Hugessen,
J.:—In
1978
the
appellants
acquired
shares
in
the
capital
stock
of
their
employer,
Mitchell
Installations
Ltd.
(“Mitchell”).
Since
Mitchell
is
a
“Canadian
controlled,
private
company”*,
they
claim
that
they
are
taxable
under
the
provisions
of
subsection
7(1.1)
of
the
Income
Tax
Act.
That
subsection,
by
its
terms,
only
applies
to
employee
stock
option
agreements
entered
into
after
March
31,
19777.
The
trial
judge
found
as
a
fact
that
there
was
an
option
agreement
dating
from
shortly
after
the
time
each
appellant
became
employed
(in
1972
and
1973)
by
which
each
had
the
right
to
acquire
five
shares
of
Mitchell
at
a
price
of
$1
per
share.
While
we
have
some
doubts
as
to
the
correctness
of
this
finding,!
it
is
not
necessary
that
we
express
any
final
view
on
the
matter
for
it
is
clear
that
even
if
there
were
such
agreements,
they
were
radically
changed
by
mutual
consent
prior
to
the
appellants’
acquisition
of
shares
of
Mitchell
in
1978.
These
changes
consisted,
in
particular,
in
the
requirement
that
each
appellant
as
a
condition
of
acquiring
his
shares:
(a)
guarantee
Mitchell’s
indebtedness
to
the
bank
to
the
extent
of
$20,000
and
(b)
execute
a
buy-back
agreement
whereby
Mitchell
could
re-acquire
the
shares
of
either
appellant
upon
the
latter
ceasing
to
be
an
employee.
In
our
view
these
conditions
represent
fundamental
changes
in
any
rights
which
the
appellants
might
have
had
to
acquire
shares
in
Mitchell.
In
this
regard,
the
trial
judge,
after
referring
to
the
fact
that
Mitchell
had
been
engaged
in
some
litigation
with
two
other
shareholder/employees
which
was
finally
settled
in
February
1977,
said:
.
.
.Only
after
that
did
the
company
put
forward
a
change
in
its
policy,
imposing
new
conditions,
i.e.
the
signing
of
a
buy-sell
agreement
in
case
a
shareholder
would
leave
the
company,
and
a
guarantee
of
indebtedness.
But
there
was
no
change
as
to
the
general
policy
agreed
upon
prior
to
1977
being
the
acquisition
of
5
shares
at
$1.00
per
share.
The
analysis
of
evidence
brought
before
the
Court
indicates
that
the
terms
and
conditions
established
pursuant
to
Mitchell’s
change
in
company
policy
cannot
be
characterized
as
conditions
precedent
to
the
acquisition
of
company
shares
but
as
conditions
put
forward
because
of
this
litigation
with
Mr.
Bryant
and
Mr.
Marmont.
These
conditions
did
not
interfere
with
the
basic
elements
of
the
company
policy
stock-option
agreement.
[Emphasis
added.]
With
great
respect,
we
disagree.
The
fact
that
the
new
conditions
were
put
forward
because
of
the
litigation
with
other
shareholders
seems
to
us
to
be
irrelevant
to
the
issue
in
this
appeal.
What
is
important
is
that
these
were
new
conditions
which
attached
to
the
appellants’
becoming
shareholders
of
the
company
at
the
time
they
acquired
their
shares.
They
were
conditions
which
substantially
affected
the
“basic
elements""
of
any
earlier
purported
stock
option
agreement.
In
particular,
they
affected
the
consideration
to
be
paid
by
adding
the
important
requirement
of
a
personal
guarantee
with
the
bank
to
the
extent
of
$20,000;
they
also
drastically
affected
the
terms
upon
which
each
appellant
became
a
shareholder
by
requiring
the
concurrent
execution
of
a
buy-back
agreement.
Changes
as
fundamental
as
this
are
inconsistent
with
the
continuing
existence
of
the
alleged
prior
stock
option
agreement;
rather
they
represent
a
whole
new
agreement.
Since
it
is
common
ground
that
the
changes
came
into
being
after
March
31,
1977,
the
appellants’
acquisition
of
shares
in
Mitchell
was
made
under
an
agreement
entered
into
after
that
date.
The
appeal
should
be
allowed,
and
the
reassessment
of
the
appellants’
income
tax
for
1978
referred
back
to
the
Minister
for
reconsideration
and
reassessment
on
the
basis
that
each
of
the
appellants
acquired
shares
in
Mitchell
Installations
Ltd.
under
an
agreement
made
after
March
31,
1977.
Since
both
appeals
were
heard
together,
the
appellants
are
entitled
to
one
set
of
costs,
both
here
and
below.
Appeal
allowed.
Email this Content