Mahoney, J.A.:—In assessing the appellant's 1985 income tax return, the respondent disallowed its entire contribution to its Employee Stock Purchase Plan. I have had the advantage of reading the reasons for judgment of my brother Marceau herein and, while I agree with him in the result, I cannot subscribe entirely to his reasons. Mr. Justice Marceau has set out in full the agreed statement of facts and the relevant provisions of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act"), subsections 5(1), 7(1) and 7(3).
In my respectful opinion, there is no basis upon which it is to be concluded that the plan was not operated precisely as the agreed statement of facts says and the trust agreement between the respondent and National Trust provided. In particular, I am unable to conclude that the respondent did not actually” pay over" its monthly contributions as and when required by Article IV(F). Nor am I able to conclude that the price the trustee paid for treasury shares was other than that established on the Toronto Stock Exchange as provided by Article VI(A)(2). I do not see that the issue of treasury shares at a price established in the open market can be found to be their sale "at a discount”. The question of whether the employer's contribution was actually paid or effected by mere bookkeeping entries was canvassed extensive y on the hearing of the appeal; counsel for the appellant was clear in stating that there was no issue as to the actual payment of its contributions by the respondent to the trustee.
It remains that in 1985 84,106.5412 shares were purchased by the trustee, whereof 40,794.7412 were purchased from the accounts of terminating members and 43,304 were treasury shares. The respondent's total 1985 contribution was $282,076, the amount of the deduction disallowed. That $282,076 was 1/3 of the total amount paid for the 84,106.5412 shares while, of those shares, something over 1/2 were treasury shares. It follows that, in 1985, the entire employer's contribution flowed back to it for the purchase of treasury shares and was, therefore, expended in the circumstances expressly contemplated by subsection 7(1), that is "where a corporation has agreed to sell or issue shares of the capital stock of the corporation”. The $282,076 was taxable to the employees under subsection 7(1), not 5(1), and the deduction of the amount precluded by 7(3).
Marceau, J. (Linden, J.A., concurring):—In this appeal, Her Majesty the Queen contests a judgment rendered by the Trial Division. The respondent—a corporation formed under the provisions of the Canada Business Corporations Act on the amalgamation of Placer Development Ltd., Dome Mines Ltd. and Campbell Red Lake Mines Ltd.—had disputed, by way of action, the validity of a notice of reassessment issued against it by the Minister of National Revenue under the Income Tax Act that disallowed the deduction it had claimed for its 1985 taxation year. The judgment declares the action well founded and varies the assessment in order to allow the disputed deduction.
At the heart of the litigation is a very complex and sophisticated stock purchase plan (the "plan"), made available by the respondent (hereinafter “Placer” or "the employer”) to all its employees of at least 19 years of age who have more than one year of service with it or one of its affiliated companies. Basically, the plan dictates that the employer provide contributions that are added to amounts subscribed by the participating employees towards buying Placer Dome common stock. It is these contributions, which in the relevant year amounted to some $282,876, that the respondent seeks to deduct from its taxable income.
The respondent's contention, which was accepted by the trial judge, is that the employer's contributions under the plan are made as additional remuneration to the participating employees; they constitute, therefore, taxable income in the hands of the employees pursuant to the general provision of subsection 5(1) of the Act, and are also deductible from the employer's own taxable income. The Minister thinks otherwise. He argues that, in a proper interpretation of the plan, it is clear that the employer's contributions are provided merely to allow the acquisition of shares by the employees at a reduced price; as a consequence, they must be governed by the specific provisions of section 7 of the Act, more precisely subparagraph 7(1)(a)(ii) and subsection 7(3), which, in superseding the general provision of section 5, renders the contributions taxable in the hands of the employees yet not deductible by the employer.
I reproduce here those provisions of the Act which are put in question: 5. (1) 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.
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 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, if any, by which... .
