Lamarre
Proulx
J.T.C.C.:
—
The
appellant
instituted
an
appeal
from
the
assessment
by
the
Minister
of
National
Revenue
(the
“Minister”)
made
under
paragraph
6(1
)(a)
of
the
Income
Tax
Act
(the
“Act”)
for
the
1986
taxation
year.
The
point
at
issue
is
whether
an
amount
received
by
the
appellant
for
the
cancellation
of
a
stock
option
was
received
as
a
result
of
a
transfer
of
rights
under
that
agreement
within
the
meaning
of
paragraph
7(1
)(b)
of
the
Act
or
as
a
benefit
received
in
respect
of
employment
within
the
meaning
of
paragraph
6(l)(a)
of
the
Act.
If
paragraph
7(l)(b)
of
the
Act
applies,
at
the
time
of
the
transfer,
were
the
shares
subject
to
this
agreement
prescribed
shares
within
the
meaning
of
paragraph
110(
1
)(d)
of
the
Act
and
paragraph
6204(1
)(b)
of
the
Income
Tax
Regulations,
(the
“Regulations”)?
The
time
of
the
transfer
of
the
rights
provided
for
in
the
agreement
is
also
in
issue.
Paragraphs
7(1
)(b)
and
110(l)(d)
of
the
Act
and
paragraph
6204(1
)(b)
of
the
Regulations
read
as
follows:
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,
(b)
if
the
employee
has
transferred
or
otherwise
disposed
of
rights
under
the
agreement
in
respect
of
some
or
all
of
the
shares
to
a
person
with
whom
he
was
dealing
at
arm’s
length,
a
benefit
equal
to
the
value
of
the
consideration
for
the
disposition
shall
be
deemed
to
have
been
received
by
the
employee
by
virtue
of
his
employment
in
the
taxation
year
in
which
he
made
the
disposition;
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)
Employee
stock
options.
-
where,
after
February
15,
1984,
(i)
a
corporation
has
agreed
to
sell
or
issue
a
share
of
its
capital
stock,
or
of
another
corporation
with
which
it
does
not
deal
at
arm’s
length,
to
the
taxpayer,
(ii)
the
share
is
a
prescribed
share
at
the
time
of
its
sale
or
issue,
as
the
case
may
be,
(iii)
the
amount
payable
by
the
taxpayer
to
acquire
the
share
under
the
agreement
is
not
less
than
the
fair
market
value
of
the
share
at
the
time
the
agreement
was
made,
and
(iv)
at
the
time
immediately
after
the
agreement
was
made
the
taxpayer
was
dealing
at
arm’s
length
with
the
corporation,
the
other
corporation
and
the
corporation
of
which
he
is
an
employee,
an
amount
equal
to
one-half
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;
6204.
(1)
For
the
purposes
of
paragraph
110(l)(d)
of
the
Act,
a
share
is
a
prescribed
share
of
the
capital
stock
of
a
corporation
at
the
time
of
its
sale
or
issue,
as
the
case
may
be,
where,
at
that
time,
(b)
the
corporation
or
a
specified
person
in
relation
to
the
corporation
cannot
reasonably
be
expected
to,
within
two
years
after
the
time
the
share
is
sold
or
issued,
as
the
case
may
be,
(i)
acquire
or
cancel
the
share
in
whole
or
in
part,
or
(ii)
reduce
the
paid-up
capital
of
the
corporation
in
respect
of
the
share;
and
The
facts
in
issue
are
described
more
fully
below,
but,
for
the
moment,
I
shall
provide
a
brief
summary.
On
May
1,
1985,
an
agreement
was
entered
into
by
the
appellant
and
her
employer,
Nordair
Inc.,
a
corporation,
through
which
the
latter
granted
the
appellant
an
option
to
purchase
common
shares.
On
October
24,
1985,
the
corporation
was
notified
that
there
had
been
a
failure
to
comply
with
the
Quebec
Securities
Act
(R.S.Q.,
c.
V-1.1)
and
that
it
was
virtually
certain
that
the
shares
described
in
the
options
could
not
be
validly
issued.
On
November
12,
1985,
the
corporation
formally
notified
the
Quebec
Securities
Commission
(“Q.S.C.”)
that
it
would
treat
the
options
that
it
had
awarded
as
null
and
void.
The
waiver
of
the
rights
arising
from
the
agreement
entered
into
on
May
1,
1985
in
exchange
for
payment
of
the
amount
in
issue
in
the
instant
case,
that
is
$58,000,
was
signed
by
the
appellant
on
December
19,
1986
and
took
effect
on
December
31,
1986.
The
appellant
claimed
that
she
had
transferred
rights
provided
for
under
a
share
issue
agreement
within
the
meaning
of
paragraph
7(1
)(b)
of
the
Act
on
October
24,
1985,
at
the
time
the
corporation
allegedly
made
the
decision
to
cancel
its
stock
options.
The
appellant
contended
that
she
was
entitled
under
paragraph
110(
1
)(d)
of
the
Act
to
deduct
half
of
the
value
of
the
benefit
deemed
under
the
aforementioned
paragraph
to
have
been
received
because
the
shares
in
issue
were
at
the
time
of
their
issue
prescribed
shares
within
the
meaning
of
paragraph
6204(1
)(b)
of
the
Regulations.
