Re MNR and Chrysler Canada Ltd., 91 DTC 5526, [1991] 2 CTC 156 (FCTD)

Strayer, J.: —

Relief Requested

This is an application by the Minister of National Revenue under subsection 174(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") which when the application was made provided as follows:

174.(1) Where the Minister is of the opinion that a question of law, fact or mixed law and fact arising out of one and the same transaction or occurrence or series of transactions or occurrences is common to assessments or proposed assessments in respect of two or more taxpayers, he may apply to the Tax Court of Canada or, with the concurrence of the taxpayers involved, to the Federal Court- Trial Division for a determination of the question.

The question for determination is:

Whether the Chrysler Employee Stock Ownership Plan was

(a) an "employee benefit plan" as defined in subsection 248(1) of the Act, and referred to in paragraph 6(1)(g), or

(b) an agreement to sell or issue shares to employees within the meaning of section 7.

Facts

The essential facts are not in dispute. In the application the Minister set out the following facts which he assumed to be true.

(a) The Respondent Chrysler Canada Ltd. (“Chrysler Canada") is a taxable Canadian corporation that is a wholly-owned subsidiary of Chrysler Corporation ("Chrysler"), a United States corporation.

(b) The Respondents John Phaneuf, Norman Beaudoin, Leonard Bourque, Simion Bolohan, Russell Peterson, Steve Horvath, William Bridgeman and Louis Bulat (the "Employees") are employees or former employees of Chrysler Canada.

(c) In 1979, Chrysler was in severe financial difficulty. It embarked upon a series of cost cutting measures, and sought and received government assistance. It also sought and received wage concessions from its employees.

(d) United States government assistance was granted by Congress which passed the Chrysler Corporation Loan Guarantee Act of 1979, Public Law 96-185 of January 7, 1980 (the "Loan Act"),. . .

(e) As a result of receiving the government assistance and wage concessions, Chrysler acted under the Loan Act and created the Chrysler Employee Stock Ownership Plan ("ESOP"),. . . and entered into the Chrysler Employee Stock Ownership Plan Trust Agreement (the "Trust"),. . . with the Manufacturers National Bank of Detroit (the "Trustee").

(f) Under ESOP, Chrysler issued new common shares which it contributed to the Trust. Some of the shares were contributed for the benefit of Chrysler employees, and others were for the benefit of Chrysler Canada employees.

(g) Chrysler Canada reimbursed Chrysler for that portion of the Chrysler shares contributed for the benefit of Chrysler Canada employees.

(h) Chrysler Canada applied to Revenue Canada, Taxation for an advance ruling concerning the reimbursement it made to Chrysler for the Chrysler shares contributed by Chrysler to the Trust for the benefit of Chrysler Canada employees.

(i) On May 5, 1981 Revenue Canada, Taxation issued an advance ruling (the "Ruling"),. . .

(j) By 1984, Chrysler's financial situation had improved, and the fair market value of Chrysler shares had increased significantly.

(k) ESOP was terminated in January 1986, and the Trustee distributed the Chrysler shares to the employees. Some employees chose to retain the shares, and others chose to receive the cash value of the shares.

(l) When the Trustee distributed the Chrysler shares to the employees, the fair market value of the shares was higher than when they had been contributed to the Trust.

(m) The Respondents John Phaneuf, Norman Beaudoin, Leonard Bourque and Simion Bolohan were in bargaining groups represented by the Canadian Auto Workers' Union (the "Union"), the successor to the International Union, United Auto Workers.

(n) The Respondents- Russell Peterson, Steve Horvath, William Bridgeman and Louis Bulat were not covered by a collective agreement.

(o) The Respondents Norman Beaudoin, Leonard Bourque, William Bridgeman and Louis Bulat were employed by Chrysler Canada on the date ESOP was terminated. The Respondents John Phaneuf, Simion Bolohan, Russell Peterson and Steve Horvath had retired prior to that date.

(p) The Respondents Norman Beaudoin, Simion Bolohan, Russell Peterson and William Bridgeman chose to retain the Chrysler shares. The Respondents John Phaneuf, Leonard Bourque, Steve Horvath and Louis Bulat chose to receive the cash value of the Chrysler shares.