(ii) the total amount paid or to be paid to the corporation by the employee for the shares and any amount paid by the employee to acquire the right to acquire the shares shall be deemed to have been received by the employee by reason of the employee's employment in the taxation year in which the employee acquired the shares;
(3) 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 corporation with which it does not deal at arm's length
(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, and
(b) the income for a taxation year of the corporation or of a corporation with which it does not deal at arm's length shall be deemed to be not less than its income for the year would have been if a benefit had not been conferred on the employee by the sale or issue of the shares to him or to a person in whom his rights under the agreement have become vested.
There is no question of fact arising on this appeal nor was there any before the trial judge. The case proceeded on the basis of an agreed statement of facts, so the issue is strictly one of law. It may appear to be a narrow one, but its disposition requires a review of the entire operation of the plan and a proper understanding of the commercial and practical nature of the underlying transactions provided for therein. As we will see, this is not an easy matter.
The plan is set out in an obscure and most convoluted document, the text of which covers some eight double column small print pages and is fraught with repetitions, references and cross-references between articles. It is far too long to be reproduced in these reasons. As indicated above, however, the agreed statement of facts contains the basic provisions of the plan. This statement is also extremely lengthy, and as the articles to which it refers are reproduced verbatim, I had first thought of limiting myself to a mere overview of it. I quickly realized, though, that it would be much more satisfactory, for a proper appreciation of my understanding of it, to reproduce the statement (save the attached schedules) in its entirety.
AGREED STATEMENT OF FACTS
The parties hereto by their respective solicitors admit the following facts, provided that the admission is made for the purpose of this action only and may not be used against either party on any other occasion, and provided further that the parties may adduce further and other evidence relevant to the issues and not inconsistent with this agreement.
1. The plaintiff is an amalgamated corporation formed under the provisions of the Canada Business Corporations Act effective August 13, 1987 on the amalgamation of Placer Development Ltd., Dome Mines Ltd. and Campbell Red Lake Mines Ltd.
2. On February 13, 1973, Placer Development Ltd. approved the establishment of the Placer Development Ltd. Stock Purchase Plan (the"Plan") for the benefit of its employees and the employees of its branches and associated companies. Although Placer Development Ltd. is one of three predecessor corporations of the plaintiff herein, for simplicity in this Agreed Statement of Facts, Placer Development Ltd. will hereinafter be referred to as the“ plaintiff”.
3. A copy of the Plan, as amended May 7, 1985, is Schedule A to this Agreed Statement of Facts. This is as the Plan read during the 1985 taxation year, the year here under appeal. The amendments of May 7, 1985 are inconsequential to this appeal.
4. By resolution of the Board of Directors of the plaintiff dated June 15, 1973 (a copy of which is Schedule B to this Agreed Statement of Facts), the Board resolved that "all shares purchased by the Trustee pursuant to the Plan shall until May 31, 1974 or until this direction is changed, whichever shall later occur, be purchased through a member firm of the stock exchange on which the Company shares are listed".
5. By resolution of the Board of Directors of the plaintiff dated August 5, 1975 (a copy of which is Schedule C to this Agreed Statement of Facts), the Board resolved that “effective September 1, 1975 all shares purchased by the Trustee pursuant to the Company's Employee Stock Purchase Plan shall be purchased, until this direction is changed, from the Company as original issue shares".
6. The Plan provided, inter alia:
(a) Article I—Definitions
"Salary"—means the base salary paid to an Employee by a Participating Company for personal services rendered by him as an Employee of such Participating Company, including vacation pay and payments under the Placer Development Ltd. 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.
(b) Article II—General
The purpose of the Plan is to enable Employees to acquire Placer Common Shares through payroll deductions with financial assistance provided by the Participating Company.
The Placer Common Shares purchased by the Trustee under the Plan shall, at the election of the Board, be purchased either (i) through a member firm of a stock exchange on which such shares are listed, or (ii) from Placer or a subsidiary of Placer.
(c) Article IV A
Contributions by Members. Any Member may, except while on leave, contribute in any calendar month toward the purchase of Placer Common Shares for his account under the Plan an amount which shall not exceed six percent (6%) of his salary during such month.
(d) Article IV F
Contributions by Participating Companies. The Participating Company employing any Member who makes a contribution in any calendar month pursuant to this Article shall pay over to the Trustee within six days after the close of such calendar month, as contribution on behalf of and as an absolute benefit for such Member for such calendar month, an amount (in Canadian funds, if required by the Trustee) equal to one-half (1/2) of the amount contributed by such Member.