According
to
the
appellant,
it
was
important
that
the
time
of
disposition
of
the
rights
be
October
24,
1985,
not
December
31,
1986
because,
at
that
time,
Nordair
Inc.
had
not
been
taken
over
by
another
corporate
entity.
The
respondent’s
claim
is
that
the
amount
received
as
a
result
of
the
waiver
of
the
appellant’s
rights
was
a
benefit
within
the
meaning
of
paragraph
6(1
)(a)
of
the
Act
and
was
not
a
transfer
of
rights
provided
for
by
the
agreement
within
the
meaning
of
paragraph
7(1
)(b)
of
the
Act.
The
respondent
relied
on
the
decisions
rendered
by
both
divisions
of
the
Federal
Court
in
À.
v.
Huestis,
(sub
nom.
Reynolds
v.
R.),
(sub
nom.
Huestis
v.
The
Queen)
[1975]
C.T.C.
85,
75
D.T.C.
5042
(F.C.T.D.);
affirmed
[1975]
C.T.C.
560,
75
D.T.C.
5393
(F.C.A.);
affirmed
[1976]
C.T.C.
792,
77
D.T.C.
5044.
These
decisions
were
that
amounts
received
as
compensation
for
the
cancellation
of
an
agreement
were
not
amounts
received
for
the
transfer
of
a
right
provided
for
by
that
agreement.
However,
these
decisions
did
not
provide
that
the
amounts
received
should
be
included
in
computing
the
taxpayer’s
income.
The
case
law
cited
in
support
of
the
inclusion,
under
paragraph
6(1
)(a)
of
the
Act,
of
the
amount
received
in
compensation
for
the
cancellation
of
the
appellant’s
rights
in
the
agreement
were
in
particular
Robertson
v.
R.,
(sub
nom.
Robertson
v.
Canada),
(sub
nom.
Robertson
v.
The
Queen)
[1990]
1
C.T.C.
114,
90
D.T.C.
6070;
and
Schwartz
v.
R.,
(sub
nom.
Schwartz
v.
Canada)
[1994]
2
C.T.C.
99,
(sub
nom.
R.
v.
Schwartz),
94
D.T.C.
6249
(F.C.A.);
reversed
(sub
nom.
Schwartz
v.
Canada)
[1996]
1
S.C.R.
254,
[1996]
1
C.T.C.
303,
96
D.T.C.
6103.
If
the
amount
was
an
amount
received
under
paragraph
7(l)(b)
of
the
Act,
the
respondent
contends
that
the
shares
that
were
the
subject
of
the
agreement
were
not
prescribed
shares
and
that
the
appellant
therefore
was
not
entitled
to
the
deduction
under
subsection
110(1)
of
the
Act.
At
the
start
of
the
hearing,
counsel
for
the
appellant
informed
the
Court
that
this
appeal
was
a
test
appeal
since
there
were
16
other
cases
similar
to
this
one.
The
facts
of
the
case
were
not
properly
speaking
disputed.
A
joint
document
book
was
filed
as
Exhibit
A-1.
It
was
divided
into
42
tabs.
Exhibit
A-2
was
filed
following
the
appellant’s
testimony
at
the
request
of
counsel
for
the
respondent.
(It
was
a
letter
from
the
appellant’s
employer
describing
the
employer’s
and
the
appellant’s
rights
and
obligations
resulting
from
the
latter’s
termination
of
employment.)
The
appellant
and
André
Bourque
testified
at
the
request
of
counsel
for
the
appellant.
Both
were
managerial
employees
at
Nordair
Inc.
at
the
time
of
the
events
in
issue.
The
appellant
was
vice-president
for
public
affairs
and
Mr.
Bourque
head
of
legal
services
and
secretary
of
the
corporation.
The
appellant
had
held
the
position
since
1982.
She
left
it
in
July
1986.
The
airline
industry
had
been
tightly
regulated
until
1984,
but,
according
to
testimony,
there
was
a
very
strong
perception
in
the
industry
that
there
would
be
deregulation,
as
had
happened
in
the
United
States.
Innocan
Inc.
(“Innocan”),
a
company
described
by
the
witnesses
as
a
venture
capital
company,
had
acquired
control
of
Nordair
Ltd.
through
a
merger
of
132894
Canada
Inc.
(of
which
Innocan
held
all
the
shares)
and
Nordair
Ltd.
on
December
27,
1984
(Exhibit
A-l,
tab
2).
The
name
of
the
new
corporation
was
Nordair
Inc.
At
its
meeting
of
May
8,
1985,
Nordair
Inc.’s
new
board
of
directors
considered
the
question
whether
certain
incentives
for
the
business’s
executive
staff
were
appropriate
and
to
this
end
decided
to
award
options
to
purchase
275,000
Nordair
Inc.
shares
(Exhibit
A-1,
tab
5).
The
draft
agreement
was
approved
at
the
same
meeting.
The
appellant
signed
such
an
agreement,
which
is
reproduced
in
tab
4
of
Exhibit
A-1.
It
is
dated
May
1,
1985
and
I
cite
clause
1
thereof:
1.
