REASONS
FOR JUDGMENT
Hogan J.
I. Overview
[1]
The present case is an appeal from a
reassessment made by the Minister of National Revenue (the “Minister”) for
the Appellant’s 2007 taxation year. The dispute concerns the
characterization of an amount (the “Surrender Payment”) received by the taxpayer, Edward S. Rogers (“Mr. Rogers”), in that
year. The Surrender Payment was made to Mr. Rogers by Rogers Communications
Inc. (“RCI”) in exchange for the surrender of options (the “Options”) which
had been granted to Mr. Rogers under RCI’s employee stock option plan
in 1997. The Appellant reported the Surrender Payment as a capital gain in
his tax return for that year and accordingly included one half of the amount in
his taxable income for that year.
[2]
In 2011, the Minister reassessed the taxpayer to
include the full Surrender Payment in income. This reassessment was defended by
the Respondent on the basis of any of three alternative arguments, i.e.,: (i) that
the amount was income from employment or an employment benefit under either
section 5 or paragraph 6(1)(a) of the Income Tax Act (the “Act”);
(ii) that the amount was a shareholder benefit taxable under subsection 15(1)
of the Act; (iii) that the amount was a profit from an adventure in the nature of
trade and taxable under subsection 9(1) of the Act.
[3]
At trial, the Respondent abandoned the last of
these arguments – namely, that the amount at issue is profit from an adventure
in the nature of trade (the “Section 9 Argument”) – on the basis that
there was insufficient evidence. The only evidence tendered at trial was the
Statement of Agreed Facts, the Joint Book of Documents and the Discovery Read-Ins.
[4]
At the end of the hearing, I asked the parties
for written submissions on the question of whether I can nevertheless consider
the Section 9 Argument. After consideration of the parties’ supplementary
submissions, I decided that I am not bound by the Respondent’s concession on
this point for the reasons set out below.
II. Facts
[5]
The parties filed a Statement of Agreed Facts
which is summarized below.
[6]
During all relevant periods, Mr. Rogers was the president
and chief executive officer of RCI, a major Canadian diversified communications
and media company. RCI had two classes of shares: Class A voting shares and
Class B non‑voting shares. Both classes of shares were listed on the
Toronto Stock Exchange (“TSX”). The Class B shares were also listed on the New
York Stock Exchange. On April 13, 2007, Mr. Rogers beneficially
owned and controlled nearly 91% of RCI’s issued and outstanding Class A shares.
Therefore, Mr. Rogers and RCI were deemed not to deal at arm’s length for the
purposes of the Act.
[7]
In 1996, RCI implemented a stock option plan
(the “Plan”) for the directors and key officers of RCI, including Mr. Rogers.
The stated purpose of the Plan was to compensate the directors and key officers
of RCI and its affiliates for their employment services and to enable them to
acquire a proprietary interest in RCI through share options. The Plan was
administered by the compensation committee of RCI’s board of directors (the
“Compensation Committee”).
[8]
On December 4, 1997, the board of directors of
RCI granted Mr. Rogers an option to acquire Class B shares at an option price
of $6.29 per share. On December 15, 2006, RCI’s shareholders approved a
resolution passed by RCI’s board of directors effecting a two-for-one split of
the Class B shares, which doubled the Options held by Mr. Rogers.
[9]
Over the course of time, the terms of the Plan
were amended in order to comply with various regulatory requirements, the one exception
being an amendment on May 28, 2007 whereby RCI changed the Plan to allow a so‑called
share appreciation right (“SAR”) to be attached to all new and previously
granted options. The SAR permitted an option holder to surrender all or a
portion of an option to RCI for a cash payment equal to the “SAR Price”. The SAR Price was equal to the average
trading price of the Class B shares on the TSX for the business day on
which the SAR was exercised, less the exercise price of the option. The
exercise price of each option was fixed at the time the option was granted. Of
note here is the fact that the Compensation Committee could refuse to allow an
option holder to exercise a SAR, instead requiring him to exercise an option.
[10]
On December 3, 2007, Mr. Rogers excised his SAR
by surrendering the Options to RCI in exchange for the Surrender Payment. RCI
did not withhold any amount and it did not issue a T4 slip to the Appellant
with respect to the Surrender Payment. The Appellant reported the Surrender
Payment as a capital gain in the 2007 taxation year.
III. Is the Court Bound by
the Respondent’s Concession on the Section 9 Argument?
[11]
The Appellant argues that I am bound by the Respondent’s
decision to drop the Section 9 Argument. First, the Appellant argues that it is
not the role of the judge in a tax adjudication to frame and define the issues.
