Hogg v. The Queen, 87 DTC 5447, [1987] 2 CTC 257 (FCTD)

Joyal, J.:—The plaintiff-taxpayer appeals from a tax reassessment issued by the defendant on May 24, 1983 covering the 1979 taxation year.

The issue before the Court may be simply stated. It is to determine when were vested to the benefit of the plaintiff under paragraph 6(1)(a) of the Income Tax Act, 1970-71-72, c. 63 as amended, certain employer contributions to an investment plan in which the plaintiff participated.

The Facts

The plaintiff, a professional geologist, was a long-time employee of Hanna Mining Company, doing business out of Cleveland, Ohio. The plaintiff, during his years with Hanna from 1961 to his retirement in 1979, remained a Canadian resident, his duties as a geologist being restricted to mining properties in Canada in which Hanna had an interest. His salary and other benefits, however, were paid from the company's offices in Cleveland.

In 1962, the plaintiff began to participate in the "Investment Plan for Salaried Employees of the Hanna Mining Company and Associated Companies" (the "Plan"). It was a trusteed plan with the National City Bank of Cleveland, acting as Trustee.

The plaintiff participated in the Plan, without interruption, until his retirement in 1979. At that time, the plaintiff received as distribution from the Trustee of the Plan a total of 2,023 shares of Hanna together with a small amount of cash. This distribution represented all the accumulation held by the Trustee for the plaintiff's account.

This distribution represented a value of some $77,000. The Crown considered that a portion of this amount, namely $47,874.34, was income in the hands of the plaintiff received in 1979 and assessed the plaintiff accordingly.

The plaintiff took the position that substantially all of the value of the distribution had vested in him in prior years and were or should accordingly be calculated as income earned in prior years and therefore tax exempt in the year of distribution.

Analysis of the Plan

In a nutshell, the purposes of the Plan were to stimulate Hanna's employees to save on a regular basis and to encourage them to become active shareholders in the company. Its relevant provisions were as follows:

1. The Plan was open to all employees and was on an optional basis (section 2.1).

2. The Plan in essence was an employee savings plan. As provided in section 2.2, the employee could elect to pay a percentage of his salary into the Plan of not less than one per cent and not greater than seven and one-half per cent. Whatever the percentage the employee elected to pay, the employer would pay in a matching amount (section 3.1 and section 4.1).

3. The trustee could then use the combined employer and employee contributions, plus any dividend and interest income exclusively to the employee's account to purchase Hanna shares either in the open market or from Treasury (section 5.1 and section 5.3).

4. After three years' participation in the Plan, the employee could elect to withdraw all shares and cash which had accumulated in his favour, less the amounts attributable to the employer's contributions during the immediately preceding two years. It was understood that the forfeited amounts would be used to offset ongoing employer contributions to the Trust (sections 7.2, 7.3 and 7.6).

5. The employee, however, was entitled to all the amounts accumulated in his account upon any of the following events:

(1) retirement;

(2) death or total disability;

(3) termination of the Plan;

(4) involuntary termination as defined.

(section 7.1).

6. With respect to the employee's company share accumulation in his account, the employee:

(1) was entitled to all dividends accruing thereon; (section 5.3)

(2) could exercise all rights respecting share warrants and options; (section 5.4);

(3) could give directions to the Trustee in any voting on the shares, whether vested to him or not. (section 8.1).

7. The Plan also contained a six-month waiting period before an employee could rejoin the Plan after having withdrawn his shares.

Reporting of Employer's Contributions

It was clearly established at trial and admitted by the parties that for the years 1965 to 1968 inclusive, the employer contributions to the Plan were reported on the plaintiff's Statement of Earnings (T-4) as taxable benefits.

The total employer contributions reported during this period were $5,391.47 spread out more or less evenly over each of the four years.

For the next ten years, however, these contributions were not reported. No evidence was adduced by the plaintiff to explain this nor was the discrepancy raised at any time by the Crown. The Court can only surmise that it was just one of those things. In any event, the Crown took the position, and it should be commended for doing so, that the tax reporting history of these contributions should not have a bearing on the disposition of the case and that the issue should be limited to an interpretation of the vesting provisions of the Plan to determine whether paragraph 6(1)(a) of the Act applied.

The Reassessment

The Minister’s reassessment for the 1979 taxation year increased the plaintiff's income by $47,874.34. This amount was calculated on the basis of the fair market value of 2,023 Hanna shares at the fair market value of 2,023 Hanna shares at $37 (U.S.) per share as at May 25, 1979, the date the shares were distributed or delivered to the plaintiff. To this sum was added a cash amount of U.S. $22.51. There was deducted from the whole amount a sum equal to the plaintiff's own contributions to the Plan and the total of the reported contributions by the employer in the course of years 1965-1968 inclusive.

Findings

As earlier stated, the issue before the Court is to determine when the employer's contributions to the Plan vested in the plaintiff.

