Date:
20071121
Docket: A-415-06
Citation: 2007 FCA 370
CORAM: SEXTON
J.A.
SHARLOW
J.A.
RYER
J.A.
BETWEEN:
THE ATTORNEY GENERAL OF CANADA
Appellant
and
CHRISTOPHER M. HENLEY
Respondent
REASONS FOR JUDGMENT
[1]
This is an
appeal from a decision of Sheridan J. of the Tax Court of Canada (2006 TCC 347)
allowing the appeal of Mr. Christopher M. Henley against a reassessment of his
income tax liability for his 2000 taxation year under Part I of the Income
Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the “ITA”). Unless otherwise
indicated, all statutory references in these reasons are to the corresponding
provisions of the ITA for the taxation year under consideration.
[2]
In 1997,
Canaccord Capital Corporation (“Canaccord”), Mr. Henley’s employer, arranged a
financing for Unique Broadband Systems Inc. (“UBS”). As consideration for this
service, UBS agreed to pay a cash fee and to issue warrants to purchase 2,970,767
of its common shares to Canaccord. Mr. Henley worked on the deal and, as a
result, Canaccord allocated 742,692 of those warrants to him.
[3]
In 2000,
Mr. Henley instructed Canaccord to exercise all the 742,692 warrants that had
been allocated to him and to sell all of the UBS shares that were received as a
result of that exercise. Canaccord complied with those instructions and after payment
of the warrant exercise price and sales commissions, Mr. Henley was left with
$967,480.
[4]
The issue
in this appeal is the basis upon which Mr. Henley is to be taxed on that amount
in his 2000 taxation year. The Crown says that the amount should be taxed as
employment income, while Mr. Henley says that the amount should be taxed as a
capital gain from the disposition of the UBS shares that were acquired on the
exercise of his warrants.
BACKGROUND
[5]
The
hearing before the Tax Court of Canada proceeded on the basis of an agreed
statement of facts.
[6]
In his
2000 income tax return, Mr. Henley reported the $967,480 amount as employment
income on the basis of the T-4 that had been issued to him by Canaccord and the
Minister issued a notice of assessment on that basis.
[7]
Mr. Henley
objected to this assessment on the basis that the T-4 amount from Canaccord
should have been nil and that the amount reported in the T-4 was a capital
gain. The Minister confirmed the assessment and Mr. Henley appealed to the Tax
Court of Canada.
TAX COURT OF CANADA DECISION
[8]
Sheridan
J. found that as part of their employment arrangement, Canaccord promised to
compensate Mr. Henley for his efforts in the UBS financing by giving him
742,692 of the warrants that were to be issued by UBS, and that on September
28, 1998, the date upon which 2,970,767 warrants were issued to Canaccord by
UBS, Canaccord fulfilled its promise. Accordingly, she held that 742,692 of
those warrants were received by and became the property of Mr. Henley on
September 28, 1998, when those warrants were allocated to him by Canaccord. Sheridan
J. then found that the receipt of those warrants by Mr. Henley constituted a
benefit received in the course of or by virtue of his employment, within the
meaning of paragraph 6(1)(a), the amount of which was equal to the value
of those warrants when received by him on September 28, 1998.
[9]
In
reaching this conclusion, Sheridan J. rejected the contention of the Minister
that by virtue of the decision of this Court in Robertson v. Canada (C.A.),
[1990] 2 F.C. 717, Mr. Henley received a taxable employment benefit in 2000
when the warrants were exercised and the UBS shares were sold, and not in
September of 1998, when the warrants were received by Mr. Henley. While
acknowledging that the Tax Court of Canada is bound by decisions of this Court,
Sheridan J. concluded that the decision in Robertson was dependent upon
the particular facts in that case and that the facts before her were sufficiently
different from those in Robertson to enable her to distinguish that
decision.
[10]
Sheridan
J. went on to find that the value of the employment benefit was an amount equal
to one cent per warrant, the difference between the market value of a UBS share
on September 28, 1998 ($0.32) and the exercise price of each warrant ($0.31).
[11]
Sheridan
J. concluded that the net proceeds of $967,480 that were received by Mr. Henley
in 2000 from the sale of the UBS common shares that were issued as a result of
the exercise of his warrants, did not constitute a benefit of the type
contemplated by paragraph 6(1)(a). Instead, she concluded that such net proceeds
constituted a capital gain realized by Mr. Henley in his 2000 taxation year.