Secondly, and more importantly, the Appellant contends that the Section 9
Argument is not properly before the Court because (i) it is an agreed fact that
Mr. Rogers received the cash payment qua employee and (ii) the allegation that
the Surrender Payment was profit from an adventure in the nature of trade is
incompatible with this agreed fact. Additionally, the Appellant submits that
the Section 9 Argument is not properly before the Court because (iii) the Court
may only review the correctness of the reassessment by looking at the basis on
which the Minister made the reassessment and (iv) considering the Section 9
Argument would amount to usurpation by the Court of the Minister’s assessment
power.
[12]
The Respondent’s position is that the Court may
reject a party’s abandonment of a position of law provided that the parties are
invited to make further submissions on the issue. In support of her position,
the Respondent cites Labourer’s International Union of North America, Local
527, Members’ Training Trust Fund v. Canada,
where Judge Bowman, as he then was, noted:
Parties to an action may agree on certain facts
and this agreement may form the basis for a judicial admission by which the
presiding judge will be bound. Parties cannot, however, make a judicial
admission on a point of law, because “the Court may not be bound by error in an
admission by the parties as to the law…” The court is not bound by concessions
on points of law. . . .
[13]
All three of the Appellant’s parallel arguments
rest, according to the Respondent, on a tendentious assertion that it is an “agreed fact” between the parties and an “implicit assumption” of the Minister that Mr. Rogers
received the Surrender Payment qua employee. In fact, the Minister made no stated
assumption to that effect, nor is this alleged fact contained in the Statement
of Agreed Facts.
[14]
The Appellant tends to conflate the granting of the
Options with their subsequent surrender for cash, but these are two distinct
events capable of distinct characterization. While the evidence shows that Mr.
Rogers received the Options in his capacity as an employee of RCI, it does not
logically follow from this that the Surrender Payment was likewise received by
him qua employee. It is possible to characterize the grant of options in 1997
as having been received by Mr. Rogers qua employee while the subsequent
disposition of those options in 2007 remains open to characterization as a
transaction giving rise to a profit from an adventure in the nature of trade or
to a capital gain. These are questions that need to be resolved after
consideration by the Court.
[15]
Although the trial proceeded on the basis of a
Statement of Agreed Facts, this does not displace the judge’s role as the
person entrusted with making factual findings based on the documentary evidence
and the Discovery Read-Ins.
[16]
Whether the cash payment is profit from an
adventure in the nature of trade is a question of mixed fact and law. In
deciding the question, the Court must consider various factors, including:
•
the nature of the property;
•
the length of the period of ownership;
•
the frequency or number of other similar
transactions by the taxpayer;
•
the circumstances responsible for the sale of
the property; and
•
the taxpayer’s motive in acquiring the asset.
In each case, the determination will
involve analyzing and weighing all these facts or in light of the particular
circumstances of the case. There is nothing in this case that would
conclusively preclude the Court from considering whether section 9 of the
Act could apply to the Surrender Payment.
[17]
The Appellant argues that, because the
Respondent withdrew the Section 9 Argument at trial, further consideration of
the argument would amount to the Court constructing its own basis for
assessment.
[18]
In support of this position, the Appellant
relies primarily on Lipson v. Canada
for the proposition that the Court cannot consider a provision of the Act where
the Minister was not prepared to argue as a matter of fact that the test for
the application of that provision was met. Rothstein J., in his dissent in Lipson,
attempted to resolve the parties’ dispute on the basis of a section of the Act
that both sides had maintained throughout the proceedings did not apply. The
majority of the Supreme Court of Canada (the “SCC”) held that such an approach
was inappropriate.
[19]
In the instant case, the Respondent pleaded the
Section 9 Argument and advanced a case, in part through the Statement of Agreed
Facts, that is, at least in principle, capable of supporting a section 9 argument.
At trial, the Respondent abandoned such an argument on the basis of
insufficient evidence only after all the evidence had been presented through
the Statement of Agreed Facts. The Respondent’s abandonment of her position
therefore amounts to a conclusion of mixed fact and law. It cannot bind the
Court as it is trite law that the Court cannot be bound by the parties’
interpretation of a point of law. For these reasons, Lipson does not
apply here.
[20]
The Appellant argues that consideration of the
Section 9 Argument is akin to usurping the Minister’s assessment power and
thereby depriving the taxpayer of the benefit of the limitation period. The
assessment process involves ascertaining the facts, applying the law to those
facts and determining and assessing tax on that basis. Since the Respondent
abandoned the Section 9 Argument due to lack of evidence, the Appellant argues
it would be akin to opening a new assessment process for the Court to consider
the abandoned argument.
