Date: 20011017
Docket: 2000-420-IT-G
BETWEEN:
NANCY McANULTY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Bowman, A.C.J.
[1]
This appeal is from an assessment for the appellant's 1996
taxation year. In that year the appellant exercised stock options
that she held to acquire 45,000 shares of Bre-X Minerals Ltd.
("Bre-X"). Under section 7 of the Income Tax
Act she brought into income the difference between the price
paid on the exercise of the options and the fair market value on
the date of exercise. She also claimed a deduction of 25% of the
taxable benefit under paragraph 110(1)(d) of the
Income Tax Act. One of the conditions to the right to
claim that deduction is that the option price be not less than
the fair market value of the shares at the time of the agreement
to issue the shares.
[2]
The appellant's position is that the relevant date (the date
of the agreement) was April 29, 1994 when the President of
Bre-X, David Walsh, told the appellant that she would be
receiving options to purchase 45,000 shares. The respondent's
position is that the relevant date is not earlier than
May 19, 1994.
[3]
The parties entered into a partial agreed statement of facts
which reads as follows.
For the purposes of this appeal, the parties, by their respective
counsel, admit the following facts and agree that their admission
of facts shall have the same effect as if the facts had formally
been proved and accepted by the Court as true. The parties each
reserve the right to adduce additional evidence which is relevant
and probative of any issue before the Court and which is not
inconsistent with the facts admitted herein. All statutory
references are to the Income Tax Act (Canada)
("Act") as it read during the 1996 taxation year,
unless noted otherwise.
1.
The Appellant is a resident of Canada for the purposes of the
Act.
2.
During the relevant period Bre-X Minerals Ltd.
("Bre-X") was a mining corporation, the common shares
of which were listed for trading, and in fact traded, on the
Alberta Stock Exchange ("ASE").
3.
During the relevant period the President of Bre-X was Mr. David
Walsh.
4.
The appellant was an employee of Bre-X throughout the period
between 1993 and 1996.
5.
Pursuant to a directors' resolution dated December 30, 1988,
Bre-X passed a Stock Option Plan as an incentive for its
directors, officers and employees ("Plan").
6.
Pursuant to the terms of the Plan, the granting and exercise of
the options thereunder were subject to compliance with the
requirements of the applicable stock exchange and any government
authority or regulatory body to which Bre-X was subject.
7.
On April 29, 1994, the fair market value of a common Bre-X
share did not exceed $1.50.
8.
On May 2, 1994, Mr. Wash met with the Director of Listings from
the ASE, Mr. Gerald Romanzin.
9.
On May 4, 1994, Mr. Walsh wrote a letter to Mr. Romanzin wherein
Mr. Walsh expressed the intention of Bre-X to grant stock options
to its employees and directors.
10.
Throughout the period May 19, 1994 to September 30, 1994
(inclusive), the faire market value of Bre-x common shares was
greater than $1.50 per share.
11.
On June 30, 1994 Mrs. Jeannette Walsh, Secretary of Bre-X,
certified the contents of a resolution of the directors of Bre-X
effective May 19, 1994 approving the granting of, inter
alia, 45,000 options to the Appellant.
12.
The Appellant did not pay any amount or consideration to Bre-X to
acquire the 45,000 options in issue.
13.
On January 2, 1996, the Appellant exercised all of the 45,000
options in issue and purchased 45,000 common shares of Bre-X
("Subject Shares") from treasury at the total option
price of $67,500 ($1.50 per share).
14.
In computing her income for her 1996 taxation year the Appellant
included an employment benefit of $2,317,500 under subsection
7(1) in respect of the exercise of her 45,000 options. The said
employment benefit was reported on a T4 slip issued to the
appellant by Bre-X in accordance with the Act.
15.
In computing her taxable income for her 1996 taxation year the
Appellant claimed a deduction under paragraph 110(1)(d) of
$579,375 relating to the benefit deemed by subsection 7(1) to
have been received by the Appellant in that year in respect of
the exercise of her 45,000 options.
16.