(q) When assessing Chrysler Canada, the Minister allowed it to deduct from income the reimbursements it made to Chrysler in respect of the Chrysler shares contributed by Chrysler to the Trust for the benefit of Chrysler Canada employees.

(r) The Minister assessed the Employees on the basis that they received a taxable benefit in respect of the Chrysler shares distributed by the Trustee, and on the basis that any increase in value in the Chrysler shares, between the dates they were contributed to and distributed from ESOP, was income to the Employees, not a capital gain.

The application states that it is the Minister's understanding that the employees believe certain other relevant facts to be:

(a) Under ESOP, Chrysler issued new common shares which it contributed to the Trust, and the Trustee allocated those shares to the accounts of eligible individual employees. The basic features of ESOP are described in a Chrysler document dated January 5,1980

(b) The effective date for implementation of ESOP was July 1, 1980.

(c) ESOP had a proposed term of four years. Each plan year began on July 1st and ended on June 30th.

(d) The terms of ESOP required Chrysler to contribute to the Trust, before June 30th of each plan year, shares having a market value of not less than $40,625,000.00.

(e) Over the four year term of ESOP, Chrysler was required to contribute shares having a total value of not less than $162,500,000.00.

(f) As soon as practicable after the end of the plan year, the Trustee divided the shares equally among all eligible employees by crediting those shares to accounts in the name of individual employees.

(g) As soon as practicable after the end of the plan year, employees received a statement of account showing the number of shares allocated to their account for that plan year and the market value of those shares.

(h) Employees were entitled to direct the Trustee on how to vote the shares held in their accounts at any Chrysler shareholders' meeting.

(i) Some employees did, in fact, exercise their right to vote their shares at Chrysler shareholders' meetings.

(j) Any dividends earned on shares held in an employee's account were invested by the Trustee in additional shares of Chrysler. Those shares were also allocated to the particular employee's account.

(k) When ESOP became effective on July 1, 1980 only employees of Chrysler were eligible to participate. This appears from a letter dated March 31, 1980 from Chrysler to the United Auto Workers, Employees of Chrysler Canada initially chose not to participate.

(l) However, by letter dated January 14, 1981 from Chrysler to the United Auto Workers,. . . employees of Chrysler Canada became eligible to participate in ESOP retro-active to the plan year commencing July 1, 1980.

(m) A new plan was not implemented for employees of Chrysler Canada. Rather, those employees simply became eligible to participate in the existing ESOP established pursuant to the Loan Act. Chrysler Canada reimbursed Chrysler for those Chrysler shares allocated to the accounts of Chrysler Canada employees.

(n) Accordingly, shares contributed to ESOP by Chrysler for the plan years 1980 and 1981 were allocated to the accounts of Chrysler Canada employees. Those employees received statements of account shortly after the end of the plan year verifying the number and value of their shares.

The Minister states that while he does not rely on these further facts he does not dispute their accuracy except to the extent that they may be inconsistent with the facts quoted earlier upon which he relies.

Various documents were attached as exhibits to the application including the Chrysler Corporation Loan Guarantee Act of 1979 passed by the U.S. Congress, a document entitled "Chrysler Employees Stock Ownership Plan” issued by the Chrysler Corporation, the "Chrysler Employees Stock Ownership Plan Trust Agreement" entered into between Chrysler Corporation and the Manufacturers National Bank of Detroit which was designated to act as the trustee under that agreement, an advance ruling given by the Department of National Revenue on May 5, 1981 which is consistent with the subsequent assessments made by the Minister, and a letter of January 14, 1981 from Chrysler Corporation to a vice-president of the United Auto Workers confirming that it had been agreed (presumably between Chrysler Corporation and the union) that eligible current employees in Canada of the Corporation (presumably of Chrysler Canada) who were covered by the "1979 National Agreements" (presumably collective bargaining agreements) would begin participation in the ESOP on July 1, 1980.