[21]
The Appellant has no direct authority for this
argument. With respect, I consider it to be without merit as this is a circumstance
where the Respondent pleaded and advanced an argument which it later withdrew
on the basis of its own interpretation of an issue of mixed fact and law. All
the evidence has been presented. The Court has not requested that the
Respondent present further evidence. Rather, it is the Appellant that is asking
the Court to consider itself bound by the Respondent’s concession on a point of
law even though it is trite law that the Court cannot be bound by such a
concession.
IV. Issue
[22]
The main issue is the proper treatment of the
Surrender Payment under the Act. The question is: does the carve-out in
paragraph 7(3)(a) apply to preclude the Surrender Payment from being a
benefit taxable under section 6, notwithstanding the fact that the Surrender
Payment is not taxable under section 7 because of Mr. Rogers’ non-arm’s
length relationship with RCI? In the alternative, can the Surrender Payment be
characterized as “salary, wages and other remuneration”
under section 5, or as a shareholder benefit under subsection 15(1) of the
Act? In the further alternative, is the Surrender Payment taxable under
subsection 9(1) of the Act?
V. Positions of the
Parties
[23]
The Respondent submits that Mr. Rogers received
the Surrender Payment in respect of, in the course of, or by virtue of his
office or employment as a director of RCI and therefore, the Minister properly
included the entire Surrender Payment in income pursuant to paragraph 6(1)(a)
or section 5 of the Act. The Respondent asserts that paragraph 7(3)(a)
of the Act does not apply to the Surrender Payment because RCI did not agree to
sell or issue securities to Mr. Rogers when he surrendered the Options.
[24]
The Respondent puts forward two further
alternative positions regarding the Surrender Payment. First, the Surrender
Payment was a shareholder benefit fully includable in income under subsection
15(1) of the Act. Second, the Surrender Payment was business income from an
adventure in the nature of trade.
[25]
Not surprisingly, the Appellant does not see it
quite the same way. The Appellant argues that the Surrender Payment was
not taxable as income from employment because it was not “salary,
wages and other remuneration” under section 5, and that paragraph 7(3)(a)
applies to deem it not to be an employment benefit for the purposes of section
6 of the Act.
[26]
As to the alternative arguments, the Appellant argues
that they are without merit because the evidence shows that the Options and the
SAR were granted to Mr. Rogers qua employee and there is no evidence to
show that Mr. Rogers dealt with the Options with a trading intent.
VI. Law and Analysis
A. Is the Surrender Payment Taxable
as Employment Income?
[27]
Sections 5 through 7 of the Act determine a
taxpayer's income from an office or employment. Subsection 5(1) states simply
that a taxpayer's income for a taxation year from an office or employment is
the “salary, wages and other remuneration, including
gratuities, received by the taxpayer in the year.” Section 6 operates
to include in the computation of the income of an employee or officer the value
of various ancillary benefits which are commonly associated with an office or employment.
[28]
Section 7 of the Act sets out the ground rules
for the taxation of benefits specifically derived from the exercise or
disposition of stock options in the course of employment. The purpose of
section 7 is, among other things, to defer recognition of employment benefits
from the exercise or disposition of stock options until they are received in
their entirety and quantifiable. Section 7 was enacted to provide a complete
scheme for the taxation of stock options. It provides rules regarding when the
benefit is subject to tax and with respect to the form of taxation. Coupled
with the one‑half deduction under section 110 of the Act, it affords a
more favourable tax treatment than that applicable to other employment benefits.
[29]
In the absence of section 7 of the Act, the
timing of the taxation of stock option benefits would be a vexing issue. But
for section 7, benefits enjoyed under stock options could be taxed at various
points, including the following: at the date of the grant, at the date of
vesting, or upon exercise. Section 7 deals with this issue, as it provides that
the benefit is income from employment and identifies the point in time at which
such income is deemed to have been realized. Generally, this point in time is
when the employee exercises the option or transfers the option to an arm's
length person.
[30]
Section 7 of the Act sets out very detailed
rules for determining amounts to be included under section 6 as an employee
benefit in respect of the exercise or disposition of stock options. Of those
rules, paragraph 7(1)(b) applies where an employee disposes of his right
to shares, taking cash instead of the shares. The relevant portions of
paragraph 7(1)(b) are reproduced below:
Agreement to issue securities to employees
7(1) Subject to subsection (1.1), where a
particular qualifying person has agreed to sell or issue securities of the
particular qualifying person (or of a qualifying person with which the
particular qualifying person does not deal at arm’s length) to an employee of
the particular qualifying person (or of a qualifying person with which the
particular qualifying person 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 securities to a person with whom the employee
was dealing at arm’s length, a benefit equal to the amount, if any, by
which
(i) the value of the
consideration for the disposition
exceeds
(ii) the amount, if
any, paid by the employee to acquire those rights
shall be deemed to
have been received, in the taxation year in which the employee made the
disposition, by the employee because of the employee’s employment;
. . .