On May 7, 1999 the Minister of National Revenue reassessed the
Appellant's 1996 taxation year ("Reassessment") to
disallow the paragraph 110(1)(d) stock option deduction of
$579,375.
17.
The Appellant filed a Notice of Objection to the Reassessment in
accordance with the Act.
18.
By Notice of Confirmation dated December 14, 1999 the Minister of
National Revenue confirmed the Reassessment.
[4]
The parties also agree that the following assumptions by the
Minister are correct:
10s) on
September 12, 1994, the ASE informed Bre-X, in writing, that the
additional listing of 409,000 common shares had been approved,
subject to the payment of an additional listing fee of $535;
t)
on January 2, 1996, the Appellant exercised her option of
purchasing 45,000 shares at $1.50 per share (the "Subject
Shares"); and
u)
on January 15, 1996, Bre-X filed notice with the ASE of shares
issued upon exercise or cancellation of reserved securities
wherein the Appellant was listed to have been granted her stock
option on May 19, 1994.
[5]
Section 7 of the Income Tax Act contains a code for
the taxation of employees on stock options given them by their
employers. They are not taxed on the fair market value of the
options when they are given to them (as was the treatment in the
United Kingdom under Abbott v. Philbin, [1961]
A.C. 352).
[6]
Rather they are taxed when the options are exercised on the
difference between the option price paid and the fair market
value of the shares at the time of exercise.
Paragraph 110(1)(d) gives a deduction of a portion of
the amount so taxed (in the year in question it was 25%) so as,
in effect, to put stock option benefits on the same footing as
capital gains. However the deduction under
paragraph 110(1)(d) is taken away if the fair market
value of the stock at the time the option is granted is greater
than the option price.
[7]
Paragraph 110(1)(d) reads
110(1) For the purpose of computing
the taxable income of a taxpayer for a taxation year, there may
be deducted such of the following amounts as are applicable:
...
(d)
where, after February 15, 1984,
(i)
a corporation has agreed to sell, issue or cause to be issued to
the taxpayer a share of its capital stock or of the capital stock
of another corporation with which it does not deal at arm's
length,
(ii)
the share was a prescribed share at the time of its sale or
issue, as the case may be, or, where the taxpayer has disposed of
rights under the agreement, the share would have been a
prescribed share if it were issued or sold to the taxpayer at the
time the taxpayer disposed of such rights,
(iii)
the amount payable by the taxpayer to acquire the share under the
agreement (determined without reference to any change in the
value of a currency of a country other than Canada relative to
Canadian currency during the period between the time the
agreement was made and the time the share was acquired) is not
less than the amount by which
(A) the
fair market value of the share at the time the agreement was
made
exceeds
(B)
the amount, if any, paid by the taxpayer to acquire the right to
acquire the share,
or where the rights under the agreement were acquired by the
taxpayer as a result of one or more dispositions of rights to
which subsection 7(1.4) applied, the amount payable by the
taxpayer to acquire the old share under the original option
(determined without reference to any change in the value of a
currency of a country other than Canada relative to Canadian
currency during the period between the time the agreement was
made and the time the share was acquired) that was disposed of in
consideration for a new option in the first such disposition was
not less than the amount by which
(C)
the fair market value of the old share at the time the agreement
in respect of the original option was made
exceeds
(D) the
amount, if any, paid by the taxpayer to acquire the right to
acquire the old share, and
(iv) at
the time immediately after the agreement was made and, where the
rights under the agreement were acquired by the taxpayer as a
result of one or more dispositions to which subsection 7(1.4)
applied, at the time the agreement in respect of the original
option was made and at the time immediately after each
disposition, the taxpayer was dealing at arm's length with
the corporation, the other corporation and the corporation of
which the taxpayer is an employee,
an amount equal to ¼ of the amount of the benefit
deemed by subsection 7(1) to have been received by the taxpayer
in the year in respect of the share or the transfer or other
disposition of the rights under the agreement.
[8]
The facts are not complicated. The appellant is a former legal
secretary. When she moved from Montreal to Calgary with her
husband she began working for Bre-X in November of 1992. At that
time its offices were in one large room in the basement of a
house. It had four or five employees, including the appellant.
