exceptions have no application in this case.)

Finally, as a further alternative, defendant submits the value of the shares received by plaintiff from the exercise of the options less the price he paid for the options were income of the plaintiff within the meaning of section 3 of the Act. The said section is the basic rule for calculating income for a taxation year.

The sole witness was plaintiff William Scott and the parties filed an agreed book of documents.

Plaintiff's argument is to the effect that his position as secretary and director of Night Hawk Resources was not an employment. As a secondary position, it is argued that if it is he did not receive his stock options as a result of it so is excluded by subsection 7(5) from the operation of subsection 1, which subsection 5 reads:

This section does not apply if the benefit conferred by the agreement was not received in respect of, in the course of, or by virtue of the employment.

Plaintiff Scott testified that although not a lawyer he had been a detective officer in Britain and when he came to Canada he obtained employment in the law firm as a law clerk. Delsco Realty Ltd. was incorporated in 1968 and he became an employee of it early in 1970. Delsco Realty worked with the law firm in connection with real estate matters and was paid a fee by the law firm DZ for this. He considers that his services were provided for the law firm although he was paid by Delsco, his remuneration being adjusted annually. Delsco dealt with such matters as zoning subdivisions and condominium plans as well as buying and selling real estate and he worked under the supervision of one of the law partners. In 1979-80 he became involved in Night Hawk and Saxton Industries in oil and gas work, becoming a director and officer of both, still under the supervision of the law firm. In cross-examination, he testified that he was corporate secretary of Night Hawk Canada and vice-president for two to three months. He described himself as the "work horse" of the company and said the shares were given to him for this purpose. These companies acquired leases in oil drilling rights and Night Hawk Canada eventually became a public company prior to the grant of the stock options. He did considerable work for Night Hawk looking after the financing, banking and leases but the law firm actually used Delsco and him to provide these services and was paid by Delsco for these services.

Among the documents produced are a substantial number of accounts between 1980 and 1982 rendered by the law firm DelZotto Zorzi Applebaum to Saxton Industries Ltd. and Saxton Petroleum Corporation Ltd., the accounts frequently including inter alia the preparation of minutes, corporate resolutions and banking affairs. Most of these accounts end with the statement "This is the account of DelZotto Zorzi Applebaum per William Scott”. There is an account for $20,000 dated October 28, 1983 along the same lines. The first time Scott's name appears in the account itself is an account dated February 27, 1984 which refers"To our fees for managerial services of our Mr. William Scott in the field and office relative to the activities, operations, filings and day-to-day and administration of Saxton Industries Ltd. and its wholly-owned subsidiary Saxton Petroleum Corporation covering the months of January, February, March, April and May 1983.” There is a similarly worded account elated June 1, 1984 covering Scott's services during June, July and August 1983 and one dated July 20, 1984 for his services during September, October and November 1983. There is a further such account dated September 14, 1984 covering Scott's services for December 1983, January and February 1984 and one dated February 1985 for Scott's services during March, April, May, June and July 1-15, 1984 and another account dated the following day, the 20th of February 1985 for Scott's services from July 16-31, August, September and October 1984. All the accounts for Scott's services are addressed only to Saxton Industries Ltd. while the earlier accounts commencing December 2, 1980 were addressed jointly to Saxton Industries Ltd. and Saxton Petroleum Corporation, both at the same address in Ontario. There is probably no significance in this.

There are a similar series of accounts addressed to Night Hawk Resources Ltd. commencing December 2, 1980 and following August 4, 1981 to Night Hawk Resources Ltd. and Night Hawk Resources Corporation, now at the same address as Saxton Industries, reading in much the same way as those addressed to Saxton Industries Ltd and similarly signed for DelZotto Zorzi and Applebaum by William Scott continuing to October 28,1983 and commencing February 26, 1984 reading: "To our fees for managerial services of our Mr. William Scott in field and office relative to the activities, operations, filings and day-to-day administration of Night Hawk Resources Ltd. and its wholly-owned subsidiary Night Hawk Resource Corporation. They are billed for a few months at a time as in the case of the other accounts.