[Emphasis added.]
[31]
Of note is the fact that paragraph 7(1)(b)
of the Act requires that the employee deal at arm’s length with the person to
whom that employee disposes of the stock options. In this case, Mr. Rogers
surrendered the Options to RCI, a person with which he was not at arm’s length.
Therefore, the transaction is not caught by paragraph 7(1)(b) of the
Act, or any of the other paragraphs of section 7. Therein lies the issue.
[32]
According to the Appellant, paragraph 7(3)(a)
precludes the application of paragraph 6(1)(a) of the Act because
paragraph 7(3)(a) deems the Surrender Payment not to be a benefit received
or enjoyed by Mr. Rogers, except as provided for in section 7.
[33]
The Appellant directs my attention to the recent
decision of the Federal Court of Appeal (the “FCA”) in Canada v. Quinco
Financial Inc.
There, the FCA held:
There may be cases where precisely-worded
provisions or their interaction creates an advantage or a windfall for a
registrant under the Act. But we do not interpret taxation provisions in a
tendentious or result-oriented way to enhance the federal treasury: Shell
Canada, supra at paragraphs 39 and 40. Instead, absent words
allowing us to address situations of abuse or windfall, where the provisions
are precisely-worded, clear and unambiguous, they must be given their plain
effect.
[34]
The Respondent’s position is that any portion of
an employment benefit not included in income by virtue of section 7 should be
included in income under section 6 of the Act. In support of this, the
Respondent directs me to this Court’s decision in Dundas v. M.N.R. There, the taxpayer had
received an amount from his employer in settlement of the cancellation of a
stock option agreement. The taxpayer maintained that the amount constituted
damages on account of the breach of the stock option agreement and was therefore
a capital gain. Judge Rip, as he then was, held that the amount was deemed by
paragraph 7(1)(b) to be an income amount. Judge Rip discussed section 7
of the Act as follows:
Subsection 7(3) states that where a corporation
has agreed to sell or issue shares of its capital stock to an employee no
benefit shall be deemed to have been received by the employee under or
by virtue of the agreement for purposes of Part I of the Act except as provided
for by section 7. Subsection 7(3) applies to deemed benefits and provides that
such benefits arising from a Stock Option Agreement are taxable only if they
meet the conditions contained in section 7. Subsection 7(3) therefore provides
that only benefits deemed to be received or enjoyed by an employee under or by
virtue of a stock option plan in accordance with section 7 are included in
income for purposes of subsection 5(1). Or inversely, if a benefit is to
be included in employment income of an employee under subsection 7(1) or
7(1.1), then by virtue of subsection 7(3) no part of the benefit received under
or by virtue of the agreement contemplated in subsection 7(1) and 7(1.1) may be
included in employment income under another provision in Part I of the Act.
Therefore if an employee receives a benefit
from his employer otherwise than under or by virtue of an agreement
contemplated in subsections 7(1) or 7(1.1), he is liable to include the value
or amount in his income by virtue of section 6.
[Emphasis added.]
[35]
On the basis of Judge Rip’s reasoning in Dundas, the Respondent invites me to adopt the proposition that paragraph 7(3)(a)
applies only if one of the enumerated circumstances in subsection 7(1) of the
Act exists. I observe that the circumstances leading to the cancellation of the
option in Dundas were very different than the circumstances
giving rise to the receipt of the Surrender Payment in the instant case. In Dundas, the stock options were cancelled pursuant to the terms of a merger
agreement. This was done in violation of the terms of the stock option plan
that provided that the options were to survive any merger. In the instant case,
the Surrender Payment was made under or pursuant to the terms of the Options, which
included the SAR feature.
[36]
As authority for the position that section 7
trumps sections 5 and 6 of the Act, the Appellant cites the decision in M.N.R.
v. Chrysler Canada Ltd. et al.
There, the Federal Court – Trial Division was tasked with determining whether
Chrysler’s Employee Stock Ownership Plan (“ESOP”) was to be considered as an “employee
benefit plan” within the meaning of subsection 248(1) of the Act or as a
stock option under section 7 of the Act. Strayer J. ruled that the ESOP was
both a stock option plan and an employee benefit plan. Noting the rule of
statutory interpretation providing that specific provisions take priority over
general ones, the Court concluded that section 7 had priority over section 6 of
the Act, which, as a result, did not apply. Strayer J. concluded as follows:
Where there are such benefits taxable in
accordance with section 7, the Act itself appears to give that section
“priority”. Where an agreement exists such as described in subsection 7(1),
paragraph 7(3)(a) provides that:
(a) no benefit
shall be deemed to have been received or enjoyed by the employee under or by
virtue of the agreement for the purpose of this Part except as provided by this
section. . . .