Her husband, Stephen McAnulty, started working for Bre-X in 1993
in the field of industrial relations. At all times relevant to
this appeal the president of Bre-X was Mr. David Walsh, who
is now deceased. Mr. Walsh appears at this time to have
exercised control of the day-to-day operations of Bre-X. When she
started working for Bre-X the appellant was paid no salary. She
worked 20-30 hours per week doing mainly clerical duties. In
March of 1993 she started receiving a salary of $2,000 per
month.
[9] I
come now to the events that occurred in the critical period
between April 29, 1994 and May 19, 1994.
[10] On
Friday, April 29, 1994 Bre-X received by fax from the
stockbrokers Loewen, Ondaatje, McCutcheon Limited
("LOM") the following letter.
Loewen, Ondaatje, McCutcheon Limited ("LOM" or the
"Agent") would be pleased to assist Bre-X Minerals Ltd.
(the "Issuer"), as lead manager, in the placement
outside Canada of up to 3,000,000 units (hereafter
"Units") of the Issuer by way of a private placement on
a "best effort" agency basis (the "Issue").
Each unit will consist of one common share and one half of one
non-transferable common share purchase warrant exercisable at
$1.75 per common share with an expiration date ending two years
from the Closing Date. The Agent proposes to place the Units at
an offering price of $1.50 per Unit. Net proceeds to the Issuer
will be the offering price of $1.50 per Unit less the Agent's
commission of $0.105 per Unit, for net proceeds of $1.395 per
Unit before all expenses related to the Issue. In addition, the
Issuer will issue to the Agent 300,000 broker warrants
exercisable for Units at $1.50 for a period of one year following
the end of any applicable hold periods. The Issuer will be
responsible for all expenses related to the Issue, including the
fees for the Agent's legal counsel and applicable GST and all
reasonable travel and out-of pocket expenses. The general terms
and conditions of this private placement of Units are set out
herein and in the schedule attached to this letter.
It is agreed that management of the Issuer will make itself
available, if required, to meet certain institutional investors
in Europe. It is further agreed that the Agent may select and
invite certain other investment dealers to participate in a
syndicate for the offering of the Units, in which case LOM will
have the right to choose members and control all syndicate
arrangements.
The closing of the Issue will take place in Paris, France on
May 19, 1994, or such other time and place as we may
mutually agree, at which time delivery of the Units and cheques
for the Agent's commission and the fees for the Agent's
legal counsel will be provided against the payment of the gross
proceeds from the sale of the Units.
This letter agreement is subject to the execution of a
detailed Agency Agreement by 4:00 p.m. (Toronto Time) on May 17,
1994 containing terms and conditions typical in the industry for
transactions of this nature, including standard clauses regarding
market conditions and events of serious international
consequences.
It is further agreed that the Issuer will grant LOM a right of
first refusal to lead manage any subsequent financings for the
Issuer for a period of eighteen (18) months from the Closing
Date.
This agreement will also be subject to the Issuer receiving
the required regulatory approvals for the issuance of the Units
at the price of $1.50 and supplying additional material to the
Agent, to the satisfaction of the Agent, including: (1) audited
financial statements for the year ended November 30, 1993; (ii)
additional information concerning the company's finances to
the date of this letter; (iii) evidence that the Issuer holds
titles in good standing for all material mineral properties held
by the Issuer including the Busang, Teware and Sable properties;
and (iv) any such other information that the Agent may reasonably
request.
If the terms and conditions outlined herein and in the
attached terms sheet are acceptable please indicate by signing
below.
[11] It was
signed as accepted and agreed by Mr. Walsh as president of
Bre-X and faxed back to LOM on April 29, 1994 by
Mr. Walsh's wife, Jeannette Walsh, who was the secretary
of the company.
[12]
Mr. Walsh called the appellant to his desk and told her that
he was going to issue to her 45,000 stock options at $1.50.
Mrs. Walsh also testified that she was standing at this desk
when he said this to the appellant.
