Bastin, DJ:—This is an action by a taxpayer to set aside a reassessment of his income tax for the year 1969, which increased his tax by $8,247.71 with interest of $1,505.20 based on the assumption that he should be deemed to have received in that taxation year a taxable benefit under paragraph 85A(1)(a) equal to the amount by which the value of certain shares he purchased from the Nova Scotia Trust Company on that date exceeded the amount paid to the company therefor by him.
Paragraph 85A(1)(a) reads as follows:
85A. (1) Where a corporation has agreed to sell or issue shares of the corporation or of a corporation with which it does not deal at arm’s length to an employee of the corporation or of a corporation with which it does not deal at arm’s length,
(a) if the employee has acquired shares under the 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;
I consider that the word “acquire” as used in paragraph 85A(1)(a) of the Income Tax Act has its ordinary meaning of to gain or to get and this would occur when something was purchased whether for cash or on credit. The issue in this case is on what date did a binding agreement for the sale of the shares in question to the plaintiff come into existence.
The contention of the defendant is that the written application for shares dated July 24, 1968 was an offer which was not accepted by the company until it issued the stock certificate for the shares to the plaintiff on July 24, 1969. I do not agree.
The plaintiff was the president and general manager of the Nova Scotia Trust Company. He testified that in July 1968 the directors of the company decided to sell shares in the company to senior employees on credit to strengthen the relationship between such employees and the company to prevent them from being lured away by other companies. A similar plan had been tried in 1963 when 3,000 shares had been offered but only 2,296 had been sold. The executive committee, consisting of the plaintiff and five other directors, passed a resolution on July 11, 1968 to effectuate the plan. The form of the resolution was the joint composition of the plaintiff and several other directors and was in the following terms:
Resolution passed at a meeting of the Executive Committee of The Nova Scotia Trust Company on Thursday, July 11, 1968:
The Executive Committee approved a plan to be submitted to the next meeting of the Board of Directors whereby 704 shares of unsubscribed Company stock out of an original allotment of 3,000 made in 1963 be made available to employees of the Company with a minimum of 15 years’ service augmented by a further allotment of 563 shares for a total of 1,267 shares. This will result in a total Issued Capital Stock of 76,500 shares.
A resolution terminating the original plan as passed by the Executive Committee on January 7, 1966 was on motion rescinded.
Subscriptions are to be based on the following conditions:—
1. Shares will be made available to those with 15 or more years of service at the price of $35 per share which is approximately the current market price.
2. Payment will be made over a period of three years from the subscription date with an immediate down payment of 10% of the purchase price and the balance at the rate of 30% a year but payments may be accelerated.
3. A share certificate will not be issued until the shares subscribed are paid for in full and, if paid before the three-year period will not be sold or transferred on the books of the company under three years from the subscription date, the only exception to this being the sale or exchange of shares based upon any merger or amalgamation approved by the shareholders.
4. In the event of the death of a subscriber before his or her certificate is issued, a certificate shall be issued to the subscriber’s estate for the number of shares paid for in full at the date of death of the subscriber. 5. No dividend will be paid until the subscribed shares are paid for in full.
Following the passing of this resolution the plaintiff prepared a form of application for shares, approached five employees who had been in the company for over 15 years and had each of them complete a form indicating the number of shares each wished to buy. As the five employees agreed to purchase a total of 520 shares, the plaintiff signed an application to buy 847 shares, being the remainder of the 1,267 shares which were to be made available. The same form was used in each case. The plaintiff’s form of application was as follows:
The Executive Committee
To: Board of Directors
The Nova Scotia Trust Company
The Nova Scotia Trust Company
I hereby apply for 847 shares of the Capital Stock of The Nova Scotia Trust Company. I agree to pay $35.00 per share and to adhere to the following conditions:
1. That payment will be made over a period of three years from the subscription date with an immediate down payment of 10% of the purchase price and the balance at the rate of 30% a year but payments may be accelerated.
2. That I will not sell, assign or transfer my right to any part of my subscription until a share certificate is issued to me on my subscription being paid in full and in no case before May 15, 1971.
3. That I shall not be entitled to any dividend on my subscribed shares until paid for in full.
DATED at Halifax, NS, this 24th day of July, 1968.
Donald G Grant
At a meeting of the board of directors held on July 25, 1968 plaintiff presented the six applications for shares. One of the directors mentioned that another employee, LC MacKinnon, was qualified through 15 or more years of service to participate in the plan. As MacKinnon was then on vacation, plaintiff undertook to hold for him out of the 847 shares he had applied for whatever number of shares MacKinnon might wish to purchase. On his return from vacation MacKinnon agreed to take 12 shares.
Plaintiff testified that the shares of the company were widely distributed among 500 shareholders. They were not listed and had sold over the counter at $45 a share prior to the amendment to the Bank Act eliminating the ceiling on bank interest of 6% and permitting chartered banks to invest in mortgages. When this change in the law occurred their market price fell to $35 a share. Plaintiff admitted that he had only paid $1,000 into the deposit account. On July 24, 1969 he had his bank pay the full amount of the price of the shares. By then their market value had risen to $70 a share as a result of a takeover bid by another trust company, the Central Trust Company, which in the spring of 1969 published an offer in the newspapers to buy a specified number of the shares of the Nova Scotia Trust Company at a price of $70 a share. There is no evidence that plaintiff on July 25, 1968, the date he applied for the shares, had any knowledge that this development would occur.