The reference is to Part I of the Act. Part I
includes subsection 5(1), a general provision for taxing “salary, wages and
other remuneration . . .” from employment, and subsection 6(1) which taxes
various amounts received as income from employment including those received
from an employee benefit plan. In applying either of those taxing sections one
would be obliged, by the terms of paragraph 7(3)(a), to treat the
benefits gained by the employees as being the amount calculated in accordance
with paragraph 7(1)(a), such amount being received in the year
determined in accordance with paragraph 7(2)(a) (namely in the year when
the trustee commenced to hold the shares).
[37]
In further support of this view, counsel for the
Appellant referred me to the decision of Judge Bowman, as he then was, in Bowens
v. The Queen.
There, the Crown had argued that paragraph 7(1)(b) applied to a
disposition of options by a taxpayer to a third party. In the alternative, the
Crown relied on section 6. In obiter, Judge Bowman commented that the
application of section 7 trumps section 6 of the Act. He stated the following:
The alternative position under section 6 was
not pressed with vigour, and rightly so, in my view, in light of paragraph
7(3)(a). The grant by DEB of the options to the appellant was the type
of agreement contemplated by subsection 7(3) and this fact alone displaces
section 6. As it happens, however, paragraph 7(1)(b) was inapplicable.
This in itself does not of course propel the taxpayer into section 6.
[38]
I agree with the reasoning endorsed in Chrysler
and Bowens. A textual, contextual and purposive reading of section 7 of
the Act leads me to conclude that this provision is meant to provide a complete
code for the taxing of benefits arising under or because of a stock option
agreement. The text of paragraph 7(3)(a) is clear and unambiguous: it
deems an employee to have neither received nor enjoyed any benefit under or
because of a stock option agreement, except as provided by that section. The
relevant provision reads as follows:
7(3) If a particular qualifying person has
agreed to sell or issue securities of the particular person, or of a qualifying
person with which it does not deal at arm’s length, to an employee of the
particular person or of a qualifying person with which it does not deal at
arm’s length,
(a) except as
provided by this section, the employee is deemed to have neither received nor
enjoyed any benefit under or because of the agreement;
. . .
[Emphasis added.]
[39]
If the carve‑out in section 7(3)(a)
is interpreted in a narrow fashion, as the Respondent argued it should be –
that is it only applies if the benefit is subject to tax under subsection
7(1) of the Act – it would mean that a non-arm’s length transfer could become
immediately taxable notwithstanding the fact that section 7 specifically
provided that this should not be the case. For example, paragraph 7(1)(b)
of the Act allows an employee to transfer options to his or her holding
corporation for a consideration without there being immediate taxation.
However, when the holding corporation exercises the options or disposes of them
to an arm’s length person, the benefit is subject to tax in the hands of the
employee. If I accept the Respondent’s interpretation, the benefit in the above
example would be subject to double taxation.
[40]
The Appellant notes the subsequent amendments to
section 7 that have closed this loophole. Effective March 4, 2010, subsection
7(1) was amended to include new paragraph 7(1)(b.1) of the Act, which
effectively covers the issue at bar. Essentially, an employee is deemed to have
received an employment benefit when the employee disposes of rights under a
stock option agreement to an employer with which the employee does not deal at
arm’s length. The amendment was made effective on a prospective basis. The
Appellant suggests that the amendment serves to confirm that no other provision
in section 7 applied to the Surrender Payment at the relevant time. I agree
with this interpretation.
[41]
Another of the Respondent’s submissions is that
paragraph 7(3)(a) does not apply to the Surrender Payment because it was
not the case that RCI “agreed to sell or issue
securities” to the Appellant when he surrendered his Options. Rather, he
received cash in lieu of exercising those Options.
[42]
In my opinion, the Respondent’s arguments
overlook the broad wording of subsection 7(3) of the Act. The provision
provides that, except as provided in section 7, an employee “is deemed to have neither received nor enjoyed any benefit
under or because of an agreement” whereby an employer has agreed to
issue shares to its employees. Subsection 7(1) covers benefits that arise
because options are exercised and shares are received by the employee and
benefits that arise because the employee disposes of rights under an agreement
to a person with whom the employee is dealing at arm’s length. Subsection 7(3)
is meant to exclude benefits arising from the non-arm’s length exercise and
disposition of options.
[43]
In the instant case, it is incontrovertible that
RCI had agreed to issue or sell shares to Mr. Rogers. The grant of the SAR to Mr.
Rogers did not negate RCI’s undertaking to issue shares. It was an added feature
which allowed Mr. Rogers’ to elect to dispose of the Options in exchange for
the Surrender Payment. In this context, the Surrender Payment was a benefit
received by the Appellant under or because of the Option Agreement.