Three other documents were produced in the Agreed Book of Documents. The first is a resolution of directors of Night Hawk Canada on September 2, 1983 providing for a directors' incentive option agreement for the issue of an aggregate of 126,710 shares of the company over a five-year period at $1.20 per share, the entitlement of each director being as follows:

Said resolution also provides for share convertible loan agreements with Sylvia Bragagnola for $75,000, Nedo Bragagnola for $175,000 and Supra Investments Inc. for $250,000 in one-year terms with interest payable monthly at 2% above the Bank of Montreal's prime rate, with principal sums to be convertible into fully paid common shares of the company at $1.20 per share.

It also provides for an agreement dated the same date of September 2, 1983 with Nedo Bragagnola and Angelo DelZotto to ratify the actions of Night Hawk Resources Corporation, its wholly-owned subsidiary providing them with second mortgage security over a well in Texas with respect to personal guarantees given by Bragagnola and DelZotto to the Bank of Montreal wherein each guaranteed $375,000 U.S. of the subsidiaries’ indebtedness to the bank.

The second document is the stock option agreement between Night Hawk Resources Ltd. and the seven directors providing for the allotment of options to acquire the 126,710 shares referred to above in the amounts indicated. While the options were non-assignable and non-transferable there was a provision that in the event of the death of any holder of the option, his personal representative should be entitled to purchase all or any part of the optioned shares within one year of the date of such death.

The third document is the minutes of the annual general meeting of Night Hawk Resources Ltd. on November 23, 1983. Approval was given to the granting of the stock options.

In continuation of his evidence, Scott stated that there were no changes in his remuneration from Delsco and he received none from the law firm although he also looked after some real estate matters for it. After Night Hawk Canada became public in 1984, Delsco bought some of its shares. He stated that the reason why Nedo Bragagnola and Angelo DelZotto got more options than the others was because they had guaranteed bank loans of the company. He stated Angelo DelZotto is a brother of the law firm DelZotto and not a member of the firm. He could not state why he was allotted an odd number of options stating that the 26,710 represented the work he did for the company. The four directors who received 10,000 options each did nothing for the company save as directors, except for Sullivan who was a C.A. and looked after the company's accounting. He does [not] recall if he was paid for this. He stated that he also received some options from Saxton but never exercised them. With respect to Delsco he was merely an employee and never an officer or secretary or even a shareholder. The shareholders of Delsco were Scott's wife and the wife of the law firm's DelZotto.

Plaintiff refers to the definitions of "employment" in subsection 248(1) which has a meaning of: "The position of an individual in the service of some other person and servant or employee means a person holding such a position. He therefore contends that he comes within the exception of subsection 7(5) since the benefit conferred by the agreement was not received in respect of, in the course of, or by virtue of the employment”. His other line of argument is that a director is not an employee of the company within the meaning of the definition of employment. What he was doing was fulfilling the law firm DZ's obligations to Night Hawk who had made arrangements with Delsco to pay them for his services while he in turn was remunerated by Delsco on a flat annual basis. The stock options were given to him in recognition of his management consultant services and not as a result of his work as secretary or as director of the company. He further argues that even if the options were given to him as a director of the company, this would not have covered more than 10,000 options as this was the amount given the other directors who did no work for the company.

In the definition section of the Act, the definition of "office" includes the position of a corporation director, while the definition of" employee" includes officer. Although the definition of office includes the position of corporation director, it starts off by stating that it means the "position of an individual entitling him to a fixed or ascertainable stipend or remuneration”. That is certainly not the case of plaintiff with respect to his work for Night Hawk. Section 3 of the Act provides for a tax on income from "each office, employment, business and property." Plaintiff argues that since office and employment are not the same thing, a director may be an employee, but to come within the definition of "employment" he must be in the service of some other person (which in this case would not be Night Hawk). Paragraph 6(1)(c) includes in income, directors' fees received in respect of, in the course of, or by virtue of an office or employment, again using both terms “office” and "employ- ment" in the alternative. It was argued that this paragraph was necessary as otherwise directors' fees would not be included under'"employment" alone.

It is further argued by him that at the time the option was granted it was not above the market price so he did not receive a benefit at that time.