[13] There was
really nothing more formal to it than that. Mr. Walsh did
not make the issuance of the options conditional on anything, nor
did he ask her to pay anything. I found Mrs. McAnulty a
credible witness. She did not seek to embellish the story.
However I am satisfied that it happened as the appellant
testified — nothing more and nothing less.
[14]
Mrs. Jeannette Walsh, Mr. Walsh's wife testified
and confirmed what Mrs. McAnulty said.
[15] On the
same day Mr. Walsh made an appointment to meet with
Mr. Gerald Romanzin the Director, Listings, of The Alberta
Stock Exchange ("ASE") and he met with him on Monday,
May 2, 1994. He wrote to him on May 4, 1994.
Mrs. Walsh typed the letter. It reads as follows.
Thank you for meeting on short notice with Steve McAnulty and
myself May 2, 1994.
By way of this letter, we wish to confirm our conversation as
follows:
-
We have successfully negotiated a Private Placement of 3,000,000
Bre-X Minerals Ltd. units, employing Loewen Ondaatje McCutcheon
Limited (LOM) as Agent. Please see four page LOM letter attached
for reference.
-
The terms negotiated are:
(a)
3,000,000 units @ $1.50
(b)
Each unit consists of 1 share and ½ warrant @ $1.75,
expiring May 19, 1996.
(c)
Agent's Fees:
(i)
Cash commission - 7%
(ii)
300,000 broker warrants exercisable for 300,000 units @ $1.50 for
a period of one year following the end of any applicable hold
period.
(d)
Closing: May 19, 1994
-
In addition to the 3,000,000 units being placed by LOM, we have
negotiated 300,000 units under the same terms with no commission
payable. This was done prior to LOM's involvement.
-
We enclose Notice to the Alberta Stock Exchange of a Proposed
Private Placement duly completed.
-
Employees and Directors Options:
Shares issued and
outstanding:
9,938,833
Shares to be issued re
units:
3,300,000
Pro forma shares
outstanding
13,238,833
-
Option availability 10% of pro
forma
1,328,883
Option current
reserved
925,000
Options
Available
398,883
-
The Exchange will approve Employee & Directors Options
applications @ $1.50 based on issued and outstanding as of the
Private Placements' closing and unit price.
As we foresee no problems with the scheduled closing date of
May 19, 1994, we would appreciate a letter from the Exchange
conditionally listing the shares resulting from the units
(4,950.000) and brokers warrants (450,000).
Thank you for your assistance in this matter.
[16] On
June 30, 1994 Mrs. Walsh signed a certified copy of a
resolution of the directors of Bre-X. It reads as follows.
WHEREAS the Corporation wishes to grant an option to
purchase shares to the following Employees and Directors of the
Corporation:
NOW THEREFORE BE IT RESOLVED THAT:
1.
The Corporation grant to David G. Walsh (Employee) an option to
purchase 110,000 Common Shares at an option price of $1.50 per
share, for a period of five years expiring the 19th day of May,
1999.
2.
The Corporation grant to Paul M. Kavanagh (Director) an option to
purchase 100,000 Common Shares at an option price of $1.50 per
share, for a period of five years expiring the 19th day of May,
1999.
3.
The Corporation grant to Joel King (Director) an option to
purchase 10,000 Common Shares at an option price of $1.50 per
share, for a period of five years expiring the 19th day of May,
1999.
4.
The Corporation grant to Jeannette Walsh (Employee) an option to
purchase 70,000 common Shares at an option price of $1.50 per
share, for a period of five years expiring the 19th day of May,
1999.
5.
The Corporation grant to John B. Felderhof (Employee) an option
to purchase 55,000 Common Shares at an option price of $1.50 per
share, for a period of five years expiring the 19th day of May,
1999.
6.
The Corporation grant to Nancy J. McAnulty (Employee) an option
to purchase 45,000 Common Shares at an option price of $1.50 per
share, for a period of five years expiring the 19th day of May,
1999.
7.
The Corporation grant to John B. Thorpe (Employee) an option to
purchase 15,000 Common Shares at an option price of $1.50 per
share, for a period of five years expiring the 19th day of May,
1999.
8.