(e) Article IV G
Withholding Taxes. The contribution by a Participating Company to the Trustee on behalf of any Member for any calendar month shall be regarded as additional compensation paid to such Member in such month, and any taxes payable to any jurisdiction with respect thereto shall, where required, be withheld from the salary payable to him during such calendar month.
(f) Article V VA
Individual Accounts. The Trustee shall cause to be maintained a cash account and a share account for each Member.
(g) Article V B
Posting of Transactions. The Trustee shall cause the cash account of each Member to be credited with the amount of any contributions by such Member, any contributions for his benefit by the Participating Company employing him or by Placer, 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. It shall cause such account to be debited with the cost of any Placer Common Shares purchased for his account (in the manner described in Article VI hereof) and any cash distributed to him or his legal representatives. The Trustee shall cause the share account of each Member to be credited with any Placer Common Shares purchased for his account including fractional interests in such shares (in the manner described in Article VI hereof). It shall cause such account to be debited with any Placer Common Shares sold for his account or distributed to him or his legal representatives.
(h) Article VI A
Purchase of Placer Common Shares. On the next business day following the 10th day of each calendar month the Trustee shall purchase Placer Common shares for the accounts of the Members, to the extent necessary, in accordance with the following procedure:
(1) The Board shall direct that the Placer Common Shares purchased in any calendar month by the Trustee under the Plan (other than shares required to be purchased from other Members pursuant to Paragraph C of Article Vil hereof) shall be purchased either (i) through a member firm of a stock exchange on which such shares are listed, or (ii) from Placer or a subsidiary of Placer. Any such direction by the Board shall not be effective with respect to any calendar month unless it is received by the Trustee 10 days prior to the commencement of such calendar month. Any such direction shall remain in effect for all subsequent calendar months until it is changed.
(2) The price of any Placer Common Shares purchased from Placer or a subsidiary of Placer and the price of any Placer Common Shares or fractions thereof which the Trustee is required to purchase from any Member on behalf of any other Member shall be equivalent to 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 for the purchase of such shares or dividends or other income were received for the accounts of the Members; or if the said shares did not trade on such 10th day on the applicable exchange, the last day prior to such 10th day such shares traded on the applicable exchange (hereinafter called the "Issued Price").
(3) The Trustee shall determine the aggregate sum carried in the cash accounts of the Members at the close of business on such 10th day, except in the cash accounts of those Members for whose account it is required to sell all the Placer Common shares carried in their share accounts pursuant to Paragraph C of Article VII hereof (hereinafter called the "Net Contributions").
(4) If the Net Contributions are less than an amount equal to the Issued Price multiplied by the number of shares to be sold by all Members as described in Paragraph C of Article VII hereof, the Trustee shall proceed in accordance with said Paragraph. If the Net Contributions of the Members are more than such amount, the Trustee shall purchase such shares and shall credit the cash account of each Member for whom Placer Common Shares or fractions thereof are being sold with an amount equal to the Issued Price multiplied by the number of Placer Common Shares or fractions thereof being sold for his account. At the same time, the Trustee shall debit the share account of such Member with the number of Placer Common Shares or fractions thereof being sold for his account.
(5) The Trustee shall then, according to the direction made by the Board as to the purchase of shares with respect to the calendar month in which such shares are to be made, either
(i) Place orders with one or more member firms of a stock exchange as provided under Subparagraph (1) of this Paragraph to purchase at the market price in the name of the Trustee or its nominee, the largest number of whole Placer Common Shares which can be purchased with the Net Contributions, after the same has been reduced by the aggregate amount of cash credited to the accounts of those Members for whom shares have been sold pursuant to Subparagraph (4) of this Paragraph, provided, however, that the Trustee shall not be required to purchase shares in the market at times or prices which, in the opinion of the Trustee, would not be consistent with the conduct of orderly transactions in the market for such shares; or
(ii) Purchase from Placer or a subsidiary of Placer at the Issued Price the largest number of whole Placer Common Shares which can be purchased with the Net Contributions, after the same has been reduced by the aggregate amount of cash credited to the cash accounts of those Members from whom shares have been sold pursuant to Subparagraph (4) of this Paragraph.