ISSUE
[12]
The issue
is whether Mr. Henley who received warrants to purchase UBS shares in the
course of his employment, received a benefit of the kind contemplated by
paragraph 6(1)(a) in 1998, the year in which he received those warrants,
or in 2000, the year in which he exercised those warrants.
ANALYSIS
Paragraph 6(1)(a) benefit
[13]
The
determination of the income or loss of a taxpayer from office or employment is
dealt with in subdivision a of Division B of Part I of the ITA. Cash
compensation is generally required to be included in employment income for the
taxation year of receipt under subsection 5(1). Section 7, which is
inapplicable in the circumstances under consideration, provides special rules
with respect to stock options or rights to acquire shares of an employer
corporation. These rules require the inclusion in income of stock option
benefits and specify the timing of such income inclusions.
[14]
Section 6
provides for the inclusion in employment income of a number of so-called
“fringe benefits”, often of a non-cash nature. The relevant provision for the
purposes of this appeal is paragraph 6(1)(a), which reads as follows:
|
6(1) There shall be
included in computing the income of a taxpayer for a taxation year as income
from an office or employment such of the following amounts as are
applicable
(a) the value of
board, lodging and other benefits of any kind whatever received or enjoyed
by the taxpayer in the year in respect of, in the course of, or by virtue of
an office or employment, except any benefit …
[Emphasis
added.]
|
6(1)
Sont à inclure dans le calcul du revenu d’un contribuable tiré, pour une
année d’imposition, d’une charge ou d’un emploi, ceux des éléments
suivants qui sont applicables :
a) la
valeur de la pension, du logement et autres avantages quelconques
qu’il a reçus ou dont il a joui au cours de l’année au titre, dans
l’occupation ou en vertu d’une charge ou d’un emploi, à l’exception des
avantages suivants :
[Je souligne.]
|
[15]
It is
apparent from the underlined words that the scope of this provision is broad.
In general terms, the provision requires the inclusion in the income of an
employee for a taxation year of the value of any property that the employee
receives in that year from the employer in the course of the employment
relationship, except to the extent that any provision of the ITA otherwise
provides.
[16]
In
relation to the circumstances under consideration, the Minister agreed that if
Canaccord had transferred a painting to Mr. Henley as compensation for working
on the UBS financing, the value of the painting would have been required to be
included in computing Mr. Henley’s employment income for the taxation year in
which the transfer occurred.
[17]
“Why then
should it be different simply because Canaccord transferred 742,692 warrants to
Mr. Henley, rather than a painting?”, counsel for the Crown was asked. The
answer was that while paragraph 6(1)(a) has application to transfers of
most types of property by an employer to an employee in the employment context,
that provision does not apply where the property in question is a warrant or a
right to acquire a share. The Minister argued that this distinction is mandated
by the Robertson decision. With respect, I do not agree.
[18]
In my
view, when property of any kind, including warrants or stock options (other
than section 7 options or other property covered by specific statutory
exclusions, none of which are presently relevant), is received by an employee from
an employer in the course of employment, paragraph 6(1)(a) will generally
mandate the inclusion of the value of that property in the income of the
employee for the year of the receipt. Moreover, I believe that Robertson
is consistent with this statement.
[19]
In Robertson,
Mr. Jack Pierce offered to sell 2,500 shares of Ranger Oil to Mr. J. Stuart Robertson,
who managed Mr. Pierce’s ranch, in an agreement signed in late 1974. A review
of the reasons of Marceau J.A. and of Dubé J. in the lower court decision ([1988]
2 F.C. 144) does not reveal an entirely clear picture of the terms of the
offer. Both decisions refer to the conditional or contingent nature of the
offer. At page 152 of the lower court decision, Dubé J. states:
In the
instant case, prior to the plaintiff’s acquisition of the shares in 1980, his
right was always conditional upon the continuation of his employment. In
other words, until the plaintiff actually exercised his option in 1980, it
could not be ascertained whether that central condition of the agreement would
be fulfilled: it is a principle of income recognition that an amount must not
be taxed as income until uncertainty about the taxpayer’s entitlement to it has
been removed. [Emphasis added.]
In paragraph 2 of the decision of this Court, Marceau J.A.
also commented upon the conditionality of the offer, as follows:
The option
was to become exercisable at the rate of 500 shares per year, over the next
five years, subject to certain conditions, the main condition being that the
appellant continue his employment. [Emphasis added.]
