MNR v. Chrysler Canada Ltd., 92 DTC 6346, [1992] 2 CTC 95 (FCTD)

Strayer, J.:—1 originally conducted a trial under section 174 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") for a determination of the following question put to the Court.

Whether the Chrysler Employee Stock Ownership Plan was

(a) an“ "employee benefit plan” as defined in subsection 248(1) of the Act, and referred to in paragraph 6(1)(g), or

(b) an agreement to sell or issue shares to employees within the meaning of section 7.

In my reasons for judgment I came to the conclusion that the Employee Stock Ownership Plan (ESOP) fell within both sections prima facie and therefore the question could not be answered in the form it was put. I invited counsel to prepare an agreed form of judgment if a satisfactory answer could be agreed upon based on my findings to date. If not, I invited them to present more argument.

As a result, counsel not being able to agree on the approach to assessment which would flow from my findings, I approved an amendment to the questions for determination consisting of the following addition:

1A. In the event that the Chrysler Employee Stock Ownership Plan is held to be both an employee benefit plan and an agreement to sell or issue shares to employees, or in the event that it is found to be neither an employee benefit plan nor an agreement to sell or issue shares to employees, the Minister requests a determination of the following question:

If there is a potential conflict between the provisions of paragraph 6(1)(g) and section 7 of the Income Tax Act, which has priority over the other in the taxation of the benefits received by the Employees?

I have since heard a further day of argument with respect to this question. I- will briefly state my conclusions.

There is a potential conflict between the provisions of paragraph 6(1)(g) and section 7 of the Income Tax Act because, as I said in my reasons for judgment of September 11, 1991 the ESOP on its face appears to fall within subsection 7(1) as an agreement to sell or issue shares of the Chrysler Corporation to employees of Chrysler Canada, a corporation with which Chrysler Corporation does not deal at arm's length, and at the same time on its face it falls within the definition of an“ Employee Benefit Plan” as defined in subsection 248(1), being an arrangement under which Chrysler Corporation or Chrysler Canada made contributions to a trustee for the benefit of Chrysler Canada's employees. Benefits under such a plan are taxable under paragraph 6(1)(g) of the Income Tax Act.

I have however also concluded that section 7 has “priority” over paragraph 6(1)(g) for the purpose of defining the amounts which may be taxable as income of the employees and the timing of the receipt of those amounts for income tax purposes. Essentially, I have concluded that the agreement here falls within section 7 and that, for reasons which I will explain later, other provisions which on their face might appear to apply to the taxation of shares issued to employees under this agreement do not apply in the circumstances.

I remain of the view as explained in my reasons for judgment that the ESOP contains the terms of an "agreement" as referred to in subsection 7(1). Counsel for Chrysler argued extensively that section 7 was either inapplicable to this situation or would have no practical effect on taxation because there would be no “benefit” accruing to employees within the meaning of paragraph 7(1)(a). That paragraph calculates the benefit as the amount by which the value of the shares issued to the employees exceeds the amount paid for them by the employees. Counsel argued that because, as I had held, the employees gave consideration for this share distribution by making wage concessions, such consideration must be seen as the payment for the shares. He even made rough calculations to demonstrate that on average the wage concessions would more than pay for the value of the shares at the time of their issue. I have at least two problems with this approach. Firstly, as pointed out by counsel for the respondent employees, there was no direct correlation between the value of wage concessions of any given employee and the value of shares allocated to him. Under the plan, shares were allocated equally to all those employees who were employed by Chrysler Canada at the end of the plan year in question and who had worked at least 650 hours during that year. This would mean that on the one hand many employees could be excluded from benefits because, although working in accordance with the "wage concessions", they would not have worked enough hours during the year or would not happen to be employed at the end of the year. On the other hand, there would be many who had worked far more than 650 hours who would gain no more shares than those who had worked about 650 hours. Secondly, the respondent employees themselves have taken the position that they did not pay for these shares and that therefore the full value of the shares should be treated as taxable [1] .

Where there are such benefits taxable in accordance with section 7, the Act itself appears to give that section "priority". Where an agreement exists such as described in subsection 7(1), paragraph 7(3)(a) provides that:

(a) no benefit shall be deemed to have been received or enjoyed by the employee under or by virtue of the agreement for the purpose of this Part except as provided by this section

The reference is to Part I of the Act. Part I includes subsection 5(1), a general provision for taxing "salary, wages and other remuneration . . ." from employ- ment, and subsection 6(1) which taxes various amounts received as income from employment including those received from an employee benefit plan. In applying either of those taxing sections one would be obliged, by the terms of paragraph 7(3)(a), to treat the benefits gained by the employees as being the amount calculated in accordance with paragraph 7(1)(a), such amount being received in the year determined in accordance with paragraph 7(2)(a) (namely in the year when the trustee commenced to hold the shares).

Further, the principle of generalibus specialia derogant applies. I have concluded that the definition of an "employee benefit plan” subsection 248(1) is more general than the kind of “agreement” described in subsection 7(1). While the former deals with any manner of "arrangement" by which an employer might confer benefits of any sort on an employee through the medium of a“ ^custodian", the scheme described in subsection 7(1) requires an "agreement" very specifically for the "sale or issue” of shares of the employer or a related company to employees. The common law has well established that wherever there is a particular provision and a general provision in the same statute and the latter if taken in its broadest sense would overrule the former, then the particular provision must be given effect and the general provision must be taken not to apply in these specific circumstances. [2] In the present case if both provisions were given effect the results would be contradictory: the value of the shares would be treated under section 7 as having been received by the employees in the years when the shares were first acquired by the trust, and their enhanced value at the time of actual distribution to the employees would then be treated as capital gains; but by applying paragraph 6(1)(g) so as to tax the value of the shares as benefits under an employee benefit plan, they would not be taxable in the years when received by the trust but would be taxable as income in the years when they or their cash equivalents were received by the employees. The application of the rule of generalibus specialia derogant overcomes this difficulty.

It appears to me that subsection 4(4) of the Income Tax Act would preclude the value of the shares being taxed as income of the employees in both the year of transfer of the shares to the trust and in the year of transfer of the shares or their proceeds to the employees. While subsection 4(4) precludes this kind of double taxation without indicating which rule is to prevail, both paragraph 7(3)(a) and the canons of interpretation lead us to the conclusion that the special regime provided in section 7 for the calculation and timing of deemed income should govern.

Counsel at the close of argument requested that if I came to a conclusion along these lines I should leave it for counsel to settle the terms of the judgment by agreement, there being some potential problems in connection with timing. I therefore so request counsel for the respondent employees to prepare a judgment in consultation with counsel for the applicant and the other respondent with a view to submitting a joint request for the entry of formal judgment.

As the respondent employees have been successful throughout and have met the onus which I held to be on them of demonstrating the Minister’s assessment to be wrong, they are entitled to their costs throughout against the applicant and the other respondent, Chrysler Canada Ltd.. While the latter has sought to leave the impression that it was not before the Court to support a more onerous taxation of its employees, that is precisely what the company has done throughout these hearings. It is apparent that the company has thereby sought to protect a preferred taxation position for itself. For this purpose it was obviously concerned not to have the ESOP found to be within section 7 as this might affect its entitlement to deduct the costs of benefits conferred on employees through ESOP. While the question before me does not call for a determination of the company's tax liability it is open to me to take into account the company's interest in this matter in assessing costs. It is for this reason that I have concluded that the company should share in the payment of the costs of the respondent employees.

Order accordingly.