The
Company
(Nordair
Inc.)
hereby
awards
the
Executive,
as
an
incentive
and
by
separate
agreement
respecting
her
employment
with
the
Company,
not
to
stand
in
lieu
of
any
salary
or
other
compensation
whatever
for
her
services,
the
right
and
option
to
purchase
at
the
time
and
in
accordance
with
the
terms
and
conditions
set
forth
below,
all
or
part
of
the
total
of
EIGHT
THOUSAND
(8,000)
common
shares
of
the
Company’s
capital,
as
constituted
at
the
time
of
this
Agreement
(hereinafter
called
“Shares
Subject
to
Option”)
at
the
purchase
price
of
nine
dollars
($9)
per
share.
[Translation.]
Tab
6
of
Exhibit
A-l
contains
a
message
from
the
president
and
chief
executive
officer
of
Nordair
Inc.
to
the
employees
dated
September
13,
1985.
The
purpose
of
the
message
was
to
reassure
employees
with
regard
to
the
rumours
of
a
merger,
takeover
or
other
major
structural
changes
brought
about
by
another
air
carrier.
The
Court’s
attention
was
drawn
to
two
passages
of
the
message:
Nordair
plays
an
essential
role
and
furthermore
is
the
main
building
block
in
the
creation
of
a
second
network.
Its
association
with
a
major
private
Canadian
carrier
can
only
put
it
in
a
better
position
to
face
the
competition
of
the
two
state-
owned
airlines,
and,
as
a
result
of
this
fact,
negotiations
have
been
undertaken
to
achieve
this
objective.
As
you
will
agree,
it
is
essential
to
the
success
of
these
negotiations
that
this
process
be
kept
confidential,
and
I
can
assure
you
that
the
interests
and
job
security
of
Nordair
employees
are
a
top
priority.
It
will
be
my
pleasure
to
inform
you
of
our
plans
as
soon
as
they
become
final.
[Translation.]
On
September
20,
1985,
Québecair
made
a
bid
of
$11
a
share
for
all
the
common
shares
of
Nordair
Inc.
The
expiry
date
of
the
bid
was
October
25,
1985
and
the
bid
was
valid
if
it
was
accepted
by
the
holders
of
at
least
67
per
cent
of
the
common
shares
(Exhibit
A-l,
tab
7).
On
October
11,
1985,
a
supplement
to
the
bid
of
September
20,
1985
was
issued
(Exhibit
A-l,
tab
8).
The
price
now
offered
was
$14.25
a
share.
I
cite
the
second
paragraph
of
this
supplement:
You
will
note
that
the
bid
price
is
now
$14.25
per
share.
We
believe
that
this
price
is
more
attractive
than
the
cash
equivalent
provided
for
in
the
bid
announced
by
CP
Air
on
October
8,
1985.
Furthermore,
Nordair
Inc.’s
shareholders
will
thus
be
able
to
make
an
immediate
cash
profit
which
CP
Air
does
not
make
available
under
its
bid.
[Translation.]
On
October
24,
1985,
there
was
a
new
bid
from
Québecair
at
$16
a
share
(Exhibit
A-1,
tab
9).
According
to
the
witnesses,
views
among
Nordair
Inc.’s
executive
personnel
were
divided
as
to
which
bid
to
favour.
On
October
29,
1985
(Exhibit
A-l,
tab
15),
the
president
of
Innocan
wrote
to
Innocan’s
shareholders
reminding
them
that
all
Innocan
shareholders
had
signed
an
agreement
whereby
they
had
given
their
voting
rights
to
Innocan
so
that
it
would
have
the
same
flexibility
with
regard
to
the
investment
in
Nordair
Inc.
as
it
had
in
Innocan’s
other
investments.
He
referred
to
his
letter
of
October
11,
1985
in
which
he
had
described
to
them
the
reasons
that
had
led
Innocan’s
board
of
directors
to
negotiate
with
CP
Air.
He
also
referred
to
the
meeting
of
Innocan’s
board
of
directors
on
October
17,
1985
to
which
all
Innocan’s
shareholders
had
been
invited
and
at
which
a
painstaking
analysis
of
CP
Air’s
bid
had
been
conducted.
The
board
had
approved
the
bid
and
given
the
instruction
to
sign
the
agreement.
An
agreement
in
principle
was
signed
with
CP
Air
on
October
23,
1985.
A
meeting
of
Nordair
Inc.’s
board
of
directors
was
held
on
October
24,
1985.
One
of
the
subjects
addressed
at
the
meeting
in
the
absence
of
the
Company’s
executives
was
the
options
awarded
by
Nordair
Inc.
to
its
executive
employees.
The
passage
from
the
minutes
(Exhibit
A-1,
tab
10)
relating
thereto
reads
as
follows:
PRESENTATION
BY
MR.
KAUSER
ON
OPTIONS
AWARDED
BY
THE
COMPANY
In
the
absence
of
the
Company’s
executives,
Mr.
Kauser
stated
that,
as
part
of
the
review
of
all
the
Company’s
corporate
files
conducted
by
the
firm
of
Stikeman,
Elliott
with
a
view
to
the
transaction
contemplated
by
CP
Air,
it
was
discovered
that,
in
May
1985,
the
Company
could
not
issue
275,000
options.
Although
the
Company’s
securities
were
not
registered
on
any
stock
exchange,
the
Company
had
never
lost
its
status
as
a
reporting
issuer
and
consequently
was
under
the
jurisdiction
of
the
Quebec
Securities
Commission
(QSC).