[20]
In
analyzing Robertson, the nature of the arrangement between Mr. Pierce
and Mr. Robertson must be construed. In my view, Marceau J.A. held that in 1974
Mr. Pierce made a simple offer to sell the Ranger Oil shares to Mr. Robertson at
a future time provided that Mr. Robertson continued in Mr. Pierce’s employment
for a specified period of time. On that basis, Mr. Robertson acquired a
conditional or contingent right to those shares at the time that the offer was
made. However, only by continuing in his employment with Mr. Pierce until the
end of the specified period could this condition or contingency be fulfilled
and only upon its fulfillment could Mr. Robertson be said to have acquired an
absolute right to accept the offer and to acquire the shares. Viewed in this
light, Mr. Robertson received only an expectation of a benefit at the time of
the offer and only upon the fulfillment of the condition or contingency did he
become absolutely entitled to a benefit.
[21]
To
summarize, Robertson may be considered to stand for the proposition that
where, in the course of an employment relationship, an employee receives a
right to acquire property from his or her employer upon the fulfillment of a
condition or contingency, the receipt of that right will not constitute a
paragraph 6(1)(a) benefit to the employee and such a benefit will not
arise until the condition or contingency has been fulfilled. By way of example,
if an employer gives a painting to an employee as a bonus, there is no doubt
that the painting is a benefit, the value of which must be included in income
when the painting is received by the employee. By contrast, if the employer
offers to give the employee a painting if the employee fulfils a condition,
such as concluding a deal or working for a period of time, only upon the fulfillment
of that condition can it be said that the employee becomes entitled to the
painting and therefore receives a benefit.
[22]
In the
circumstances under consideration, prior to the completion of the UBS
financing, Canaccord had made an offer to make UBS warrants available to Mr.
Henley if he worked on that financing. However, that offer was subject to two
conditions. First, the financing had to be completed and secondly, the UBS
warrants had to have been received by Canaccord. Applying Robertson, it
can be seen that in May of 1998, when Canaccord agreed that Mr. Henley could
obtain 742,692 UBS warrants by working on and concluding the UBS financing, Mr.
Henley received only a conditional or contingent right to or in respect of the
UBS warrants and therefore did not receive a paragraph 6(1)(a) benefit
at that time. At the conclusion of the UBS financing, Mr. Henley had done all
that was required of him and therefore one of the conditions or contingencies
had been fulfilled. However, at that point, the subject matter of the offer,
the UBS warrants, did not exist. That condition or contingency was satisfied on
September 28, 1998, when UBS issued the warrant certificate to Canaccord. At
that point in time, 742,692 warrants were received by Mr. Henley, as a result
of their allocation to him by Canaccord, and their value became a paragraph
6(1)(a) benefit to him on that date.
[23]
Having
determined that Mr. Henley received a paragraph 6(1)(a) benefit in
1998, when he received the 742,692 UBS warrants from Canaccord, it follows that
Mr. Henley cannot be said to have received a paragraph 6(1)(a) benefit
in 2000, when those warrants were exercised and the UBS shares received as a
result of that exercise were sold. Accordingly, I am in agreement with the
conclusion of Sheridan J. on this basis.
Valuation of the Paragraph 6(1)(a)
Benefit
[24]
The issue
in this appeal is whether Mr. Henley received a paragraph 6(1)(a)
benefit in 2000. Having concluded that he did not, the valuation of the paragraph
6(1)(a) benefit that was received by him in 1998 is not a matter that is
in issue in this appeal because Mr. Henley’s 1998 taxation year is not before
us. For that reason, I express no opinion with respect to either the
determination of Sheridan J. that the value of a warrant on September 28, 1998
was one cent or the valuation methodology that she employed in making that
determination.
CONCLUSION
[25]
The
allocation of 742,692 UBS warrants by Canaccord to Mr. Henley on September 28,
1998 constituted a benefit received by Mr. Henley, at the time of that
allocation, in the course of his employment. The value of that benefit was
required to be included in the computation of his employment income for 1998. It
follows that Mr. Henley did not receive or enjoy a benefit of the type
contemplated by paragraph 6(1)(a) as a result of the exercise of his
warrants and the sale of the shares that were issued as a consequence of that
exercise in 2000.
DISPOSITION
[26]
For these
reasons, I would dismiss the appeal with costs.
“C.
Michael Ryer”
“I
agree
J.
Edgar Sexton J.A.”
“I
agree
K.
Sharlow J.A.”
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