It would have been taxable under subsection 7(1) of the Act had RCI and
the Appellant been dealing at arm’s length.
[44]
That leads to the Respondent’s next submission,
which is that if the Surrender Payment is not taxable under section 6 then it is
“salary, wages and other remuneration” and is
accordingly to be included in income under subsection 5(1) of the Act. That
provision reads as follows:
5(1) Subject to this Part, a taxpayer’s income
for a taxation year from an office or employment is the salary, wages and other
remuneration, including gratuities, received by the taxpayer in the year.
[45]
The Appellant submits that the Surrender Payment
is not “salary” or “wages”
because it was neither a fixed payment for regular work nor a periodic payment
for the labour or services of an employee. So the question becomes: can the
Surrender Payment be characterized as “salary, wages and other
remuneration?” In my view, no.
[46]
The terms “salary”,
“wages” and “other
remuneration” are not defined for the purposes of section 5. The
ordinary meaning of the terms “salary” and “wage” connote a periodic and fixed payment by an
employer to an employee for work or for services rendered. The Surrender
Payment does not fall within that meaning.
[47]
At trial and in written submissions, counsel for
the Appellant directed my attention to the decision in Hale v. The Queen. There, the taxpayer exercised
an SAR attached to stock options that had been granted to him while he was resident
and employed in Canada. He exercised the SAR after becoming a resident of the United Kingdom. The issue was whether the SAR payment to him was “other
similar remuneration” within the meaning of article 15(1) of the Canada-United
Kingdom Tax Convention (the “Treaty”). The Federal Court concluded that the SAR
payment constituted a benefit received by virtue of the taxpayer’s employment
as described in section 7(1)(b) and was not “remuneration”
for the purposes of the Treaty. Relying on McNeill v. Canada, [1987] 1 F.C. 119, 86 DTC 6477, the Federal Court held that “[i]t must therefore be concluded that the words salaries,
wages and other remuneration unavoidably correspond to a sum of money received
in return for the provision of services.” In Hale, the Court also
relied to a great extent upon the FCA’s decision in Hurd v. The Queen, a case in which it was similarly
concluded that a benefit consisting of the difference between the value of
shares when acquired on the exercise of a stock option and the price paid for
them under the option is not “other remuneration” for
the purposes of section 5 of the Act.
[48]
I agree with the Appellant. The Surrender
Payment is not properly characterized as “salary, wages
and other remuneration.” Again, this is in accordance with the text,
context and purpose of sections 5 through 7 of the Act.
B. Is the Surrender Payment a Shareholder Benefit?
[49]
The Respondent’s alternative position is that the
Surrender Payment, if not taxable under paragraph 6(1)(a) and section 5
of the Act, was a shareholder benefit that would be included in income under
subsection 15(1).
[50]
Both parties referred me to the decision of
Judge Bowman, as he then was, in Del Grande v. The Queen. In that case, the taxpayer
was an officer and 25% shareholder of two corporations with respect to whose
shares he was granted options to purchase. The options were worthless at the
time they were granted in 1982. When he exercised those options over three years
later, the shares had a fair market value of $171,738. By reassessment, the
Minister added the amount of $171,738 to the appellant's income in 1985 on the
basis that the appellant had received a “benefit or
advantage” within the meaning of paragraph 15(1)(c). On appeal, Judge
Bowman held that there was no benefit conferred on the appellant in 1985 since
the companies were doing no more than honouring a commitment which had
previously been made. Moreover, any benefit received by the appellant was received
not by virtue of his being a shareholder but rather by virtue of his position
as an officer or director of the companies.
[51]
In the Respondent’s view, the facts of the
instant case distinguish it from Del Grande. First, the Appellant was
the controlling shareholder of RCI. He held nearly 91% of the Class A voting
shares. The Respondent suggests that the Appellant caused the SAR to be
approved by the shareholders. Given his shareholding, the outcome of the vote
to approve the amendment to the Plan granting the SAR was a foregone
conclusion.
[52]
In my opinion, the Respondent fails to take into
account the fact that Mr. Rogers gave up something of equal value to
receive the Surrender Payment. The Surrender Payment reflected the “in-the-money value” of the Options. It was
consideration for the cancellation of the unexercised Options. Viewed in this
light, the Surrender Payment can hardly be described as a “benefit” taxable under subsection 15(1) of the Act.
C. Was the Surrender of the Options an Adventure in the Nature of Trade?
[53]
In the decision Baird v. Canada, the FCA conducted a
comprehensive review of the meaning of “an adventure or
concern in the nature of trade” in the context of the disposition of shares of
a public company.