(6) After eight of the purchases described in Subparagraph (5) of this Paragraph have been completed, the Trustee shall determine the average price per share (excluding all commissions, taxes and other expenses incurred in connection therewith) at which Placer Common Shares have been acquired, for Members pursuant to Subparagraphs (4) and (5) of this paragraph (hereinafter called the "Purchase Price") and shall cause the share account of each Member to be credited with the number of shares (carried to the fourth decimal place) equal to the amount that was carried in his cash account on such 10th day divided by the Purchase Price. At the same time, the Trustee shall debit the cash account of such Member with an amount equal to the Purchase Price multiplied by the number of Placer Common Shares (carried to the fourth decimal place) that have been credited to such Member's share account.
(i) Article VI B
Custody. The Trustee shall hold for safekeeping all Placer Common Shares purchased by it pursuant to this Plan until the Member for whose account they have been purchased, or his legal representatives, direct the Trustee to transfer and deliver the same to him or such legal representatives pursuant to Paragraph A of Article VII hereof or Paragraph B of Article VIII hereof or to sell such shares pursuant to Paragraph C of Article VII hereof. While shares are held by the Trustee, the Trustee shall credit all distributions received thereon to the proper account of such Member.
(j) Article VI C
Voting Rights. Each Member for whose account the Trustee holds Placer Common Shares shall have the right to receive all material mailed by Placer to its shareholders including all notices of meetings of the shareholders thereof. The Trustee (or its nominee) shall vote such shares at such meetings of the shareholders in accordance with instructions given to the Trustee in writing by each Member. Notwithstanding the foregoing sentence, to the extent that the Trustee receives directions from Members in whose accounts fractional interests in Placer Common Shares are carried, the Trustee (or its nominee) shall have the right to vote, in a manner consistent with those directions, a number of full shares equal to the aggregate fractional interests with respect to which it has been given similar directions.
(k) Article VII A
Directions to Withdraw. A Member may direct the Trustee (i) to transfer all or any part of the Placer Common Shares carried in his share account (except any fractional interest in a Placer Common Share) into his name and to deliver the same to him, or (ii) to sell all or any part of his Placer Common Shares and fractions thereof, in accordance with Paragraph C of this Article, and remit the balance of his cash account, after the same has been credited with the proceeds of such sale, to him. All directions to withdraw shall be made by the Member directly to the Trustee by letter, telegram or cable, in a form approved by the Committee and acceptable to the Trustee. All directions to sell Placer Common Shares that are received during a calendar month shall be deemed to be effective at the close of business on the 10th day of the following calendar month.
A Member who makes a withdrawal in excess of two during any ten-year period shall be ineligible to make contributions under the Plan for a period of 12 calendar months commencing on the effective date of such withdrawal.
(l) Article VII C
Sale of Placer Common Shares. On the next business day following the 10th day of each calendar month, the Trustee shall determine the total number of Placer Common Shares (including any fractional interest in a Placer Common Share) that it has received directions to sell in accordance with Paragraph A of this Article or Paragraph B of Article VIII hereof and shall sell such shares in accordance with the following procedure:
(1) If the Net Contributions of the Members as described in Subparagraph (3), Paragraph A of Article VI hereof exceeds an amount equal to the Issued Price (determined in accordance with Sub-paragraph (2) of that Paragraph) multiplied by the number of shares to be sold by all Members, the Trustee shall proceed in accordance with Paragraph A of Article VI hereof. If the Net Contributions of the Members are less than such amount, the Trustee shall determine the number of shares to be sold that may be purchased for the accounts of the other Members by (i) subtracting from the Net Contributions of the Members an amount equal to the Issued Price multiplied by any fractional interest in a share to be sold and (ii) by dividing the balance by the Issued Price. The Trustee shall then purchase the fractional interest and the number of shares determined as aforesaid and shall cause the share account of each Member for whom Placer Common Shares must be acquired to be credited with a number of shares (carried to the fourth decimal place) equal to the amount that was carried in his cash account at the close of business on such 10th day divided by the Issued Price. At the same time, the Trustee shall debit the cash account of such Member with an amount equal to the Issued Price multiplied by the number of such Placer Common Shares (carried to the fourth decimal place) that have been credited to his share account.