Paragraph 6(1)(a) of the Act provides 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 (except the benefit he derives from his employer's contributions to or under a registered pension fund or plan, group sickness or accident insurance plan, private health services plan, supplementary unemployment benefit plan, deferred profit sharing plan or group term life insurance policy) received or enjoyed by him in the year in respect of, in the course of, or by virtue of an office or employment; [Emphasis added.]

The governing words of paragraph 6(1)(a) appear to be "benefits received or enjoyed by the taxpayer". In such event, those benefits are taxable benefits and the tax thereon applies in the year in which they are received or enjoyed.

One of the contributing editors, Brian G. Hansen, in Canadian Taxation, (Don Mills: Richard De Boo Limited, 1981) puts the issue this way at page 136:

[Under section 6(1)(a)] To determine whether an employee "received or enjoyed" a benefit it was necessary to ascertain whether the benefit had vested in the employee. . . . If a benefit vested in an employee, he was taxable on the value of the benefit in the year of vesting. If the benefit did not vest in a particular year, the value of the deferred benefit would be deferred until the benefit vested. . . .

If I should refer to section 7.4 of the Plan which sets out the rules respecting the vesting of employer contributions thereunder, I should find the provisions of paragraph 6(1)(a) of the Act as to receipt or enjoyment of their contributions have been substantially met.

Section 7.4 reads as follows:

7.4 Distributions on termination of employment after 3 years of participation. In the event that an Employee's employment with all of the Employers shall be terminated (otherwise than upon one of the events specified in Section 7.1) after he has completed 3 years of partcipation in the Plan, there shall be distributed to such Employee not later than the last day of the month next following the month in which such termination occurs, the number of shares of stock, and the amount of cash, in his account on the date of such termination, less the number of shares of stock, and the amount of cash, attributable to Employer contributions made in respect of such Employee during the 24-month period immediately preceding the date of such termination. The number of shares of stock, and the amount of cash, so attributable shall be determined by the Company under the supervision of the Committee in the following manner:

(a) Determine the aggregate amount of Employer contributions which have

been made in respect of such Employee during such 24-month period.

(b) Determine the average cost of all shares of stock purchased under the plan during such 24-month period.

(c) Divide the amount determined under paragraph (a) by the average cost determined under paragraph (b). The whole number so determined shall be the number of shares of stock attributable to Employer contributions during such 24-month period. The amount determined by multiplying the remaining fraction, if any, by the average cost determined under paragraph (b) shall be the amount of cash attributable to Employer contributions during such 24- month period. [Emphasis added.]

An analysis of these provisions of the Plan indicates that there is a time-lag in the vesting of the employer's contributions. This time-lag is of a two-year duration. Once it has lapsed, however, the employee's enjoyment of it becomes indefeasable. This is so, both as regard the employer's contributions as well as to the dividend or other income accruing on the shares purchased with these contributions or on the residual cash balances in the hands of the Trustee.

It will also be noted that the Plan specifically sets out that it is only those contributions made by the employer over the two years immediately preceding the date of termination to which the employee is not entitled. It follows logically that throughout an employee's participation in the Plan, the employee's vested rights accrue to him from year to year, with the exception, of course, of the employer's contributions during the last two years. As an example, employer contributions, including earnings of the third year pre- ceding termination and which are made to the Plan in January 1970 became vested in 1972.

It could be argued that the wording of the various provisions of the Plan results in all the employer's contributions remaining in limbo, so to speak, until an employee withdraws from the Plan. This would be an interpretation which I would respectfully suggest goes far beyond what the general language used in the Plan could bear. The Plan makes specific provisions for withdrawal from the Plan at any time, the employee's entitlement to employer contributions being defeasable only as regards the last two years. There follows, in my view, a continuing vesting of these contributions to the benefit of the employee from year to year up to the last two years of participation in the Plan.

I should also find that other provisions of the Plan, including section 5 and section 8, are consistent with the interpretation I have given to it.

There remains the matter of figuring out what portion of the payout received by the plaintiff on his retirement in 1979 constitutes income in his hands in that year. The following breakdown of both employer contributions and earnings thereon for the period of January 1977 to February 1979 is of assistance in this determination.

(1) Converted to Cdn. $ at the month end Bank of Canada spot rate applicable to the month of vesting (Jan. 1.1898; Feb. 1.1955; Mar. 1.1739; April 1.1463).

(2) Converted to Cdn. $ at the date of share delivery as used in Notice of Reassessment, 1.1586).

A calculation of the unvested employer contributions at the date of the plaintiff's retirement discloses cash contributions of $6,211 together with dividend income of $631. Furthermore, in the course of the balance of the year 1979, the plaintiff received as additional dividend income an amount of $933 which his counsel concedes is properly taxable income received in that year. That portion of the total payment received by the plaintiff in 1979 and which constitutes income in the hands of the taxpayer in that year is therefore $7,775.

Judgment

There shall be judgment in favour of the plaintiff setting aside the reassessment of the Minister of National Revenue dated May 24, 1983. The Minister is directed to reassess the plaintiff by reducing the plaintiff's income for the year 1979 accordingly.

The plaintiff is also entitled to his costs.

Appeal allowed in part.