Under
the
QSC’s
policy,
the
Company
could
not
issue
a
number
of
shares
exceeding
a
maximum
of
5
per
cent
of
all
its
issued
and
outstanding
shares.
The
Company
had
exceeded
this
limit
by
issuing
a
number
of
options
corresponding
to
11.24
per
cent
of
its
issued
and
outstanding
shares.
The
Company
also
had
to
give
notice
to
the
QSC
of
its
intention
to
award
options
to
some
of
its
directors
and
senior
executives.
At
the
time,
the
QSC
had
a
period
of
15
days
within
which
to
object
to
this
plan.
This
notice
was
not
filed
with
the
QSC.
For
these
reasons,
all
the
options
that
have
been
awarded
by
the
Board
are,
in
the
QSC’s
view,
null
and
void.
Mr.
Kauser
emphasized
that
the
options
were
part
of
a
profit
sharing
program
and
that
the
Company
would
consider
other
ways
of
remunerating
the
Company’s
directors
and
senior
executives
to
whom
those
profits
were
granted.
Mr.
Butler
added
that
the
options
represented
monetary
compensation
that
could
readily
be
dealt
with.
Mr.
Butler
also
asked
that
all
directors
be
informed
by
management
of
every
development
that
might
occur,
especially
if,
as
was
expected,
the
press
issued
comments
on
the
subject.
Senior
executives
were
then
invited
to
attend
the
meeting.
[Translation.]
During
their
testimony,
the
appellant
and
Mr.
Bourque
stated
that
the
senior
executives
were
informed
on
the
day
of
the
meeting
that
the
agreements
might
be
cancelled.
The
minutes
of
the
meeting
of
October
24,
1985
end
at
the
point
where
the
senior
executives
entered
the
meeting
room.
However,
it
is
possible
that
the
senior
executives
were
informed
of
the
matter
at
this
meeting
since,
on
October
25,
1985,
Mr.
Bourque
filed
an
application
for
retroactive
exemption
with
the
Q.S.C.
(Exhibit
A-1,
tab
11).
Mr.
Bourque
stated
in
his
testimony
that
he
had
taken
this
action
in
response
to
a
wish
by
the
senior
executives,
even
though
it
was
certain
that
the
Q.S.C.
would
not
grant
such
an
exemption
since
it
was
its
firm
policy
not
to
authorize
this
kind
of
application
retroactively.
On
October
29,
1985,
another
application
was
filed
with
the
Q.S.C.
by
the
lawyers
of
Nordair
Inc.
to
obtain
the
Q.S.C.’s
agreement
for
a
prospectus
exemption
respecting
other
options
to
purchase
Nordair
Inc.’s
shares,
this
time
122,350
shares
at
$14.40
each
(Exhibit
A-1,
tab
12).
On
November
7,
1985,
the
Q.S.C.
confirmed
in
its
letter
(Exhibit
A-1,
tab
16)
what
Mr.
Bourque
had
anticipated,
and
I
cite
the
second
paragraph
of
that
letter:
We
inform
you
that
we
cannot
grant
this
application
since
the
distribution
has
been
made.
The
Securities
Act
contains
no
provision
permitting
consent
or
non-opposition
of
a
retroactive
nature.
[Translation.]
On
November
8,
1985,
the
Q.S.C.
answered
the
lawyers’
application
respecting
the
second
series
of
options.
It
requested
that
the
first
series
of
options
be
cancelled
because
it
would
otherwise
oppose
the
second
ap-
plication
(Exhibit
A-1,
tab
17):
Unless
the
entire
matter
is
confirmed
to
us
before
November
13,
1985,
we
shall
consider
it
our
obligation
to
oppose
your
application.
[Translation.]
On
November
12,
1985
(Exhibit
A-l,
tab
18),
Mr.
Bourque,
secretary
and
head
of
legal
services,
wrote
the
following
to
the
Q.S.C.:
Further
to
your
request
of
November
8,
1985,
we
hereby
wish
to
notify
you
that
Nordair
Inc.
recognizes
that
the
options
concerned
by
the
application
of
October
25,
1985
are
null
and
void
and
that
they
will
be
treated
as
such.
[Translation.]
On
November
14,
1985,
the
Q.S.C.
granted
the
prospectus
exemption
with
respect
to
the
aforementioned
122,350
shares.
On
November
18,
1985,
CP
Air
finalized
the
agreement
with
Innocan’s
shareholders
indicating
that
the
purchase
price
of
the
shares
would
be
$16.25
a
share.
The
bid
expired
on
November
22,
1985
and
was
conditional
on
the
Canadian
Transport
Commission’s
not
preventing
the
acquisition
of
Nordair
Inc.
by
CP
Air.
On
December
19,
1985
(Exhibit
A-1,
tab
25),
CP
Air
made
the
official
bid
to
all
the
holders
of
Nordair
Inc.’s
common
shares.
That
bid
contained
the
following
statement
respecting
the
cancelled
option
agreements
in
the
chapter
entitled
“Contracts,
Arrangements
and
Understandings”:
In
May
1985,
the
board
of
directors
of
Nordair
authorized
the
issuance
of
options
to
certain
of
its
officers
to
acquire
common
shares
of
Nordair.