(2) The Trustee shall then place orders, with one or more member firms of a stock exchange on which Placer Common Shares are listed to sell at the market the remaining whole number of Placer Common Shares for which it has received directions to sell.
(3) After all of the sell orders described in Subparagraph (2) of this Paragraph have been executed, the Trustee shall determine the average price per share (after the payment of all commissions, taxes and other expenses incurred in connection therewith) at which Placer Common Shares have been sold pursuant to Subparagraphs (1) and (2) of this Paragraph and shall cause the cash account of each Member for whom such shares were sold to be credited with an amount equal to such average price per Placer Common Share multiplied by the number of Placer Common Shares that were sold for his account. At the same time, the Trustee shall debit the share account of such Member with the number of Placer Common Shares sold for his account.”
(m) Article VIII A(1)
A. Manner of Distribution. Upon the termination of the membership of any Member, the cash and Placer Common Shares held by the Trustee for the account of such Member shall be distributed as follows:
(1) If such Member or his legal representative directs the Trustee, in the manner and within the period described in Paragraph B of this Article, to liquidate his share account, the Trustee shall sell all Placer Common Shares credited to his share account and remit the net proceeds (after the payment of all commissions, taxes and other expenses incurred in connection with such sales or redemptions), together with any amount remaining in his cash account, to him or such legal representative. All Placer Common Shares shall only be sold at the times and in the manner described in Paragraph C of Article VII hereof.
(2) If such Member or his legal representative directs the Trustee, in the manner and within the period described in Paragraph B of this Article, to distribute the Placer Common Shares in his share account, or if the Trustee shall not have received any directions with respect to such account in such manner and within such period the Trustee shall sell any fractional interest in Placer Common Shares at the time and in the manner described in Paragraph C of Article VII hereof. It shall then deliver to such Member or his legal representative all of the remaining whole Placer Common Shares and the total amount carried in his cash account, including the net proceeds from the sale of any fractional interests. Any Placer Common Shares shall, before delivery, be transferred into the name of such Member (in the manner and within the period described in Paragraph B of this Article) or if the Member shall have died or been adjudged incompetent, then in the name of his legal representative.
(n) Article IX A
Appointment of a Committee. The Board shall appoint a committee, called the Stock Purchase Plan Committee, of not less than three (3) or more than five (5) persons who shall serve at the pleasure of the Board. Any vacancy in the Committee arising by death, resignation, or otherwise shall be filled by the Board.
(o) Article X A
Appointment. The Trustee shall be appointed by the Board. Thereafter, the Board shall have the power to remove the Trustee and appoint a new Trustee. In every case, the Trustee shall be a trust company duly qualified to act.
(p) Article X B
The Trust Agreement. The terms and conditions of the trust agreement shall be determined by the Board. Said agreement shall be deemed to form part of the Plan, and any and all rights or benefits which may enure to any person under the Plan shall be subject to all the terms and conditions of said agreement which are not inconsistent with the Plan.
7. By way of example as to how the Plan worked we have used the month of September 1985 and there is attached hereto as Schedule D a summary sheet prepared by the National Trust Company entitled "Placer Stock Purchase Plan: Summary of Purchase: Month September 1985”. The working of the plan was as follows:
(a) For the month of September 1985, the plaintiff wrote a cheque to the Trustee of the Plan for $127,820.79 representing the employee and employer contributions for the plaintiff, its Endako division, and its Gibraltar and Equity subsidiaries; and the plaintiff's division, Placer CEGO Petroleum, wrote a cheque to the Trustee of the Plan for $20,547.08 representing its employee and employer contributions. These contributions were made in accordance with Articles IV A and IV F of the Plan. Pursuant to Article V B of the Plan the amounts contributed were credited by the Trustee to the employees’ cash accounts. (Copies of the cheque stubs are Schedule E to this Agreed Statement of Facts.)