The Corporation grant to Catherine L. Gilchrist (Employee) an
option to purchase 4,000 Common Shares at an option price of
$1.50 per share, for a period of five years expiring the 19th day
of May, 1999.
I HEREBY CERTIFY that the foregoing is a true copy of a
Resolution of the Directors of the BRE-X MINERALS LTD.
signed by all of the Directors and made effective the 19th day of
May, 1994, which Resolution is in full force and effect,
unamended.
WITNESS my hand and the corporate seal of the Corporation
at the city of Calgary, in the Province of Alberta, this 30th day
of June, 1994.
[signed by Jeannette Walsh]
Secretary
[17] On
May 19, 1994 the appellant and Mr. David Walsh (on
behalf of Bre-X) signed the following agreement.
THIS SHARE OPTION AGREEMENT dated as of
May 19, 1994.
BETWEEN:
BRE-X MINERALS LTD. a Corporation with an office in
Calgary, Alberta (hereinafter called "Bre-X" or
the "Corporation")
- and -
NANCY J. MCANULTY, of the City of Calgary, in the Province
of Alberta (hereinafter called "N.McAnulty")
WHEREAS:
A.
N.McAnulty is an employee of Bre-X;
B.
Bre-X wishes to provide, pursuant to the terms of the
Corporation's Stock Option Plan, an option to purchase shares
in the Corporation;
THEREFORE this Agreement witnesses that in consideration
of $1.00 and other valuable consideration, receipt of which is
acknowledged, the parties agree as follows:
1.
Bre-X hereby grants an option to N.McAnulty to purchase Forty
Five Thousand (45,000) Common Shares of the Corporation
("the Option Shares").
2.
The Option granted herein is hereby deemed to be granted subject
to the approval of the Alberta Stock Exchange.
3.
The Option Shares may be acquired at any time up to an including
May 19, 1999.
4.
This Option Agreement shall terminate 30 days after N.McAnulty
ceases to be an Employee of the Corporation.
5.
The Option price shall be $1.50 per Option Share.
6.
The Option may be exercised in whole or in part from time to time
by delivering a notice in writing to the registered office of the
Corporation accompanied with sufficient funds to pay for the
Option Shares being subscribed for, or in direction to the
Corporation to set off monies owing by the Corporation to
N.McAnulty against the option price.
7.
The shares shall not be issued to N.McAnulty until the option
price in respect to those shares has been satisfied.
8.
This Agreement cannot be assigned by N.McAnulty.
9.
All terms and conditions respecting the option granted herein
shall be governed by the Company's stock option plan adopted
December 30, 1988, and the laws of the Province of
Alberta.
10.
In the event of:
(a)
any reduction in the number of shares of the Corporation due to
consolidation thereof;
(b)
any increase in the number of shares of the Corporation due to
subdivision thereof; or
(c)
any reclassification of shares of the Corporation;
the Corporation shall deliver at the time of any exercise of the
Option thereafter, such reduced, additional or reclassified
number of shares as would have resulted from such consolidation,
subdivision or reclassification if such exercise of the Option
had occurred prior to the date of such consolidation, subdivision
or reclassification.
11.
This Agreement may be executed in counterpart each of which shall
be deemed an original but all of which together shall constitute
one of the same instrument.
IN WITNESS WHEREOF the parties hereto have caused this
Agreement to be duly executed as of the day and year first above
written.
BRE-X MINERALS LTD.
PER:
[signed]
[signed]
[signed by Nancy McAnulty]
Witness
NANCY J. MCANULTY
[18]
Mrs. Walsh testified that Mr. Walsh signed on behalf of
Bre-X and also witnessed Mrs. McAnulty's signature.
[19] On
September 12, 1994 the ASE informed Bre-X that the
additional listing of 409,000 shares was approved, subject to the
payment of an additional listing fee. On January 2, 1996 the
appellant exercised her options.
[20] In filing
her return of income for 1996 she included the amount of
$2,317,500 in income for 1996 under section 7 and deducted
$579,375 under paragraph 110(1)(d).
