Regan M. Williams, Appellant v. Her Majesty the Queen, Respondent, 97 DTC 887, [1997] 2 CTC 2151 (TCC)

Bell T.CJ.:

Issue:

The issue in this case is whether the Appellant, an employee of Bateaux Resources Inc. (“Bateaux”), by exercising a stock option agreement, acquired shares of that company resulting in the deemed receipt of a benefit equal to the difference between the option price of the shares and their value on the date of option exercise pursuant to subsection 7(1) of the Income Tax Act (“Act”).

Facts:

The Appellant was the optionee in a January 11, 1988 stock option agreement between him and Bateaux. He was thereby granted the option to purchase eighty-five thousand shares of the capital stock of Bateaux at the price of $0.50 per share. On September 1, 1988 the Appellant exercised that option incurring the obligation to pay $42,500.00 for those shares. The Minister of National Revenue (“Minister”) reassessed the Appellant’s 1988 taxation year adding to his income a benefit in the amount of $65,850.00 in respect of the exercised option.

The Appellant was appointed as a director of Bateaux when it engaged the services of a corporation controlled by his long time friend James Michie (“Michie”), namely Financial Communications International Limited (“FCI”), a corporation which provided information about and to small corporations operating in British Columbia. FCI seems to have been a vehicle for Michie, its President and Chief Executive Officer, by which he acted as a stock promoter for corporations seeking listing on the Vancouver Stock Exchange (“VSE”). The Appellant was called “Managing Director” of FCI. He and Michie both testified that the title was honorific only. The Appellant was not a director of and did not own shares of FCI. Michie testified that the Appellant’s role was to be that corporation’s manager and act as Michie’s “eyes and ears” while he, Michie, was overseas on business, a frequent occurrence. The Appellant was appointed to the Board of Bateaux when it approached Michie for assistance in going public. The Appellant’s mission appears to have been to gain access to that company’s information for Michie while he was organizing a syndicate to facilitate Bateaux’s initial public offering. Michie testified that in arranging the syndicate he contacted established clients of FCI (“FCI clients”). He said that the Appellant was to act as a nominee of the FCI clients when he entered into the stock option agreement. He said that he and the Appellant had obtained an opinion from Price Waterhouse, Chartered Accountants, that the Appellant would incur no tax liability when he exercised the stock option if he was acting as nominee for another person or persons.

On December 22, 1988, the FCI clients forwarded $75,950.00 from the Bayer Landesbank International, located in Luxembourg, to Michie’s Royal Bank of Canada account. On January 3, 1989 Michie paid Bateaux for the shares with a personal cheque in the amount of $42,500.00. He paid a like amount to Bateaux in respect of an identical option which he exercised.

The Appellant’s evidence with respect to this option was that he had paid nothing to Bateaux for the shares, that the money was paid by FCI clients, that he received no compensation for exercising the option, that the shares were not his, that they were to be delivered to Michie on exercise and that he had never intended to keep them. He stated further that he received a certificate or certificates for shares in street form from Treasury, gave it or them to Michie and received nothing for so doing. Michie testified that the certificates were sent to Luxembourg for the FCI clients’ account. He also said that, to his knowledge, the Appellant had paid nothing to Bateaux for the shares and that he, Michie, had paid nothing to the Appellant to exercise the option and that the FCI clients had paid nothing to the Appellant.

Michie stated that the Appellant was the nominee of the FCI clients and that he, Michie alone, had contact with them. He denied that the Appellant was his nominee. Neither the Appellant nor Michie was able to identify the FCI clients whom they contended were the ultimate recipients of optioned shares. Michie explained that they were based in Europe and that there were two groups of three German individuals. He named one of them.

In late 1989 the Appellant consented to a number of orders from the British Columbia Securities Commission whereby he was prohibited from acting as a director or officer of any reporting issuer for a five year period. Sanctions were imposed because he, Michie, Bateaux and other officers and directors had made material misrepresentations in Securities Commission disclosure documents.

The Appellant was unable to explain inconsistencies in a number of documents entitled “Insider Report” which he said were required to be filed each month. They were not sequentially logical in their exposition of what shares were held by whom. None of those reports contained any statement to the effect that the Appellant was acting as a nominee.

On cross-examination, the Appellant admitted that his Notice of Appeal contained different assertions as to who was directing his activities or on whose behalf he was acting. It stated that the option was exercised by the Appellant at the instruction of Michie and that he was acting as Michie’s agent or nominee and was, therefore, not the beneficial owner of the shares. In his direct examination the Appellant had stated that he acted for the FCI clients and not for Michie.

The question for determination is whether the Appellant, an employee of Bateaux, acquired shares under the stock option agreement. The word “acquire” is defined, in part, in the New Shorter Oxford English Dictionary, Volume I, to mean:

1 Gain or get as one’s own, by one’s own exertions or qualities

2 Come into possession of...

The dictionary examples of the use of this word in its different forms indicate strongly that whatever is acquired is indeed one’s own, for example:

The gun ... which he had acquired ... at the sacrifice of actual food...

They had acquired piety & table manners...

The Idler acquires weight by lying still...

The word “acquiring” is defined as:

the action of obtaining for one’s self;

It is in this sense that Bonner J. of this Court in Stafford v. R., (sub nom. Stafford v. Canada) [1993] 1 C.T.C. 2284, 93 D.T.C. 438 (T.C.C.), interpreted the portion of paragraph 7(l)(a) of the Act which refers to an employee having “acquired shares under the agreement” [1] . At page 2288 (D.T.C. 441) he said:

The Appellant did in point of fact acquire shares under each of the option agreements and, by virtue of paragraph 7(l)(a), he is deemed to have received the benefit which was included in his income. ... Shares were duly issued to the Appellant in accordance with the terms of those agreements. In short these are not transactions whereby in substance White, cloaked and disguised as the Appellant, received shares from Granville and Jantar pursuant to option agreements. Appearance and reality were the same. White received the disputed shares all right, but he received them from the Appellant who, by the time he transferred the shares to White, had already incurred liability under section 7.

Other cases support the interpretation of “acquired”. [2]

Respondent’s counsel appears to have sought, by virtue of the Appellant having filed inaccurate documents with the Vancouver Stock Exchange such filing being described by her as “morally repugnant”, to compromise his integrity and credibility. The Appellant said repeatedly that he did his best when attempting to fill out the required VSE reporting forms. I accept this evidence and also accept this testimony that he entered into the stock option agreement with Bateaux at the direction of Michie for the benefit of a person or persons other than himself. Michie denied that he was the Appellant’s principal. Whether he or the FCI clients were the persons who were to benefit from the Appellant’s exercise of the option is irrelevant to the determination of this issue. I accept the Appellant’s evidence that he paid nothing to Bateaux for the eighty-five thousand shares, that he received no compensation for exercising the option, that the shares were not his, that a certificate or certificates in street form were delivered to Michie upon exercise of the option and, that he, the Appellant, never intended to keep the shares regardless of the fact that he had entered into the stock option agreement and that he had filed a number of inaccurate VSE documents and regardless of the ultimate destination of the share certificates. I accept the Appellant’s evidence that he never intended to and did not acquire shares of Bateaux for his own use.

Accordingly, the appeal is allowed with costs.

Appeal allowed.