(b) On October 10, 1985, the Trustee determined that the last trade of the plaintiff's stock on the Toronto Stock Exchange on that day had been at $22.50 which was thus established to be the price at which shares for the Plan would be purchased and sold. (Copy of the National Trust letter to the plaintiff is Schedule F to this Agreed Statement of Facts.)
(c) Pursuant to Articles V B and Vi A of the Plan, the cash account of each employee was credited and the money was first used to acquire the shares from the accounts of those Members who were making withdrawals from and terminating their membership in the Plan. For that month $46,670.80 was used to acquire 2,074.2568 shares.
(d) There was paid to terminating Members the contributions made on their behalf for the month of September, which moneys had not been utilized to buy shares. The total amount of contributions so returned for the month of September was $1,021.65. As well, there was returned to terminating Members $180.19 representing dividends that had been received with respect to their shares.
(e) There was added to the amount available for the purchase of shares $13,809.08 representing dividends received with respect to the shares held by the Plan, and there was deducted $330.20 of withholding tax relating to dividends that were credited to the cash accounts of non-resident Members of the Plan.
(f) The balance after all of these adjustments was $113,973.15 which amount was used to acquire 5,066 shares in the capital stock of the plaintiff from the treasury of the plaintiff pursuant to Article VI A (5)(ii) of the Plan.
(g) Pursuant to Article VI A(6), the Trustee credited the share account of each Member with the number of shares, carried to the fourth decimal point, equal to the amount in that Member's cash account on October 10, 1985 divided by $22.50 (the purchase price of the shares) and, at the same time, the Trustee debited each Member's cash account accordingly.
(h) The Trustee credited the cash account of each withdrawing Member with the proceeds of the sale of shares and remitted the balance in his cash account to such Member, pursuant to Article VII A of the Plan; and remitted the net proceeds of the sale of shares of each terminating Member, together with any amount remaining in his cash account, to such Member, pursuant to Article VIII A (1) of the Plan.
8. How the Plan affected each employee is demonstrated by the example of Mr. John Eckersley. During the month of September, Mr. Eckersley's "employee contribution” was $375.02 which was matched by the plaintiff's 50% contribution of $187.51 for a total of $562.53. When the plaintiff paid Mr. Eckersley his regular salary cheque for September 30th the taxes that were withheld were based on the amount actually paid to him plus the amount of $562.53 that was paid to the Plan. This was pursuant to Article IV G of the Plan. The Trustee credited Mr. Eckersley's cash account with the amount of $562.53, plus the amount of dividends received by the Plan on the shares held for his account, pursuant to Article V B of the Plan. On October 11, 1985, the Trustee purchased shares of the plaintiff, equal in number to the amount in his cash account on October 10, 1985 divided by the price of $22.50 per share, and credited Mr. Eckersley's share account with the number of shares purchased and debited Mr. Eckersley’s cash account with the amount of the purchase price for such shares, pursuant to Article VI A (6) of the Plan.
9. During the 1985 taxation year the total number of shares acquired out of contributions made to the Plan was 84,106.5412 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.
10. By Notice of Reassessment dated July 7, 1989 for the plaintiff's 1985 taxation year, the Minister of National Revenue reassessed the plaintiff disallowing as a deduction contributions made by the Company to the Plan. The form T7WC attached to the Notice of Reassessment stated:
Disallowed employer contributions
to Employee Stock Purchase Plan $282,076 11. 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.
My introductory remark regarding the difficulty of clearly understanding the operation of the plan will now be properly appreciated. There are, however, some observations that a careful reader cannot avoid making; two of them, which are particularly striking, must be stressed for our purposes.
The first one concerns the actual authority directing the plan and the function of the trustee in relation to that authority.
It will have been noted that Article IX provides that the operation of the plan is overseen by a committee, endowed with the largest powers of regulation and interpretation, the members of which are appointed at the pleasure of the board of directors of Placer. The latter have even, per Article XII, the right to amend the plan, to give the amendment retroactive effect and to terminate the plan at any time, provided only that the benefits already earned by the employees be left intact.