The complicated arrangements made by the law firm DZ for plaintiff's services make the issue in this case confusing. It is apparent that he was a very valuable and useful employee, competent in many areas of real estate, corporate management and financing, although not himself a lawyer. There is, of course, no requirement that a corporate secretary, officer or director be a lawyer. It is clear, however, that he worked throughout under the direction of members of the law firm. Instead of paying him any salary themselves, they arranged for him to work for Delsco, by whom his salary was paid at a fixed annual amount. Delsco paid the law firm for his services. Delsco in turn arranged for him to furnish his services to Night Hawk Canada and Night Hawk U.S. including negotiations between the latter and Saxton U.S. for drilling operations there. The law firm in turn billed Saxton Canada and Saxton U.S. jointly at regular intervals for legal services, including the preparation of minutes, corporate resolutions and banking officers. These accounts were signed on behalf of the law firm by Scott, but it is not apparent whether he himself rendered these services or they were rendered by the law firm. Following February 27, 1984, as already stated, the accounts read: "For our fees for managerial services of our Mr. William Scott in the field and office relative to the activities, operations, filings and day-to-day administration of Saxton Industries Ltd. and its wholly-owned subsidiary Saxton Petroleum Corporation” and were addressed to Saxton Industries Ltd.

Similar accounts as noted, supra, were sent to Night Hawk Resources Ltd. and after they had arranged for the incorporation of Night Hawk Resources Corporation in Texas, jointly for the two corporations. It is evident from the nature of services described that most of the work covered by the accounts was done by the law firm. Here again, following February 1984, the accounts are addressed only to Night Hawk Resources Ltd. and refer for the first time to managerial services of "our Mr. William Scott".

It appears to be evident that plaintiff was at all times under the direction of the law firm, although not remunerated by them. Employed" is defined in the Act as "performing the duties of an office or employment". Scott was at all times performing the duties of employment as directed from time to time by the law firm, whether directly or through directions given by it to Delsco. The definition of “employment” has already been referred to and plaintiff was certainly in its "service" and therefore a "servant or employee" within the meaning of that definition. That does not, however, exclude him from also being “employed” by Night Hawk Canada at the relevant time when his services were seconded to it by Delsco or by DZ. Even if he were considered as being in the employ of Delsco since his salary was paid by it, this would not change the tax situation in the present appeal. He was rendering practically full-time services for Night Hawk Canada and its associated companies without receiving any remuneration from it. He was secretary and a director apparently at the relevant times and also briefly vice-president. Aside from his services as secretary, he appears to have functioned, without pay from that company, as what might perhaps be described as managing director.

Both plaintiff and defendant referred to certain jurisprudence which, however, must be carefully examined as to its facts and in some cases distinguished as otherwise it appears conflicting.

Plaintiff relies on the decision of Justice McNair in the case of Verna Busby v. The Queen, [1986] 1 C.T.C. 147; 86 D.T.C. 6018, but it can be distinguished on the facts. One Rauball owned a management company for which Mrs. Busby performed part-time services without pay. Needing a Canadian resident director for two other companies, he prevailed on her to act as such and she was paid $250 a month by each as a director's fee. At one time, she guaranteed bank loans incurred by him. In consideration of this and because of their special relationship he arranged for a series of stock options for her in the two companies which she was able to exercise and make substantial profits on the sale of the shares so acquired. There were other options as in the present case. Rauball even provided her with the funds to exercise the options, with one exception.

Justice McNair, after quoting paragraph 7(1)(a) and subsection 7(5), concludes that profits arising from such options are deemed to have been received as income ” provided that it was received in respect of, in the course of, or by virtue of the employment. If the benefit is attributable to something other than the employment then it is not taxable under this section."

He concludes that "the benefits received by the plaintiff from the stock options were not in respect of her employment but instead were received by her as a person for considerations extraneous to her employment, namely, the guaranteeing of loans and more particularly, her special relationship with Wolfgang Rauball”. He therefore grants the appeal.

He refers to Phan eu f Estate v. The Queen, [1978] C.T.C. 21; 78 D.T.C. 6001 in which Associate Chief Justice Thurlow made a similar finding, stating at page 27 (D.T.C. 6005): "Is the payment made ‘by way of remuneration for his services' or is it' made to him on personal grounds and not by way of payment to him for his services'? It may be made to an employee but is it made to him as employee or simply as a person."