In
November
1985,
the
Quebec
Securities
Commission
requested
that
Nordair
not
implement
the
original
stock
option
plan
as
regulatory
approval
had
not
been
obtained.
While
CP
Air
has
no
written
or
oral
agreement
or
arrangement
with
any
of
the
directors
or
officers
of
Nordair
with
respect
to
this
matter,
CP
Air’s
present
intention
is
to
take
such
steps
as
may
be
appropriate
and
legally
permissible
to
compensate
(whether
in
cash
or
in
some
other
manner)
the
relevant
directors
and
officers
of
Nordair
for
the
loss
of
benefits
which
would
have
accrued
to
them
under
the
original
stock
option
plan.
On
April
4,
1986,
pursuant
to
a
request
by
Québecair,
the
Canadian
Transport
Commission
rendered
its
decision
that
it
did
not
object
to
Nordair
Inc.’s
acquisition
by
CP
Air
(Exhibit
A-l,
tab
29).
On
June
24,
1986,
the
Federal
Court
of
Appeal
denied
leave
to
appeal
from
this
decision
(Exhibit
A-1,
tab
30).
On
December
19,
1986,
the
appellant
signed
the
following
document
(Exhibit
A-1,
tab
33),
which
provided
for
the
waiver
of
its
rights
under
the
agreement:
December
19,
1986
Dear
Mrs.
Bernier:
RE:
Agreement
dated
May
1,
1985
(the
“Option
Agreement”)
between
Nordair
Inc.
(“Nordair”)
and
M.
Bernier
(the
“Executive”)
pursuant
to
which
Nordair
granted
to
the
Executive
the
right
and
option
to
purchase
8,000
common
shares
(the
“Option
Shares”)
in
the
capital
stock
of
Nordair
As
you
are
aware
on
December
19,
1985,
Canadian
Pacific
Airlines,
Limited
(“CPAL”)
made
an
offer
(the
“Take-Over
Bid”)
to
all
shareholders
of
Nordair
to
purchase
all
outstanding
common
shares
of
Nordair
for
a
purchase
price
per
share
of
$16.25
cash
together
with
three
warrants,
each
to
purchase
one
common
share
of
CPAL
at
a
price
of
$7.00,
if
CPAL
makes
a
distribution
to
the
public
of
its
common
shares
prior
to
December
31,
1988.
This
is
to
confirm
the
agreement
of
Nordair
to
pay
to
the
executive
upon
acceptance
of
this
agreement,
in
consideration
of
the
Executive
cancelling
the
Option
Agreement
and
waiving
all
rights
thereunder
effective
December
31,
1986,
$58,000
representing
the
difference
between
the
purchase
price
of
$9.00
per
common
share
provided
in
the
Option
Agreement
and
the
$16.25
cash
per
common
share
payable
under
the
Take-Over
Bid
and
which
would
have
been
payable
to
the
Executive
had
the
Option
Shares
been
issued
prior
to
the
expiry
of
the
Take-Over
Bid.
Please
confirm
your
acceptance
of
the
foregoing
by
signing
the
duplicate
copy
of
this
letter
and
returning
to
the
undersigned.
Yours
truly,
NORDAIR
INC.
By
Accepted
and
agreed
this
19th
day
of
December,
1986
M.
Bernier
On
April
19,
1990,
following
discussions
with
the
taxpayers,
Revenue
Canada
answered
as
follows
(Exhibit
A-1,
tab
36):
[Translation.]
April
19,
1990
Stikeman,
Elliott
Bureau
3900,
1155
Boulevard
René-Lévesque
Ouest
Montréal,
Canada
T2P
2W2
N.
Blouin
Section
142-1-1
3rd
Floor
Tel.:
283-7717
Attention:
Guy
Masson,
Gary
Nachshen
Subject:
Tax
treatment
of
amounts
received
by
Nordair
Inc.
executives
in
December
1986
in
order
to
cancel
their
options
to
purchase
shares
of
that
company.
Dear
Sirs,
Further
to
your
memo
of
January
18,
1990,
we
wish
to
inform
you
of
our
position
on
the
above
subject.
On
the
basis
of
the
relevant
facts
gathered
to
date,
we
conclude
that
Nordair
Inc.’s
executives
disposed
of
their
share
options
in
December
1986
upon
signing
the
agreement
to
that
effect
dated
December
19,
1986.
As
a
result
of
the
disposition
of
their
stock
options,
the
amounts
received
by
Nordair
Inc.’s
executives
are
taxable
in
the
1986
taxation
year
as
employment
income.
However,
the
deductions
claimed
by
the
taxpayers
concerned
in
respect
of
the
stock
options
cannot
be
allowed
in
the
circumstances
since,
on
the
date
of
disposition,
in
December
1986,
the
condition
stated
at
subparagraph
110(1
)(d)(ii)
had
not
been
met.
Consequently,
we
propose
to
make
the
necessary
adjustments
in
1986
for
each
of
the
taxpayers
concerned
(see
list
of
taxpayers
appended
hereto).
You
are
hereby
granted
a
period
of
30
days
as
of
the
date
hereof
to
enable
you
to
present
any
additional
information
that
you
believe
should
be
taken
into
consideration.