Now, coming to the trustee’s role, it will have been noted that it is precisely defined. The trustee is bound, once the company provides the tax adjusted contributions on the 6th day of the month, to credit the amounts to the appropriate members' cash accounts. The trustee then attempts to deplete the members’ cash accounts through the purchase of shares sold by withdrawing and terminating members ("old shares"). The share price at which the trustee must trade is automatically set by the market on the 10th day of the month. If any cash account credits remain after exhausting this source of old stock, the trustee is required to buy treasury shares until the cash accounts of all purchasing members are depleted. If, on the other hand, the cash account credits are insufficient to pay for all the old shares to be sold, those remaining will be offered on the stock market.
It is impossible to deny, in view of all these rules, that the trustee’s function is an automatic, and not an autonomous, one. Every phase of the trustee's activity is specifically predetermined. There is, of course, nothing irregular about such an arrangement, but, it is apparent that the trustee exercises absolutely no independence of thought or action. The trustee is, in fact, a mere executor, an agent or a servant with no power to decide and no initiative whatsoever. The trustee may be said to be an administrator in the broad sense of the word, since he has legal acts to perform, but the view that he is an administrator acting for the benefit of the employees does not appear to be wholly accurate. He is an intermediary or a conduit acting for the benefit of all concerned and his only role is to execute passively the operations as dictated by the provisions of the plan and the directives of Placer’s board of directors.
The second observation regards the assignment of the funds to be paid by the employer and the time of their actual payment.
It is important to realize that the employer never pays out money to the employees directly and never pays out money to the trustee the destination of which is not precisely predetermined by the rules of the plan. In fact, except to give effect to the cash demands of the departing or withdrawing members, no actual transfer of funds need occur; all transactions can be satisfied through bookkeeping entries. Even when cash is needed, which is to be drawn from the contributions, the actual amount to be remitted by the company to the trustee is only that required to purchase shares of withdrawing or terminating members; for the balance of the contributions, one need merely adjust the books to reflect the offsetting payments.
I realize that a cheque signed by the respondent and payable to the trustee for the month of September, 1985 (which had been submitted to present a concrete view of the operations of the arrangement) is on file, but there is no indication that the cheque was ever cashed. Even if it was, there is no indication as to who benefited from the accumulated interest. Is it not interesting that, despite its complexity, no provision of the plan addresses the interest gained on contributions either between the 30th and the 6th of the following month, when all of the contributions rest with the employer, or between the 6th and the 10th of the month, when the trustee is theoretically holding the money on the employees' behalf?
This second observation which, in effect, pertains to the actual transfer of funds, and more particularly, to the manner in which the cash demands of departing or withdrawing members are satisfied each month, can be extended. As we have seen, the money required to buy the old shares, i.e. shares credited to the accounts of those who depart or have decided to exercise their limited right of withdrawal, will first be taken from the total contributions for that month. But, we know that two-thirds of those contributions come from the employees' wages set aside by the employer to cover the employees' subscriptions. What follows is of prime importance: as the only other source of shares is the capital pool of the company, the employer will have to actually disburse money beyond what it has retained from the employees' wages only if more than two-thirds of the total sum payable to the trustee for that month is required to buy old shares.
In my view, there is no need to go any further in the analysis of the plan; conclusions flow from these two basic observations that are determinative of the issue.
Based on the following facts: that the trustee is merely a conduit through which the employer administers the plan; that the employees never receive money or money's worth until termination or withdrawal and, even then, never from the employer directly; and, that the funds payable by the employer to the trustee each month have a predetermined destination and never fall under any real control or genuine power of the employees or the trustee, it must be concluded that the true benefit the employees acquire by their participation in the plan is not the entitlement to an additional remuneration but the entitlement to a credit for shares of Placer at two-thirds of their market value. It is, of course, equivalent for a corporation to sell its treasury shares at a discount or to gratuitously give money to the purchasing employee on the express condition that it be (immediately or eventually) applied to cover part of the full value purchase price of those treasury shares. Obviously, the two operations cannot be treated differently as to their tax incidence.