Other evidence presented at the trial of this matter was to the effect that non-unionized Canadian employees had been in the ESOP from its inception and that they remained in it until it was terminated. Most if not all of the unionized Canadian employees opted out of the plan effective June 30, 1982, the end of a plan year. While there were some 10,505 Canadian employees in the plan up to that date, thereafter there were between 1,400 and 1,500 employees in the plan. As I understand it, no Canadian employees would have been entitled to have shares actually distributed to them or their estates until the ESOP was terminated in January 1986, at least unless they had either died or ceased to be employed by Chrysler Canada prior to that time.

I will refer to other details of the scheme in the course of my conclusion.

Issues

The Minister of National Revenue and Chrysler Canada take the position that the ESOP was an "employee benefit plan”, which is defined in subsection 248(1) of the Income Tax Act as follows:

“employee benefit plan",—"employee benefit plan" means an arrangement under which contributions are made by an employer or by any person with whom the employer does not deal at arm’s length to another person (in section 18 and 32.1 referred to as the "custodian") and under which one or more payments are to be made to or for the benefit of employees or former employees of the employer or persons who do not deal at arm's length with any such employee or former employee . . .

If the ESOP comes within that definition, then by virtue of paragraph 6(1)(g) of the Income Tax Act the employees of Chrysler Canada to whom shares or their cash value were distributed in 1986 (or at some earlier date in respect of employees who retired or died before 1986) would have to include in computing their income for the year of receipt the cash received in lieu of shares. This is because paragraph 6(1)(g) requires the inclusion in the income of a taxpayer of

the aggregate of all amounts each of which is an amount received by him in the year out of or under an employee benefit plan or from the disposition of any interest in any such plan . . .

As I understand it, many of the shares had greatly increased in value between the time when they were put into the ESOP and allocated to the accounts of employees and the time when they were actually distributed to the employees, mostly in 1986. If the Minister and Chrysler Canada are right in their contentions, then by virtue of paragraph 6(1 )(g) the employees would have to treat the full enhanced value of the shares when actually distributed as income.

On the other hand the employees contend that the scheme falls within section 7 of the Income Tax Act as an agreement to issue shares to employees. That section provides in part as follows:

7.(1) Agreement to issue shares to employees. —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,

(a) if the employee has acquired shares under the agreement, a benefit equal to the amount by which the value of the shares at the time he acquired them exceeds the amount paid or to be paid to the corporation therefor by him shall be deemed to have been received by the employee by virtue of his employment in the taxation year in which he acquired the shares;

(2) Shares held by trustee.—Where a share is held by a trustee in trust or otherwise, either absolutely, conditionally or contingently, for an employee, the employee shall be deemed, for the purposes of this section and paragraphs 110(1)(d) and (d.1),

(a) to have acquired the share at the time the trust commenced so to hold it;

If the scheme comes within subsection 7(1) as an agreement by Chrysler Corporation to issue shares to the employees of Chrysler Canada (a corpora- tion with which Chrysler Canada does not deal at arm's length), then by paragraph 7(2)(a) the employees will be deemed to have acquired the shares at the time the trustee commenced to hold such shares, that is when they were transferred to the trustee and allocated to the accounts of individual employees. If this is the correct characterization of the scheme, then the employees would be deemed to have acquired the shares in question here during plan years when the value of the shares was lower. Any increase in value between those dates and the date of actual distribution would then presumably be treated as a capital gain.

Conclusions

I have been invited by counsel to address the issue of onus of proof and I shall do so to confirm that I have taken it into account in reaching my decision. The respondent employees contend that the normal onus of proof which is put on the taxpayer to demonstrate that the Minister's assessment is wrong should not apply in this case. It is argued that this is not a taxpayer's appeal but a reference initiated by the Minister, and that while it may be appropriate to place the onus on a taxpayer who appeals his assessment this is not appropriate where the Minister initiates the proceeding. Counsel for the employees observed that the Minister had had a choice as to whether to invoke section 174, but having done so he had undertaken the onus of proof.