[21] The
deduction was denied on the basis that the fair market value of
the Bre-X stock "at the time the stock option agreement was
made" exceeded $1.50 per share. If "the time the stock
option agreement was made" was April 29, 1994 this
assumption is incorrect and the appellant is entitled to the
deduction under paragraph 110(1)(d). If "the
time the stock option agreement was made" is May 19,
1994 or some later date the fair market value of the shares at
that time was greater than $1.50 per share, the condition in
paragraph 110(1)(d) is not met and the appellant is
not entitled to the deduction. The relevant portion of the French
version of paragraph 110(1)(d) is:
(1)
Pour le calcul du revenu imposable d'un contribuable pour une
année d'imposition, il peut être déduit
celles des sommes suivantes qui sont appropriées :
...
d)
dans le cas où, après le 15 février 1984,
à la fois :
(i)
une société est convenue de vendre au contribuable,
ou d'émettre ou de faire émettre en sa faveur,
une action de son capital-actions ou de celui d'une autre
société avec laquelle elle a un lien de
dépendance,
...
(iii) le
montant que le contribuable doit payer pour acquérir
l'action aux termes de la convention (déterminé
compte non tenu d'un changement de la valeur de la monnaie
d'un pays étranger par rapport à la valeur du
dollar canadien entre le moment de la conclusion de la convention
et le moment de l'acquisition de l'action) est au moins
égal à l'excédent de la juste valeur
marchande de l'action au moment de la conclusion de la
convention sur le montant que le contribuable a payé pour
acquérir le doit d'acquérir l'action
...
(iv)
immédiatement après la conclusion de la convention
et, si le contribuable a acquis les droits prévus par la
convention par suite d'une ou plusieurs dispositions
auxquelles le paragraphe 7(1.4) s'applique, au moment
où la convention visant l'option initiale a
été conclue et immédiatement après
chaque disposition, le contribuable n'avait de lien de
dépendance ni avec la société, ni avec
l'autre société, ni avec la
société dont il est l'employé.
un montant égal à ¼ de la valeur de
l'avantage que le contribuable est réputé avoir
reçu en application du paragraphe 7(1) au cours de
l'année relativement à l'action ou
relativement au transfert ou à une autre forme de
disposition des droits prévus par la convention.
[22] The
question is simple: Did Bre-X agree to sell or issue shares to
the appellant on April 29, 1994 or was there no agreement
until at the earliest May 19, 1994 when the private
placement closed, the written agreement was signed by
Mr. Walsh on behalf of Bre-X and by the appellant and the
directors' resolution was signed? Clearly Mr. Walsh
informed the appellant on April 29, 1994 that Bre-X was
going to grant her 45,000 options and at that time the shares
were trading at $1.50 per share. There was nothing in writing at
that time. There is no evidence that the appellant said anything
or that she committed herself either orally or in writing to go
on working for Bre-X, although in fact she did continue to work
until March of 1996.
[23] The words
"agree" or "agreement" generally connote to a
lawyer a binding contractual commitment and it is in this sense
that the respondent argues that the word must be interpreted in
paragraph 110(1)(d). This is certainly the
conventional meaning: Helby v. Matthews, [1895] A.C. 471
at 475-6, per Lord Herschell L.C.; Goldsack v. Shore,
[1950] 1 K.B. 708 at 713, per Evershed M.R.
[24] The law
is clear that such an agreement need not be in writing. If
Parliament requires an agreement to be in writing it is quite
capable of saying so as it has in many sections of the Income
Tax Act. In M.N.R. and Chysler Canada Limited et al.,
91 DTC 5526, Strayer J. said at p. 5531:
I have considered carefully the statements by way of obiter
dicta by J.O. Weldon in Fowler v. M.N.R., concerning
the meaning of "agreement" in the predecessor to the
present subsection 7(1). With respect I am unable to find in the
words of the subsection the restrictive sense of the word
"agreement" which he adopts there. He started with the
assumption, based on the argument by the representative of the
Minister, that subsection 7(1) is intended to cover only stock
option agreements. He sees section 7 as confined to the selective
provision of special benefits based on performance. From this he
concludes that there must be a "separate formal agreement
with each employee" which the company wishes to benefit, an
agreement which should be "carefully executed by the company
and the employee". I am unable to find language in the
subsection to support that conclusion. I can see no reason why
the "agreement" referred to cannot be an oral agreement
or an implied agreement—even an implied agreement based on
a collective bargaining arrangement which, the evidence
indicates, existed in the present case.