An employee of the company, Mr L C Cameron, who acted as secretary at the meeting of the board of directors on July 25, 1968, made a list of the employees participating in the scheme and on this list placed the deposit account number to be used for the payment for the shares. No such number was inserted for Mr MacKinnon. The list in its final form is as follows:
Employees’ Stock Savings | Deposit Account |
847 | 835 | D G Grant | 20-0358 |
12 | | L C MacKinnon | |
100 | | R B Blight | 20-0359 |
100 | | A MacBean | 20-0360 |
20 | | R M Gordon Winnifred Gordon | 20-0361 |
100 | | E K Davison | 20-0362 |
100 | | J M Camerson | 20-0363 |
The directors passed the following resolution: | |
Resolution passed at a meeting of the Board of Directors of The Nova Scotia Trust Company on July 25,1968:
The Executive Committee approved a plan to be submitted to the next meeting of the Board of Directors whereby 704 shares of unsubscribed Company stock out of an original allotment of 3,000 made in 1963 be made available to employees of the Company with a minimum of 15 years’ service augmented by a further allotment of 563 shares for a total of 1,267 shares. This will result in a total issued Capital Stock of 76,500 shares.
Subscriptions are to be based on the following conditions:—
1. Shares will be made available to those with 15 or more years of service at the price of $35 per share which is approximately the current market price.
2. Payment will be made over a period of three years from the subscription date with an immediate down payment of 10% of the purchase price and the balance at the rate of 30% a year but payments may be accelerated.
3. A share certificate will not be issued until the shares subscribed are paid for in full and, if paid before the three-year period will not be sold or transferred on the books of the Company under three years from the subscription date, the only exception to this being the sale or exchange of shares based upon any merger or amalgamation approved by the shareholders.
4. In the event of the death of a subscriber before his or her certificate is issued, a certificate shall be issued to the subscriber’s estate for the number of shares paid for in full at the date of death of the subscriber.
5. No dividend will be paid until the subscribed shares are paid for In full.
Upon motion of Mr Robertson, seconded by Mr Piercey and unanimously carried, the plan was approved as presented.
There are no rigid formalities required to create a contract. If the parties intend to enter into a binding agreement and arrive at a consensus ad idem, the court will give effect to it. The whole transaction, both words and conduct of the parties, will be looked at and it is immaterial when the various steps leading to a consensus took place if from all the facts it can be determined that a contract was intended.
The company decided to make available 1,267 shares to its senior employees and then carried out its plan in two stages. The terms of the plan were set out in the resolution of the executive committee passed on July 11, 1968. At its meeting on July 25, 1968 the board of directors received the employees’ applications for shares made pursuant to the plan and confirmed their sale: It was on that date that plaintiff acquired 835 shares and it was the market value of the shares on that date which is to be considered.
Counsel for the defendant argued that for a contract to be made by the tender of the application for shares and the passing by the board of directors of the resolution, both documents must be in exactly the same terms. Condition 3 of the resolution reads as follows:
3. A share certificate will not be issued until the shares subscribed are paid for in full and, if paid before the three-year period will not be sold or transferred on the books of the Company under three years from the subscription date, the only exception to this being the sale or exchange of shares based upon any merger or amalgamation approved by the shareholders.
The application contains the following paragraph:
2. That I will not sell, assign or transfer my right to any part of my subscription until a share certificate is issued to me on my subscription being paid in full and in no case before May 15, 1971.
The resolution contains as condition 4 the following:
4. In the event of the death of a subscriber before his or her certificate is issued, a certificate shall be issued to the subscriber’s estate for the number of shares paid for in full at the date of death of the subscriber.
The application for shares made no reference to this condition. The answer to this argument is that the applications for shares were made in pursuance of and subject to the conditions of the two resolutions authorizing this employee stock savings plan. The two conditions were therefore implied in the form of application. It is a reasonable inference that plaintiff inserted clause 2 in the form of application to emphasize that the plan was intended to give the employees a permanent interest in the company and not to encourage short-term speculation. In my opinion the use of May 15, 1971, instead of the exact wording of the resolution, was a purposeless variation by the plaintiff when drawing the document which is of no legal significance. This difference has no effect on the consensus which created a binding agreement to sell the shares.
There can be no question but that the directors of the company, and the employees who participated in this plan for acquiring shares, intended that their submission of written applications for a specified number of shares and the acceptance by the directors of these applications, and the passing of the resolution approving of the plan to sell 1,267 shares to such employees would constitute a binding agreement enforceable by either party. The plaintiff acquired the right to 847 shares on July 25, 1968 and became trustee for MacKinnon for 12 of them, subject to MacKinnon paying the price of the shares. The company held his application which contained an enforceable promise to pay for the shares. If the shares had fallen in value, plaintiff could not have repudiated his promise and the company had no right to cancel its agreement because the shares had appreciated in value. In accordance with the intention of the company and the employees, the latter acquired the shares they had applied for when the directors passed the resolution confirming the plan on July 25, 1968.
Since on that date the shares were worth no more than the price to be paid by them, the company conferred no benefits on them by selling the shares.
I give judgment for the plaintiff with costs to be taxed. Plaintiff’s assessment for the year in question is referred back to the Minister for reassessment not inconsistent with the reasons.