It appears to me that the onus should remain on the taxpayer. While such a proceeding is referred to as a "reference", it is authorized by subsection 174(1) which is quoted above. It will be noted that what is sought under subsection 174(1) is "a determination of the question” which is common to several assessments arising out of the same transaction. It is significant that it is a "determination" and not an "opinion" which is sought. Further, it is clear from subsections 174(2) and 174(4) that the determination is binding on the parties to the proceeding. This is not strictly speaking true of an opinion rendered on a reference, if the analogy being drawn is to the references made by the federal and provincial cabinets to courts of various questions of law or fact. It appears to me that the rationale adopted by the majority in the Supreme Court in Johnston v. M.N.R., [1948] S.C.R. 486 [1948] C.T.C. 195; 91 D.T.C. 1182 at 203 (D.T.C. 1183; S.C.R. 489) is applicable here: that notwithstanding the form of the proceeding, the essence is that of a challenge to an assessment made by the Minister on the basis of certain assumptions with respect to the facts and the law, and the onus is on the taxpayer to demonstrate that those assumptions are wrong. That the Minister has taken the initiative in bringing the matter before the Court because many assessments arising out of the same transaction are in dispute does not, in my view, affect the onus on the taxpayer to demonstrate the errors of the assessments.

I believe that the employees here have met the onus of establishing, at least, that the issue of shares by Chrysler for their benefit came within subsection 7(1) of the Income Tax Act. What was involved here was an issue of shares by Chrysler Corporation, not a sale, and it was an issue to employees of Chrysler Canada, a corporation with which Chrysler Corporation does not deal at arm's length, Chrysler Canada being a wholly-owned subsidiary of Chrysler Corporation. While the circumstances are somewhat unusual, it appears to me that it was indeed an "agreement" between these employees and Chrysler Corporation.

It is true that Chrysler Corporation did not sit down and negotiate the terms of the ESOP with these employees, nor seemingly did either Chrysler Corporation or the employees initiate the idea of an ESOP. As conditions of a loan guarantee by the U.S. government to assist Chrysler, Congress required by the Chrysler Corporation Loan Guarantee Act of 1979 that Chrysler's unions accept rollbacks of previously negotiated collective bargaining agreements in the amount of $462,500,000 and that Chrysler establish an Employee Stock Ownership Plan involving contributions by Chrysler Corporation of not less than $162,500,000 over four years starting in 1980. It is true that both the unions and Chrysler could have refused to meet these conditions but if they had refused the company would not have obtained the financial aid it required and might have had to close down. The evidence seems clear that unionized Canadian employees agreed to make concessions early in 1981 partly in return for a right of participation in the ESOP. Similarly, non-unionized employees voluntarily agreed to wage concessions in return for participation in the ESOP from the outset of the Plan. The Minister himself admits the quid pro quo relationship between the wage concessions and the ESOP. In paragraph 4(e) of his application, quoted above, the Minister states his assumption that

(e) as a result of receiving the government assistance and wage concessions Chrysler. . . created the Chrysler Employee Stock Ownership Plan . . .

[Emphasis added.]

On cross-examination of Chrysler Canada's own witness, William Loebach, Manager of Benefits, Hourly Compensation and Employment, the following was elicited:

Q. The first time that any Canadian bargaining unit employees made concessions resulting in their inclusion in ESOP is in the fall of 1980?

A. I believe officially it was in January of ‘81.

Q. Negotiations are in the fall and it’s confirmed by an agreement in January of 1981?

A. Yes

Q. That agreement was between Chrysler Corp, and the international union meaning the U.A.W.?

A. And it included both Canadian and U.S. employees. [1]

Q Until 1980, the fall of 1980, when negotiations took place for concessions in Canada the Canadian employees had not been part of ESOP even though American employees had been covered. They were excluded, correct?

A. That's true with respect to the union employees, yes.

Q. Let's deal with the non union employees. They had voluntarily agreed to wage concessions earlier than that and in exchange for those wage concessions they were included in ESOP right from its commencement?

A. That's correct.

Q. Now, inclusion in ESOP for the bargaining unit employees continued until the end of the 1982 plan year as that's defined under the plan, correct?