Yours
sincerely,
Normand
Blouin
Audit
Division
Department
of
National
Revenue
Taxation
Analysis
The
first
question
that
comes
to
mind
in
analysing
this
case
is
whether
the
shares
that
were
the
subject
of
the
options
in
issue
were
valid.
With
respect
to
the
ab
initio
validity
of
the
shares
provided
for
in
the
agreement,
counsel
for
the
appellant
referred
to
an
article
written
by
Linda
Giroux,
LL.M.,
entitled
[Translation.]
“Civil
Sanctions
Open
to
Savers
in
Cases
of
Transactions
Performed
Without
Prospectus
or
Offering
Memorandum”
published
in
Revue
du
Barreau,
volume
49,
no.
2,
March-April
1989.
The
author
deals
with
the
nature
of
the
validity
of
stock
option
agreements
entered
into
without
complying
with
the
prescriptions
of
the
Quebec
Securities
Act
(R.S.Q.,
c.
V-1.1).
According
to
the
author,
the
nullity
of
such
agreements
is
relative,
not
absolute.
In
her
view,
under
sections
214
and
215
of
the
Quebec
Securities
Act,
it
is
the
person
who
subscribed
for
the
security
at
the
time
of
a
distribution
of
securities
made
without
prospectus
who
can
apply
to
have
the
transaction
rescinded.
For
the
purposes
of
this
analysis,
I
agree
that
the
agreements
were
subject
to
relative
nullity
and
were
not
subject
to
absolute
nullity
from
the
outset.
This,
however,
does
not
remove
all
doubt
as
to
their
possible
existence
at
the
time
the
options
were
cancelled.
The
arguments
of
both
counsel
focused
first
on
the
question
whether
the
amount
received
must
be
included
in
computing
income
under
paragraph
7(1
)(b)
of
the
Act
(position
of
counsel
for
the
appellant)
or
under
paragraph
6(1
)(a)
of
the
Act
(position
of
counsel
for
the
respondent).
Counsel
for
the
respondent
also
added
subsection
5(1)
of
the
Act
and
section
3
of
the
Act.
Counsel
referred
in
particular
to
the
following
decisions:
R.
v.
Huestis,
(sub
nom.
Reynolds
v.
R.)
[1975]
C.T.C.
85,
75
D.T.C.
5042
(F.C.T.D.);
affirmed
[1975]
C.T.C.
560,
75
D.T.C.
5393
(F.C.A.);
affirmed
[1976]
C.T.C.
792,
77
D.T.C.
5044
(S.C.C.);
Jorgenson
v.
Jack
Cewe
Ltd.,
(sub
nom.
Jack
Cewe
Ltd.
v.
Jorgenson)
[1980]
1
S.C.R.
812,
[1980]
C.T.C.
314,
80
D.T.C.
6233;
Dundas
v.
Minister
of
National
Revenue,
[1990]
1
C.T.C.
2492,
90
D.T.C.
1529;
affirmed
[1993]
1
C.T.C.
398,
(sub
nom.
Dundas
v.
R.)
93
D.T.C.
5162
(F.C.T.D.);
affirmed
(sub
nom.
Dundas
v.
Canada)
[1995]
1
C.T.C.
184,
95
D.T.C.
5116;
(F.C.A.);
Schwartz
v.
R.,
(sub
nom.
Schwartz
v.
Canada)
[1994]
2
C.T.C.
99,
(sub
nom.
R.
v.
Schwartz)
94
D.T.C.
6249
(F.C.A.).
There
is
no
doubt
that
the
amount
received
must
be
included
in
computing
income
under
one
of
the
provisions
cited.
There
was
no
argument
to
the
contrary.
It
is
in
the
taxpayer’s
interest
to
characterize
the
income
under
paragraph
7(1
)(b)
of
the
Act
if
he
is
entitled
to
the
deduction
provided
for
under
paragraph
110(
1
)(b)
of
the
Act.
If
he
is
not
entitled
to
that
deduction,
that
characterization
no
longer
has
any
importance.
Counsel
for
the
appellant
contended
that
reference
must
be
made
to
October
24,
1985,
the
date
on
which
Nordair
Inc.
decided
to
cancel
the
stock
options.
It
was
at
that
time
that
the
appellant
disposed
of
her
rights
under
the
agreement
and,
at
that
time,
the
shares
were
prescribed
shares
because
one
could
not
reasonably
expect,
given
the
train
of
events
adduced
in
evidence,
that
in
two
years
Nordair
would
cancel
all
or
part
of
the
shares
subject
to
option.
On
this
point,
these
shares
thus
met
the
conditions
of
paragraph
6204(1
)(b)
of
the
Regulations.
Counsel
for
the
appellant
admitted,
however,
that
there
was
no
possibility
of
issuing
the
shares
subject
to
the
options
and,
in
this,
he
abided
by
the
facts
and
by
his
own
argument
respecting
the
date
of
October
24,
1985
as
being
the
date
of
disposition
of
the
rights
provided
for
in
the
agreement,
Nordair
Inc.
having
decided
on
that
date
not
to
issue
the
shares
subject
to
the
options
and
accordingly
to
cancel
the
options
awarded
to
its
executive
employees.
It
is
therefore
impossible
for
me
to
agree
with
his
claim
that
subparagraph
110(l)(d)(ii)
of
the
Act
and
paragraph
6204(1
)(b)
of
the
Regulations
still
apply
in
respect
of
those
shares.