Defendant, for his part, relies heavily on the Tax Court case of Michael K, Taylor v. M.N.R., [1988] 2 C.T.C. 2227; 88 D.T.C. 1571 in which a careful analysis was made of the jurisprudence including the Busby and Phaneuf cases, supra. Taylor was a petroleum engineer who through a corporation of which he was sole shareholder provided consulting services to a number of other companies. He became a director of two of them and in due course obtained share options in each. As director he performed minimal duties. At page 2231 (D.T.C. 1574), the judgment refers to a decision of Justice Muldoon in N.V. Beaumont v. The Queen, [1988] 2 C.T.C. 365; 88 D.T.C. 6522 in which he held that an unremunerated officer may be an employee for the purposes of section 248. The Taylor judgment continues:

While there is a definite connection between employment and remuneration in that there is a general presumption that employees are entitled to remuneration, the absence of remuneration is not determinative of the nature of the relationship and an individual can be an employee despite the fact that he is not being paid: Archambault v. Desmarteaux, [1945] R.L. 129 (C.S.); Huba v. Schulze and Shaw (1962), 37 W.W.R. 241 (Man., C.A.); Poppe v. Tuttle (1980), 14 C.C.L.T. 115 (B.C.S.C.). For the purposes of subsection 7(1) a director is an employee.

The judgment concluded that the options were granted in consideration of the services Taylor was to perform as director, "an employee of each of the corporations" and were taxable by virtue of subsection 7(1).

Plaintiff contends that this decision is wrong, since directors, although employees, do not have employment" within the meaning of subsection 7(5) without the usual coupling with the word "office" in sections 3, 5 and 6 of the Act. This is an argument referred to in the Busby judgment, supra, at page 151 (D.T.C. 6020), which the Taylor judgment, supra, at page 2231 (D.T.C. 1574) designates as obiter. Certainly the Busby decision was based on the fact that the benefit was conferred on Mrs. Busby as a person and not in respect of her employment, so the issue of whether as a director she was not in employment was not the ratio decidendi.

In the case of Frithjof Groh ne v. The Queen, [1989] 1 C.T.C. 434; 89 D.T.C. 5220, Justice Strayer after quoting subsection 6(1), paragraph 7(1)(a) and subsection (5) of the Act states at 438 (D.T.C. 5223) :

I accept that in accordance with the definitions in the Income Tax Act the plaintiff, as a director of Ohio, was “an employee” of that company. By section 248 it is provided that "employee" includes "officer". That section defines “office” to include the position of a corporation director and provides that the term "officer" means a person holding such an office. Therefore for certain purposes a director of a corporation is an "employee" of the corporation even though he may not receive remuneration nor perform services in ways typical of ordinary employment.

This does not mean, however, that every benefit flowing to a president, director, or other officer of the corporation flows to him” in respect of, in the course of, or by virtue of” such "employment". The test used in paragraph 6(1)(a) and subsection 7(5), as quoted above, by implication recognizes that the benefit may be conferred because of some relationship other than that of employment.

While he does not specifically deal with the argument of the significance of leaving the word "office" out of subsection 7(5), this judgment is authority for finding that for certain purposes a director may be considered as an employee even if not receiving remuneration from the company or performing services in ways typical of ordinary employment. In the present case, it cannot be said that plaintiff was not performing services for Night Hawk Canada in ways typical of ordinary employment.

Part of the problem in these cases arises from the fact that fundamental principles of corporation law are not always reflected in the wording of the provisions of the Income Tax Act. Certainly, in corporation law a director is not an employee, being elected by the shareholders, whereas an officer is normally an employee appointed by the directors and usually a director himself, unlike a corporate secretary who would be considered as an employee and an officer but most likely not a director.

We have to deal with the definitions in the Income Tax Act itself and the provisions of it. While a statute requires strict interpretation and this is especially so of a complex statute such as the Income Tax Act, it is nevertheless necessary to look at the statute as a whole and what it seeks to accomplish rather than relying on any specific section and especially the definitions in section 248 in order to reach an interpretation which would defeat the intent of the Act.

The general section of the Act setting out the Basic Rules, section 3, taxes “income for the year from each office, employment, business and property". Subsection 5(1) provides that income for the year from an office or employment is the “salary, wages and other remuneration, including gratuities" received in the year. Paragraph 6(1)(a) taxes "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" save for certain excepted benefits which do not apply here. Section 7 clearly intends to tax benefits received by an employee by way of the issue of shares (or options in the present case) of a value greater than what is paid for them which are deemed to have been received by virtue of his employment.

All these sections are broadly worded and since I have concluded that the share options given to him were as a result of his employment by Night Hawk Canada, although his salary remuneration was paid by Delsco and his work for Night Hawk Canada was assigned to him by Delsco and directed by it or by the DelZotto law firm who had seconded him to Delsco, the profits resulting from the acquisition of shares by the exercise of these options and subsequent sales of some of them at a profit are taxable as income in his hands.