[25] Counsel
for the appellant went further and submitted that
"agreement" in section 7 and
paragraph 110(1)(d) could mean a non-binding
commitment by a corporation to sell shares to an employee at a
fixed price. The point is not without merit, when one considers
the way in which employee stock options are granted to employees.
The company traditionally allocates stock options to employees
based on a variety of criteria such as position in the company,
seniority or past services. How many options are issued to a
particular employee is a matter of management's discretion,
not of negotiation and bargaining between the employee and the
company. Whether at the time of allocation a binding agreement
comes into existence may be an open question — I think that
it does — but it is certainly at that point that it can be
said that the company "agreed" to sell shares to the
employee.
[26] Do the
facts in this case justify a similar conclusion?
[27] We have a
senior member of management, the president, Mr. Walsh,
informing the appellant that the company would give her 45,000
options. This is confirmed by an immediate phone call to The
Alberta Stock Exchange, a meeting the following Monday and a
letter on Wednesday confirming the meeting.
[28] Counsel
for the respondent argued that Mr. Walsh had no authority to
bind the company to issue options because the Bre-X stock option
plan, which was a Schedule to Directors' Resolutions of
December 30, 1988 gave the administration of the plan to the
Board of Directors who had not (at least on the evidence before
me) delegated their powers to Mr. Walsh.
[29]
Sections 2 and 3 of the plan read as follows.
2.
IMPLEMENTATION
The Plan and the grant and exercise of any options under the
Plan are subject to the compliance with the applicable
requirements of each stock exchange on which the shares of the
Corporation are listed at the time of the grant of any options
under the Plan and of any government authority or regulatory body
to which the Corporation is subject.
3.
ADMINISTRATION
The Plan shall be administered by the Board of Directors of
the Corporation which shall, without limitation, have full and
final authority in its discretion, but subject to the express
provisions of the Plan, to interpret the Plan, to prescribe,
amend and rescind rules and regulations relating to it and to
make all other determinations deemed necessary or advisable for
the administration of the Plan. The Board of Directors may
delegate any or all of its authority with respect to the
administration of the Plan and any or all of the rights, powers
and discretions with respect to the Plan granted to it hereunder
to such committee of directors of the Corporation (which may
comprise only the President or any one director) as the Board of
Directors may designate and upon such delegation such committee
of directors, as well as the Board of Directors, shall be
entitled to exercise any or all of such authority, rights, powers
and discretions with respect to the Plan. When used hereafter in
the Plan, "Board of Directors" shall be deemed to
include a committee of directors acting on behalf of the Board of
Directors.
[30] The
president of Bre-X had ostensible authority to commit the company
to issue shares under an option agreement and the appellant had
no reason to question his authority. The genesis of the so called
"indoor management rule" is found in The Royal
British Bank v. Turquand, (1856) 6 E &
B 327.
[31] I do not
however think that this is the case for a lengthy dissertation on
the rule in Turquand's case. Mrs. McAnulty had no
reason to go behind Mr. Walsh's promise to ensure that
all of the formalities required by the by-laws had been met. This
is a clear case in which the rule applies. It is discussed at
some length in McKnight Construction Co. v. Vansickler,
[1915] 51 S.C.R. 374 at 382 and 387; and Acton
Tanning Co. v. Toronto Suburban Rway Co., [1918]
56 S.C.R. 196 at 217.
[32] Counsel
for the respondent also pointed to clause 6.2 of the stock
option plan which reads
6.2
OPTION AGREEMENT
All options shall be granted under the Plan by means of an
agreement (the "Option Agreement") between the
Corporation and each Participant in the form as may be approved
by the Board of Directors, such approval to be conclusively
evidenced by the execution of the Option Agreement by the
President or any two (2) directors or officers of the
Corporation.