A. Yes. Continued right through to the end of the collective agreement.

Q. At the end of that collective agreement as is usual there was further negotiation about terms of employment, correct?

A. Correct.

Q. In the course of those negotiations the final agreement was that ESOP would no longer apply to Canadian bargaining unit employees and you said that they got an increased wage compensation package which was used to justify taking them out of ESOP, correct?

A. That's right. [2]

Whether or not the collective bargaining agreement can be seen as a binding contract per se, and this point was not argued before me (nor was any issue of lack of privity or consideration), it is fair to infer that unionized employees continued to work for Chrysler Canada on the implied condition that they would be entitled to the compensation negotiated by the union including participation in the ESOP. Similarly non-union employees must be taken to have made concessions and continued employment on the same basis, these conditions being implied in terms of their individual contracts of employment.

It should be noted that the Minister's admission, and the clear evidence from a Chrysler Canada witness, of a trade-off relationship between the ESOP and wage concessions appear to be in direct contrast to an assumption upon which the Revenue Canada ruling of May 5, 1981 was based. In the statement of assumed facts upon which that ruling was based is the following passage.

8. The Canadian resident employees of Chrysler's subsidiaries and affiliates, whose compensation and benefits were modified as provided in the Loan Act, have no option as to whether or not they will participate in the Plan. Their participation is not a result of any bargaining on their part but rather at the sole discretion of Chrysler which established the classes of beneficiaries in intended compliance with the Loan Act. . .

I have considered carefully the statements by way of obiter dicta by J.O. Weldon in Fowler v. M.N.R. (1963), 32 Tax A.B.C. 353; 63 D.T.C. 600 at 356-67 (D.T.C. 603). concerning the meaning of "agreement" in the predecessor to the present subsection 7(1). With respect I am unable to find in the words of the subsection the restrictive sense of the word "agreement" which he adopts there. He started with the assumption, based on the argument by the representative of the Minister, that subsection 7(1) is intended to cover only stock option agreements. He sees section 7 as confined to the selective provision of special benefits based on performance. From this he concludes that there must be a "separate formal agreement with each employee" which the company wishes to benefit, an agreement which should be "carefully executed by the company and the employee". I am unable to find language in the subsection to support that conclusion. I can see no reason why the "agreement" referred to cannot be an oral agreement or an implied agreement—even an implied agreement based on a collective bargaining arrangement which, the evidence indicates, existed in the present case.

Although in my view an agreement existed within the meaning of subsection 7(1), if that subsection stood alone there could be serious doubt as to its application to the ESOP in question here. Subsection 7(1) requires, for present purposes, that a corporation issue shares “to an employee" and paragraph 7(1)(a), which determines the year of taxability, refers to the time at which the employee has "acquired" the shares. The arrangement in question here did not involve the direct issue of shares by Chrysler Corporation to the employees of Chrysler Canada and upon the initial issue of the shares by Chrysler Corporation to the trustee the employees did not "acquire" the shares in the normal sense of that word. There is no evidence that at that stage the shares were ever entered in the names of the employees in the share registry of Chrysler Corporation. Instead, the trustee held the shares as owner and it "allocated" a certain number of shares to the account of each employee. As dividends were received those dividends were converted into shares and credited on a proportional basis to the accounts of the respective employees. The only right which the employees could exercise in respect of the shares was to give instructions, if they wished, as to how the shares should be voted at shareholders' meetings. The employees could not assign, or use as security, the number of shares allocated to them during the years when ESOP existed and they were participants in it.

It appears to me, however, that paragraph 7(2)(a) requires a broader interpretation of such words as "issue . . . to an employee . . .” and "acquired" as found in subsection 7(1). For convenience I will quote again the provisions of paragraph 7(2)(a).