He
contended
that
subparagraph
110(
1
)(d)(ii)
of
the
Act
stipulated
a
statutory
fiction
and
that,
as
a
result
of
that
fiction,
even
if
the
share
could
not
be
issued,
that
subparagraph
required
that
it
be
analyzed
as
though
the
share
could
be
issued.
If
it
had
been
issued,
nothing
at
that
time
could
have
permitted
anyone
to
foresee
that,
in
two
years,
the
corporation
would
cancel
all
or
part
of
the
share
within
the
meaning
of
paragraph
6204(1)(b)
of
the
Regulations.
I
obviously
cannot
share
this
view.
First,
I
do
not
believe
that
subparagraph
110(l)(d)(ii)
of
the
Act
stipulates
a
statutory
fiction
and
I
shall
give
my
reasons
below.
Second,
even
if
this
subparagraph
provided
for
a
fiction,
the
fiction
provided
for
in
this
subparagraph
is
in
respect
of
a
share
that
is
not
yet
issued
but
that
could
be
issued,
not
in
respect
of
a
share
that
cannot
be
issued
either
now
or
later.
It
is
clear
from
the
very
object
of
the
statutory
provisions
in
question
that
their
purpose
is
not
to
prescribe
shares
that
will
never
exist.
It
is
not
important
whether
paragraph
110(l)(d)
of
the
Act
constitutes
a
statutory
fiction,
but
as
the
argument
was
raised,
I
shall
therefore
analyze
it.
The
notion
of
what
is
a
statutory
fiction
was
developed
by
Judge
Rip
in
Dundas
v.
Minister
of
National
Revenue,
supra,
and
I
cite
the
relevant
passage
at
page
2505
(D.T.C.
1539):
…
In
À.
v.
Vermette,
[1978]
2
S.C.R.
838
(S.C.C.),
Beetz
J.
described
the
function
of
a
deeming
provision
at
page
845:
A
deeming
provision
is
a
statutory
fiction;
as
a
rule
it
implicitly
admits
that
a
thing
is
not
what
it
is
deemed
to
be
but
decrees
that
for
some
particular
purpose
it
shall
be
taken
as
if
it
were
that
thing
although
it
is
not
or
there
is
a
doubt
as
to
whether
it
is.
A
deeming
provision
artificially
imports
into
a
word
or
an
expression
an
additional
meaning
which
they
would
not
otherwise
convey
beside
the
normal
meaning
which
they
retain
where
they
are
used;
it
plays
a
function
of
enlargement
analogous
to
the
word
“includes”
in
certain
definitions;
however,
“includes”
would
be
logically
inappropriate
and
would
sound
unreal
because
of
the
fictional
aspect
of
the
provision.
Dickson
J.,
as
he
then
was,
also
explained
the
purpose
of
such
a
provision
in
R.
v.
Sutherland,
[1980]
2
S.C.R.
451
at
page
456:
The
purpose
of
any
“deeming”
clause
is
to
impose
a
meaning,
to
cause
something
to
be
taken
to
be
different
from
that
which
it
might
have
been
in
the
absence
of
the
clause.
[...]
Dans
l’arrêt
R.
v.
Vermette,
[1978]
2
R.C.S.
838
(C.S.C.),
le
juge
Beetz
a
décrit,
à
la
page
845,
le
rôle
que
joue
une
telle
disposition:
Une
telle
disposition
déterminative
est
une
fiction
légale;
elle
reconnaît
implicitement
qu’une
chose
n’est
pas
ce
qu’elle
est
censée
être,
mais
décrète
qu’à
des
fins
particulières,
elle
sera
considérée
comme
étant
ce
qu’elle
n’est
pas
ou
ne
semble
pas
être.
Par
cet
artifice,
une
disposition
déterminative
donne
à
un
mot
ou
à
une
expression
un
sens
autre
que
celui
qu’on
leur
reconnaît
habituellement
et
qu’il
conserve
là
où
on
l’utilise;
elle
étend
la
portée
de
ce
mot
ou
de
cette
expression
comme
le
mot
“comprend”
dans
certaines
définitions;
cependant,
en
toute
logique,
le
verbe
“comprend”
n’est
pas
adéquat
et
sonne
faux
parce
que
la
disposition
crée
une
fiction.
Le
juge
Dickson,
tel
était
alors
son
titre,
a
aussi
expliqué
le
but
que
remplit
une
telle
disposition
dans
l’arrêt
R.
c.
Sutherland,
(1990)
2
R.C.S.
451,
à
la
page
456:
L’objet
d’une
disposition
qui
crée
une
“présomption”
est
d’imposer
une
signification,
de
faire
en
sorte
qu’une
chose
soit
interprétée
différemment
de
ce
qu’elle
aurait
été
en
l’absence
de
la
disposition.
A
statutory
provision
requiring
one
to
place
oneself
at
a
certain
time
in
order
to
determine
the
nature
of
a
thing
is
not
a
statutory
fiction.
It
is
not
a
statutory
fiction
to
stipulate
that
the
taxpayer
is
entitled
to
the
deduction
provided
for
under
paragraph
110(l)(d)
of
the
Act
at
the
time
of
the
disposition
of
a
right
provided
for
in
a
stock
option
agreement
if
the
shares
provided
for
in
that
agreement
have
the
characteristic
of
prescribed
shares.