[33] The stock
option plan is not a statute. It sets out rules for the
administration of the plan but failure to comply with those rules
does not invalidate the granting of options as against the
grantee. The directors' resolution and the written agreement
of May 19, 1994 are formal confirmation and implementation
of the agreement made on April 29, 1994.
[34] It was
also contended that on April 29, 1994 there was no binding
agreement since there was no new consideration because the
appellant was already receiving a salary. Alternatively it was
argued that the consideration was past consideration which, in
law, is not consideration at all. The argument is that the
agreement to sell her shares at $1.50 was a reward for the period
when she worked for no pay at all. It is interesting, albeit
possibly irrelevant, that section 25 of the Alberta
Business Corporation Act includes in the permissible
consideration for the issuance of shares the value of past
services. No doubt the appellant's past unpaid service was a
factor that influenced Mr. Walsh, as was her continued
employment with the company.
[35] I do not
mean in any way to minimize the cogent and persuasive arguments
advanced by Mr. O'Callaghan, or criticize the position
taken by Mr. Peddle, the CCRA auditor. Mr. Peddle acted
on what appeared to him, not unreasonably, to be evidence of the
date of the agreement — the directors' resolution and
the written agreement dated May 19, 1994. Moreover, the
notice to The Alberta Stock Exchange stated that the options were
granted on May 19, 1994. Such a notice could of course not
bind the appellant.
[36] My view
is simply this: a broader approach to the interpretation of
"agree" and "agreement" in
paragraph 110(1)(d) is required if the object of that
paragraph is to be achieved. A technical one that excludes an
oral commitment made by a senior officer of the company with
apparent authority would in my view destroy the purpose for which
the provision is in the act, that of according to the taxation of
employee stock options what essentially amounts to capital gains
treatment where the option price at the time of the agreement is
no less than the price at which the shares are trading at that
time. It would create chaos in the public companies in the
country if when senior management tells the employees that they
are to be given options at a particular price, they had to look
at the by-laws and ensure that management followed the rules, and
then, if there is an upward fluctuation in the price of the
shares between the date of notification and the date something
was put in writing and a final resolution of the directors is
passed an adjustment had to be made to the option price.
[37] The
appeal is allowed with costs and the assessment is referred back
to the Minister of National Revenue for reconsideration and
reassessment to allow the appellant the deduction of $579,375
under paragraph 110(1)(d) of the Income Tax
Act.
Signed at Toronto, Canada, this 17th day of October 2001.
"D.G.H. Bowman"
A.C.J.
COURT FILE
NO.:
2000-420(IT)G
STYLE OF
CAUSE:
Between Nancy McAnulty and
Her Majesty The Queen
PLACE OF
HEARING:
Calgary, Alberta
DATE OF
HEARING:
October 1, 2001
REASONS FOR JUDGMENT BY: The
Honourable D.G.H. Bowman
Associate Chief Judge
DATE OF
JUDGMENT:
October 17, 2001
APPEARANCES:
Counsel for the Appellant: Ken S. Skingle, Esq.
Counsel for the
Respondent:
John O'Callaghan, Esq.
COUNSEL OF RECORD:
For the
Appellant:
Name:
Ken S. Skingle, Esq.
Firm:
Felesky Flynn
Calgary, Alberta
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-420(IT)G
BETWEEN:
NANCY McANULTY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on October 1, 2001, at
Calgary, Alberta by
The Honourable D.G.H. Bowman
Associate Chief Judge
Appearances
Counsel for the
Appellant: Ken S.
Skingle, Esq.
Counsel for the Respondent: John
O'Callaghan, Esq.
JUDGMENT
It is
ordered that the appeal from the assessment made under the
Income Tax Act for the 1996 taxation year be allowed with
costs and the assessment be referred back to the Minister of
National Revenue for reconsideration and reassessment to allow
the appellant the deduction of $579,375 under
paragraph 110(1)(d) of the Act.
Signed at Toronto, Canada, this 17th day of October 2001.
A.C.J.
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