7.(2) Shares held by trustee.—Where a share is held by a trustee in trust or otherwise, either absolutely, conditionally or contingently, for an employee, the employee shall be deemed, for the purposes of this section and paragraphs 110(1)(d) and (d.1),

(a) to have acquired the share at the time the trust commenced so to hold it;

Although counsel for the Minister and Chrysler Corporation took the position that subsection 7(2) could have no bearing on the matter unless it was first found that subsection 7(1) applied, I do not think the matter is that simple. It appears to me that subsection 7(2) provides a special broad interpretation of the words of subsection 7(1), and its effect is to recognize that there can be an "issue" of shares to an employee through a trust and that such shares are deemed to have been "acquired" by the employee when they are acquired by the trust. Further, I believe that the present arrangement falls within the words of subsection 7(2), that is that the shares here were held by a trustee "absolutely, conditionally or contingently, for an employee . . .” It is clear from the description of the plan prepared by Chrysler and the trust agreement, in respect of which documents both union and non-union employees contracted in agreeing to accept rollbacks and continue employment, that the trustee had only a limited role in holding the shares. This role was: to allocate the shares notionally to the employees during the duration of the employee's participation in the plan; to reinvest dividends in further shares which would be similarly allocated and held; and at the end of the plan (or in the case of death or termination of employment of an employee), to distribute the shares themselves to each employee in the numbers allocated to such employee or to sell the shares and give the employee the cash value at that time. It was understood that the duration of the plan would be limited and it was inevitable, if the plan and the trust agreement were implemented by their terms, that each employee would ultimately receive shares of Chrysler Corporation or, at his election, the cash equivalent being the market value of the shares at that time. It does not alter the situation that some of the employees in question here took the cash instead of the shares: they were entitled to the shares on the date of distribution. It therefore appears to me that the trust scheme here provided for shares being held by the trustee “absolutely, conditionally or contingently . . ." for the employees, and I need not determine which of those adverbs is appropriate to describe the arrangement.

Counsel for the Minister and for Chrysler Corporation argued that the ESOP was an "employee benefit plan" within the definition in subsection 248(1) as quoted above and that, such being the case, by virtue of paragraph 6(1)(g) the benefits would be taxable in the hands of the employees when the actual distributions were made from the trust. I accept that the ESOP does also come within the definition of “employee benefit plan”. There was: an "arrangement" (the ESOP and the trust agreement, in reference to which the employees undertook to continue working); under which "contributions" (the issue of shares) were made by a "person" (Chrysler Corporation) “with whom the employer" (Chrysler Canada) did not deal at arm's length, to another "person" (Manufacturers National Bank Detroit, the trustee); and under which arrangement "payments" (the distribution of shares or cash equivalent) would be made for the benefit of employees of the "employer" (Chrysler Canada).

This case was argued essentially on the basis that the ESOP scheme falls within either subsection 7(1) or subsection 248(1). Counsel for Chrysler Canada did suggest that it might fall within neither. The possibility was not addressed that it might fall within both. As I have found that, on its face, the scheme falls within both it appears that there is a potential conflict between the provisions of subsection 7(2) and paragraph 6(1)(g) as to the taxation year in which the shares or their equivalent should be deemed to have been received by the employees. Under subsection 7(2), the value of the shares would be deemed to have been received in the years in which Chrysler Corporation issued shares to the trustee for the benefit of the employees; by paragraph 6(1)(g) the shares or their value would be deemed to have been received by the employees in the year of distribution by the trustee. No argument was addressed to me as to any means of resolving this problem as it was not anticipated to arise. It may be that there are arguments which could be made as to why one section should be applied instead of the other. At this point I can only determine the question put to me by saying that the Employee Stock Ownership Plan was both an "employee benefit plan” as defined in subsection 248(1) of the Act and an agreement to sell or issue shares to employees within the meaning of section 7.

It was agreed at the hearing that I would leave to counsel the preparation of an appropriate order to implement my reasons. If this is now impossible or inappropriate because of the conclusions reached and, if the parties agree, I am prepared to hear argument on the question of whether either section has priority over the other in the taxation of the benefits in question in this case. If the parties are not in agreement that further submissions be made on this subject, then they should proceed to settling the formal judgment on the basis of the foregoing reasons and if necessary address the Court on that issue alone.

In the present circumstances I am not prepared to make any order as to costs. If the parties cannot agree on that matter and wish to make further representations, orally or in writing, they may do so.