[54]
In that case, the appellant was granted
options to acquire shares of his employer, BCE Emergis. The appellant exercised
the options and acquired the shares. The appellant sold the shares in two
transactions and incurred losses totalling a little over $1,000,000. The
Appellant claimed the losses as non-capital losses. The Minister reassessed on
the basis that the losses were capital losses.
[55]
Margeson J. dismissed the appeal. The
appellant appealed to the FCA on the grounds that the losses stemmed from an adventure in the nature of trade.
[56]
Nadon J. A. adopted, at paragraph 14, the following
definition of “adventure or concern in the nature of
trade” provided, at page 333, in Principles of Canadian Income Tax
Law (5th ed. (Toronto: Thomson Carswell, 2005) by Peter W. Hogg, Joanne E.
Magee and Jinyan Li): “An adventure or concern in the
nature of trade is an isolated transaction (which lacks the frequency or system
of a trade) in which the taxpayer buys property with the intention of selling
it at a profit and then sells it (normally at a profit, but sometimes at a
loss).”
[57]
Nadon J. A. then goes on to review the SCC’s
decision in Friesen. He
observes:
In Friesen v. Canada, [1995] 3 S.C.R.
103, Major J., writing for a majority of the Supreme Court of Canada, remarked
at page 115 that the concept of an adventure in the nature of trade is a
judicial creation designed to determine which purchase and sale transactions
are of a business nature and which are of a capital nature. Major J. then made
the point that for a purchase and sale to constitute an adventure in the nature
of trade, there had to be a "scheme for profit-making". In his view,
there was a requirement for the taxpayer to have had an intention of gaining a
profit from his transaction and, in that regard, he referred to Interpretation
Bulletin IT-459: "Adventure or Concern in the Nature of Trade" (Sept.
8, 1980), which sets out the relevant tests found in the case law for a
determination of whether a transaction constitutes an adventure in the nature
of trade. Paragraph 4 of IT-459 provides as follows:
In determining
whether a particular transaction is an adventure or concern in the nature of
trade the Courts have emphasized that all the circumstances of the transaction
must be considered and that no single criterion can be formulated. Generally,
however, the principal tests that have been applied are as follows:
1. whether the
taxpayer dealt with the property acquired by him in the same way as a dealer in
such property ordinarily would deal with it;
2. whether the nature
and quantity of the property excludes the possibility that its sale was the
realization of an investment or was otherwise of a capital nature, or that it
could have been disposed of other than in a transaction of a trading nature;
and
3. whether the
taxpayer's intention, as established or deduced, is consistent with other
evidence pointing to a trading motivation.
[58]
He also considered the SCC’s decision in Irrigation
Industries Ltd. v. Minister of National Revenue. In that case, the issue was
whether a purchase of shares from treasury and a subsequent disposition of the
shares for profit constituted “an adventure or concern in
the nature of trade.”
[59]
In reviewing that decision, Nadon J. A. remarks
as follows:
In disposing of the issue before the Court in
that case, Martland J. made a number of comments which remain relevant to this
day. First, he indicated at paragraph 13 of his Reasons that he found it
difficult to conceive that any purchaser of securities did not have "some
intention of disposing of them if their value appreciates to the point where
their sale appears to be financially desirable". He then said that if the
intention to sell shares at a profit was dispositive of the issue, "then
any purchase and sale of securities must constitute an adventure in the nature
of trade, ...". He therefore indicated that the issue of whether an
isolated transaction of shares constituted an adventure in the nature of trade
could not "be determined solely" on the basis of whether the purchaser
intended to sell his shares if a profit could be made. . . .
[60]
In summary, in light of on the above, to determine whether a
particular transaction is an adventure or concern in the nature of trade, all
of the circumstances of the transaction must be considered. The principal tests
that have been applied can be summarized in the following questions: (i) did
the taxpayer deal with the property acquired by him in the same manner as a trader
in such property ordinarily would deal with it? (ii) was the nature of the property
such that the taxpayer could only have disposed of it in a transaction of a
trading nature? and (iii) did the taxpayer intend at the time of the
acquisition of the property to resell it at a profit?
Is the SAR Separate Property?
[61]
Before applying these tests, I must deal with a novel issue
raised by the Respondent in her written submissions on the Section 9 Argument.
The Respondent argues that the amendments to the Plan which added the SAR
fundamentally altered the nature of the Options.
[62]
The essence of the Respondent’s argument is that the SAR must be
viewed as a right that is distinct from the Options such that the disposition
of the SAR gave rise to an income amount.
[63]
With respect, I disagree with this proposition. As noted earlier,
the granting of the SAR did not negate RCI’S promise to issue shares under the
terms of the Plan. The SAR had no function or force independent of the Options.