The situation created by the plan is, as I see it, precisely the one envisaged by section 7 of the Act, even if the draftsman had probably in mind, in formulating the provision, the more recognizable "stock option plan”, where the employee acquires the right to purchase shares at a fixed price which is actually, or may become, lower than the market price, or a “share purchase plan” in which shares are offered at a price less than their actual value. Indeed, the very words used in paragraph 7(1)(a) describe that situation, since the employees are simply given the opportunity to acquire shares of the capital stock of their employer by paying only a fraction of the market price. It follows that subsection 7(3) will govern all of the respondent's contributions which, applied to the purchase of its treasury shares by the trustee, have merely served to reduce the price actually paid by the employees.
There is another conclusion to be drawn, which, in my view, is even more telling and incontrovertible than the first one. For the respondent to be compelled under the plan to make any irrecoverable cash outlay, more than two-thirds of the combined contributions of an entire year (income tax being chargeable on a yearly basis) would be needed to satisfy the cash demands of the departing or withdrawing members during that year; or, put otherwise, more than twice as many old shares as new treasury shares had to be sold during the year. The eventuality is quite a remote one indeed, as the employer's contributions are due monthly and are dependant on the actual employees' contributions. In any event, it is clear that, in the relevant year, 1985, the respondent has not made any output of funds under the Plan. Since, in that year, more treasury stock was bought than old stock was sold (43,304 v. 40,795), the respondent remained well above the minimum ratio of 2:1 required before an actual capital outlay was demanded. The respondent is, therefore, in no position to speak of deductibility, it being well established that an employer must incur an expense or a cash outlay or a loss of value of its assets in order to claim a deduction from its taxable income (see Lowry (Inspector of Taxes) v. Consolidated African Selection Trust, Ltd., [1940] A.C. 648 (P.C.)).
Counsel for the respondent put great emphasis on the statements which appear in Article IV F of the plan to the effect that the employer's contribution is "on behalf of and as an absolute benefit for (the) member" and that such contribution ” shall be regarded as additional compensation paid to (the member)"; they likewise attach much importance to the fact that income taxes for participating employees are withheld not only from their wages but also from the employer's contribution. But, it is the substance of a transaction that must be looked at in order to determine the true legal rights and obligations of the parties. Similarly, it is the commercial and practical nature of the transaction, the true legal rights and obligations flowing from it, that must be looked at to determine its tax implications. As to the amounts withheld and presumably remitted to the Department in the name of the employees, it was a necessary corollary of the employer's assumed position under the plan, but, of course, it cannot transform the reality of the transaction.
Before closing, I pause to address a statement made by the Crown's representative at trial, the relevant portion of which follows:
The Minister will be conceding that to the extent that the plaintiff did not receive back funds from the trustee to purchase treasury shares, those amounts are deductible so what we're speaking only of in this appeal are the amounts paid back from the trustee to the corporation for the purchase of treasury shares.
It is suggested that, by this statement, the Crown conceded that that portion of the employer's contribution going towards the purchase of old shares was, in fact, deductible. This is not my interpretation. What the Crown is actually saying here conforms to my analysis of the plan; that is to say, if any portion of the employer's contribution, over the year, is not returned to it, then, that amount would be deductible. As demonstrated above, this certainly was not the case here.
My final conclusion will now be clear. With respect, in finding that Placer's contributions to the plan form part of the remuneration paid to its employees, and were therefore deductible, I think that the trial judge failed to identify the overall focus of the plan and to accurately characterize all its underlying transactions. In my judgment, the commercial reality of the plan is that it puts shares into the hands of the employees at a discounted price. The Minister was, therefore, correct in concluding that the benefits accruing to the employees under the plan were taxable pursuant to paragraph 7(1)(a) of the Act, not subsection 5(1), and could not be treated by the employer as an expenditure deductible from its taxable income in view of the provision of subsection 7(3) of the Act.
I would allow the appeal, set aside the judgment of the Trial Division and reinstate the reassessment of the Minister, the whole with costs in the Trial Division and in this Court.
Appeal allowed.