Mansfield v. The Queen, 83 DTC 5136, [1983] CTC 97 (FCTD), aff'd 84 DTC 6535, [1984] CTC 547 (FCA)

Mahoney, J:—The issue is whether, upon conversion in 1977 of a debenture purchased from his employer in 1972, the plaintiff received a taxable benefit in the amount of $6,577.25, being the difference between the value of the shares acquired on conversion and the cost of the debenture.

The plaintiff was, at all material times, an employee of V K Mason Construction Limited, hereafter “Mason”. Mason was, and is, a private company. In December, 1972, the plaintiff was among the employees offered convertible debentures by Mason. He was offered a debenture in -the principal amount of $5,000 bearing interest at 7 /2% per annum, at a price of $5,125. The offer was similar to offers made to other employees at the time and to employees at other times, both before and since. Such offers have been made only to employees who, from time to time, meet criteria set by Mason.

Having regard to the evidence as to interest rates prevailing in late 1972, I am satisfied that $5,125 was a fair value for the debenture when purchased. The plaintiff availed himself of an arrangement Mason had made with its bank to finance his purchase of the debenture. The bank lent the plaintiff $5,125 at 7 /2% per annum and he hypothecated the debenture to the bank as security for the loan. Mason guaranteed repayment of the loan and, as security, deposited an amount equal thereto in an account with the bank bearing interest at 5 /2% per annum. I consider the price of the debenture and the financing arrangements irrelevant in this action. It is not the benefit, if any, conferred on the plaintiff in 1972 that is in issue. Furthermore, I reject the defendant’s argument that, the effect of the arrangement being that Mason netted no cash from sale of the debenture, the debt instrument was not really a debenture. It was; Mason still owed the plaintiff $5,000, payable according to its terms. It was no sham.

The debenture was dated December 29, 1972, and matured October 31, 1982. It was not convertible, in whole or part, between the date of issue and September 30, 1977. During the period commencing on October 1, 1977, and ending on October 31, 1977, it was convertible into 105 common shares, as constituted September 30, 1972, for each $1,000 principal amount. It was not convertible after October 31, 1977. The plaintiff exercised his right of conversion and was issued 525 common shares in October, 1977. The defendant pleads, and it is neither denied or disproved, that their fair market value was then not less than $11,702.25.

The defendant relies on paragraph 7(1 )(a) and, alternatively, subsection 245(2) of the Act. The plaintiff relies on section 51. The material portions of those provisions follow.

7. (1) . . . where a corporation has agreed to sell or issue shares of the capital stock of the corporation . . . to an employee of the corporation . . .

(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;

245. (2) Where the result of one or more sales, exchanges, declarations of trust, or other transactions of any kind whatever is that a person confers a benefit on a taxpayer, that person shall be deemed to have made a payment to the taxpayer equal to the amount of the benefit conferred notwithstanding the form or legal effect of the transactions or that one or more other persons were also parties thereto; and, whether or not there was an intention to avoid or evade taxes under this Act, the payment shall, depending upon the circumstances, be

(a) included in computing the taxpayer’s income for the purpose of Part I,

51. Where shares of one class of the capital stock of a corporation have, after May 6, 1974, been acquired by a taxpayer in exchange for a capital property of a taxpayer that was a share, bond, debenture or note of the corporation (in this section referred to as a “convertible property”) the terms of which conferred upon the holder the right to make the exchange and no consideration was received by the taxpayer for the convertible property other than shares of that class,

(a) the exchange shall be deemed not to have been a disposition of property,

and

(b) the cost to the taxpayer of the shares shall be deemed to be the adjusted

cost base to him of the convertible property immediately before the exchange.

It is also pertinent to refer to paragraph 53(1 )(j).

53. (1) In computing the adjusted cost base to a taxpayer of property at any time, there shall be added to the cost to him of the property such of the following amounts in respect of the property as are applicable:

(j) where the property is a share in respect of the acquisition of which a benefit was deemed by section 7 to have been received by the taxpayer in any taxation year ending after 1971 and commencing before that time, the amount of the benefit so deemed to have been received;

The evidence of James Bruce Pitblado, chairman of Dominion Securities Ames, is that a convertible debenture is a well known instrument in financial markets. It is a debt security carrying certain contractual rights including the right to exchange it for something else at the option of its owner.

“Agree” and “agreement” are not terms of art or technical expressions. I am satisfied that, in purchasing the debenture from his employer, the Plaintiff obtained its agreement to convert the debenture to its shares according to its terms. Unless excepted by section 51, his conversion of the debenture was an acquisition of shares within the contemplation of subsection 7(1). Subsection 245(2) adds nothing and, if section 51 provides an exemption at all, the exemption extends equally to a transaction within its contemplation.

I do not see how section 51 can be interpreted as exempting the share acquisition from taxation pursuant to subsection 7(1). What section 51 does is deem the conversion not to have been a disposition of the debenture and deem the plaintiff's costs of the shares to be the adjusted cost base of the debenture immediately before conversion. It says nothing directly of whether or not the exchange has a taxable consequence. That must be found elsewhere and, in the particular exchange, is to be found in subsection 7(1). Parliament, in enacting paragraph 53(1 )(j), clearly contemplated that a transaction might lead both to the receipt of a benefit by virtue of employment, taxable as income in the year of its receipt, and to the acquisition of a property, the gain or loss on disposition whereof would be taxable or allowable, as the case may be, in the year of its disposition.

JUDGMENT

The action is dismissed with costs.