If there were any doubt as to the intent of Night Hawk Resources Ltd. in granting the options it may be found in the preamble to the agreement which reads: * Whereas the Holders are Directors of the Company and in that capacity are devoting considerable time and effort to the affairs of the Company."

The options are then granted in varying amounts, those doing little work, save as directors being given 10,000 each, with Nedo Bragagnola and Angelo DelZotto receiving 30,000 each and plaintiff the odd number of 26,710. During his evidence when asked to explain how this number was reached for him he readily admitted that it represented the work he did for the company.

I conclude that the profits resulting from the options must be taxed as income.

This does not entirely conclude the matter, however. In the case of J. Stuart Robertson v. Canada, [1990] 1 C.T.C. 114; 90 D.T.C. 6070, Justice Marceau, writing for the Court of Appeal had to decide the difficult question of whether profits from the exercise of stock options should be taxed in the year in which they were given, or only when the options were converted into shares, on the basis of the fair market value at that time. Section 7 of the Act did not apply since the employer was not a corporation, but paragraph 6(1)(a) did. A careful analysis of the House of Lords decision in Abbott v. Philbin, [1960] 2 All E.R. 763 was made. It had held that the right to purchase property conveyed by the option is in itself a valuable asset and is the only benefit related directly to the employment. There were two dissents by Lord Keith and Lord Denning and Justice Marceau preferred the reasoning in them. Lord Denning had said ” the offer itself (the option) would not be a perquisite or profit, for it conferred only the expectation of profit, not any profit itself." Justice Marceau found that the benefit resulting from the conferring of the option itself eludes quantification whereas the benefit arising when the option is taken up can be measured by the discrepancy between the cost of exercising the option and the market value of the shares at the time of the acquisition, and that it is only the second benefit, the quantifiable one, that falls within the scope of paragraph 6(1)(a).

In our case, if paragraph 7(1)(a) is applied, the amount by which the values of the shares at the time plaintiff 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.

For plaintiff's taxation year 1983, there is no problem, whether paragraph 7(1)(a) or the exception of 7(1.1) is applied, as the options were both exercised and the shares so acquired sold in that year. For 1984 and subsequent years, there is a problem, however, since although the right to all the options was granted in 1983, he exercised this right for 22,000 of them in 1984 and only sold 12,000 of the shares so acquired in that year.

It is for that reason that I have referred to the Robertson judgment, supra, although on the facts it is not directly applicable. On the same reasoning set out in it, I have concluded that the amount to be taxed should be based on the difference between the cost of the options at the time the options were taken up and the net proceeds of the sale of the shares in the year they are disposed of as it is at that time that this can be quantified.

This would be the solution reached by the application of subsection 7(1.1) for 1984 and any subsequent years when said shares are disposed of, if it is concluded, as I have, that it applies to plaintiff on the assumption that Night Hawk Canada is a Canadian-controlled corporation with which he is dealing at arm's length. This is the manner in which defendant's reassessment for 1984 was made.

One more matter remains to be considered, however, although it was not addressed by the parties. The term “value” used in subsection 7(1) is not defined but it appears reasonable to conclude that it would mean "market value” where there is a market, rather than a value depending on the sale price, which fluctuated widely in 1984, for example, as appears from plaintiff's tax return for that year when his 12,000 shares were sold in a series of transactions at wideiy differing prices, the total receipts from such sales being less however than the $10.875 per share on which the reassessment was made. Per contra in 1983 plaintiff's sales yielded somewhat more than the $11 per share taken by defendant as the value of the shares in that year.

It is clear, however, that the options had a value substantially in excess of the issue price even in 1983 when the shares acquired that year were sold for amounts in excess even of the "market price" used in the reassessment, as plaintiff was able to sell them almost immediately after exercising his option late in the year, so there is no merit to his subsidiary argument that the options were only worth the option price at the time of acquisition.

However, since the issue of the relationship between “value”, "market price" and actual proceeds of sale was not argued it is preferable to leave this for possible settlement if it becomes necessary in years after 1984 when plaintiff may have disposed of his remaining shares acquired by the options exercised in 1984, and to accept the Minister's reassessments for the 1983 and 1984 taxation years calculating the profit as they did.

The appeal is therefore dismissed with costs.

Appeal dismissed.