The
effect
of
this
provision
is
not
to
decree
that
something
is
not
what
it
is
when
that
provision
asks
one
to
verify
whether
a
share
would
have
the
characteristic
of
a
prescribed
share
if
it
were
issued.
Whatever
the
case
may
be,
even
if
subparagraph
110(l)(d)(ii)
of
the
Act
constituted
a
fiction,
that
fiction
goes
no
further
than
what
I
stated
above,
that
is
to
say
that
it
applies
only
to
shares
that
may
be
issued.
It
does
not
consider
only
shares
that
may
not
exist.
The
amount
received
by
the
appellant
was
received
for
the
cancellation
of
the
stock
option
that
had
been
awarded
to
her
in
May
1985.
When
the
stock
options
were
cancelled,
the
shares
subject
to
the
options
clearly
would
not
be
issued
or
purchased.
Furthermore,
if
those
options
were
cancelled,
that
was
because
the
corporation
had
made
the
decision
to
comply
with
the
requirements
of
the
Quebec
Securities
Act
and
accordingly
not
to
issue
those
shares
and
to
cancel
the
options.
The
object
of
the
provisions
of
the
Act
is
to
enable
employees
to
invest
in
the
capital
stock
of
the
corporations
for
which
they
work.
To
conclude
that
those
shares
are
prescribed
shares
when
they
will
never
be
either
issued
or
purchased
goes
against
the
object
of
those
provisions.
Although
this
has
no
bearing
on
my
preceding
conclusion
that
the
appellant
was
not
entitled
to
the
deduction
provided
for
under
paragraph
110(l)(d)
of
the
Act,
I
believe
it
is
important
to
determine
the
date
on
which
disposition
of
the
rights
arising
from
the
agreement
took
place.
It
could
not
be
October
24,
1985
since
only
one
party
to
the
agreement
acted
on
that
date.
The
agreement
was
an
agreement
between
two
parties,
the
employer
and
the
employee.
The
employer
perhaps
decided
in
October
1985
not
to
fulfil
its
obligation
arising
from
the
agreement,
although
it
was
in
November
1985
that
it
so
informed
the
Q.S.C.
Whatever
the
case
may
be,
this
was
a
unilateral
breach
of
contract.
It
is
true
that
the
appellant
appears
to
have
been
made
aware
of
this
breach,
but,
in
1985,
she
signed
neither
a
waiver
of
her
rights
nor
any
other
document
of
the
same
kind
and
there
was
no
oral
acceptance
on
her
part.
She
was
waiting.
It
was
in
December
1986
that
she
signed
such
a
document
in
consideration
of
a
compensatory
amount.
It
was
thus
at
that
time
that
she
disposed
of
her
rights
under
the
agreement.
In
light
of
my
decision
that
the
shares
were
not
prescribed
shares
and
that
the
deduction
under
paragraph
110(l)(d)
of
the
Act
does
not
apply,
it
does
not
appear
to
me
useful
to
decide
whether
paragraphs
7(1
)(b)
and
6(1
)(a)
of
the
Act
apply
in
the
instant
case.
There
is
no
doubt
that
the
amount
received
could
be
included
in
computing
income
under
paragraph
6(1
)(a)
of
the
Act.
The
option
awarded
was
a
benefit
conferred
on
the
appellant
as
an
employee.
The
decisions
of
the
Federal
Court
of
Appeal
in
Robertson
and
Schwartz,
supra,
confirmed
that
the
payments
for
breaches
of
agreements
relating
to
their
employment
found
their
source
in
those
agreements
and
were
benefits
received
on
the
basis
of
employment.
However,
in
accordance
with
the
principles
of
interpretation
of
legislative
texts
taken
up
and
stated
in
Minister
of
National
Revenue
v.
Chrysler
Canada
Ltd.,
(sub
nom.
Canada
v.
Chrysler
Canada
Ltd.
(No.
3))
[1992]
2
C.T.C.
95,
at
page
96,
when
a
choice
must
be
made
between
two
provisions
that
could
apply
equally,
the
more
specific
provision
applies.
Counsel
for
the
respondent
tried
to
differentiate
the
circumstances
of
the
compensatory
payment
received
in
the
instant
case
from
those
of
the
compensatory
payment
received
in
Dundas,
supra,
in
which
Dundas
agreed
for
this
payment
to
be
made
under
paragraph
7(1
)(b)
of
the
Act.
I
do
not
wish
to
dwell
on
this
point
because
the
amounts
received
in
compensation
of
the
cancellation
of
the
option
must
be
included
in
computing
the
appellant’s
income
either
under
paragraph
6(1
)(a)
or
under
paragraph
7(l)(b)
of
the
Act.
For
the
reasons
given
above,
I
have
concluded
that
the
appellant
was
not
entitled
to
the
deduction
provided
under
paragraph
110(l)(d)
of
the
Act
and,
accordingly,
I
do
not
have
to
decide
under
which
of
the
provisions
cited
above
the
amount
in
question
must
be
included
in
computing
her
income
for
1986.
The
Minister’s
assessment
is
valid
in
fact
and
in
law
and
the
appeal
is
dismissed,
with
costs.
Appeal
dismissed.
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