It was an added feature that allowed Mr. Rogers to elect to surrender the
Options for a consideration that was the Surrender Payment.
[64]
Its sole purpose was to allow for the disposition of the Options instead
of their simply being exercised, which latter would have resulted in greater
share dilution. For these reasons, the SAR cannot be considered separate
property.
Mr. Rogers’ Conduct
[65]
Applying the tests outlined in Baird, the first question
is whether Mr. Rogers dealt with the Options in the same way as a dealer
would.
[66]
The Respondent says the answer to that question is yes because
Mr. Rogers waited until the last possible day to dispose of his Options in
consideration of the Surrender Payment.
[67]
With respect, I disagree with the Respondent’s portrayal of how
traders deal with options. Traders use options for a variety of purposes. The
Options held by Mr. Rogers are commonly referred to as call options. A call
option allows a holder to buy a security at a fixed price within a specific
period of time.
[68]
A call option also allows a trader to leverage his bet that the
underlying securities will rise in value over a short period of time. A trader
does this by risking only the option price rather than employing capital equal
to the full price of the security.
[69]
In most cases, a trader will dispose of the option when he is
satisfied with the increase in the money value or profit to be realized through
the sale of the option. Mr. Rogers did not behave in this manner. He held
the Options right up to the last moment and surrendered them when they were
about to expire.
(1)
Nature of the Property
[70]
The Options were incapable of providing income, often
considered a hallmark of capital property. This alone, however, is not
sufficient to preclude the Options from being capital property. Support for
this proposition can be found in section 49 of the Act, which regulates, inter
alia, the tax treatment of options that are exercised or have expired.
Section 49 of the Act
is found in Part I, Division B, Subdivision c entitled “Taxable
Capital Gains and Allowable Capital Losses”. Section 49 recognizes that
options to acquire property may be capital property depending on the
circumstances surrounding the acquisition and disposition of the options.
(2) Mr. Rogers’ Intent
[71]
The evidence shows that Mr. Rogers held the
Options for ten years and surrendered them to RCI for the Surrender Payment
shortly before the Options expired.
[72]
When the Options were granted to Mr. Rogers, the
Plan did not provide for a SAR. I surmise that, but for the addition of the SAR
almost ten years after the grant of the Options, Mr. Rogers would have
eventually exercised the Options and added the additional shares to his
considerable shareholdings in RCI. The Respondent accepts that, had he done so,
the shares received by Mr. Rogers would have been capital property and a
taxable capital gain or loss would have been realized or incurred on a
subsequent disposition of the shares.
There is nothing in the record to suggest that Mr. Rogers acquired the Options
with the intent of disposing of them or the underlying shares for cash.
[73]
In light of the above, I am satisfied that the
Surrender Payment was not profit from an adventure in the nature of trade.
(3) New Argument
[74]
On August 29, 2014, almost three and a half
months after the hearing of this appeal, the Appellant brought a motion for
leave to amend its Notice of Appeal in order to put forward a new argument (the
“New Argument”), namely that Mr. Rogers mistakenly
treated the Surrender Payment as a capital gain. According to the Appellant,
this New Argument merits my consideration because it is based on the outcome in
Mathieu c. La Reine,
a recent decision of this Court released on June 27, 2014.
[75]
I dismissed the Appellant’s motion for the
reasons outlined in my order, which I will not repeat here. However, I would
like to make two observations. First, in Mathieu, the Court did not
address the question whether the surrender of the options by the appellant therein
gave rise to a capital gain. This issue was not raised by the parties nor was
it considered by the Court.
[76]
While subsection 7(3) of the Act deems there to
be no benefit when options are disposed of, this deeming provision applies only
for the purposes of section 6 of the Act. It is important to note that a
capital gain is not defined in the Act as a gain arising or resulting from the
disposition of capital property. Instead, subsection 39(1) defines a capital
gain broadly as “the taxpayer’s gain . .
. from the disposition of any property” other than property specifically
excluded under that provision (“Excluded Property”). Recognizing the potential for
overlap with other sections of the Act, the legislator chose to specifically
exclude gains that are otherwise included in income under section 3.
[77]
In the case at bar, Mr. Rogers realized a gain
from the disposition of the Options. The Options are property. They are not
Excluded Property. Because of subsection 7(3) of the Act, no part of the gain
was otherwise included in income under section 3. Therefore, the gain is a
capital gain for the purpose of section 39. Consequently, Mr. Rogers was
correct in considering that he realized a capital gain corresponding to the
amount of the Surrender Payment received as proceeds of disposition for his
Options.
[78]
For all of these reasons, the appeal is allowed
and the reassessment is vacated.
Signed at Toronto, Ontario, this 25th day of November 2014.
“Robert J. Hogan”
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