Tedmon v. MNR, 91 DTC 962, [1991] 2 CTC 2128 (TCC)

Beaubier, T.C.J.:—This appeal was heard at the City of Toronto, Ontario, on May 2, 1991.

At the opening of trial, parties filed an agreed statement of facts which reads as follows:

1. Dr. Tedmon was employed as a scientist and subsequently as a Research and Development Manager at General Electric Company (“GE”) during the period June, 1964 through February, 1987. All of Dr. Tedmon's employment activities during this period were exercised in the United States.

2. GE is a corporation incorporated in the United States.

3. Throughout the period June, 1964 through February, 1987, Dr. Tedmon was a citizen of and resident in the United States. At no time in or prior to this period was Dr. Tedmon resident in or employed in Canada.

4, Under the terms of his employment by GE, Dr. Tedmon was entitled to participate in the GE employee Stock Option Plan (the "US Stock Plan”).

5. Dr. Tedmon chose to terminate his employment with GE in February, 1987. G.E. agreed that Dr. Tedmon would continue, notwithstanding his termination, to be able to exercise the options granted to him up to that time.

6. Dr. Tedmon did not receive any options from GE after February, 1987.

7. In March, 1987, Dr. Tedmon began working for Noranda Inc. in Canada. Nor- anda Inc. is a Canadian corporation that is unrelated to GE.

8. In March, 1987, Dr. Tedmon moved to and became resident in Canada, and was resident in Canada throughout 1988.

9. In 1988 Dr. Tedmon exercised certain of his options under the US Stock Plan and acquired 12,000 GE shares.

10. The Minister of National Revenue (the "Minister") assessed Dr. Tedmon's 1988 taxation year on the basis that his US Stock Plan options resulted in a benefit that was employment income subject to tax under the Income Tax Act (Canada). This benefit was valued by the Minister on the basis of the difference between the value of the GE shares on the date that they were acquired and the exercise price under the US Stock Plan.,

11. Dr. Tedmon filed a Notice of Objection in respect of his 1988 assessment on the grounds, inter alia, that his rights under the US Stock Plan accrued while he was a U.S. resident employed in the U.S. by a U.S. employer and, as such, any benefit derived therefrom was not subject to taxation in Canada.

12. By Notice of Reassessment dated July 12, 1990, the Minister disallowed Dr. Tedmon's objection.

There was no other evidence.

The principal argument between the parties centres on section 7 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the “Act’”) which, for purposes relevant to this appeal, reads:

(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 by him shall be deemed received by the employee in the taxation year in which he acquired the shares.

Subsection 7(4) of the Income Tax Act then states, in essence:

. . . where a person . . . has ceased to be an employee before all things have happened that would make the provision applicable, subsection (1) shall continue to apply as though the person were still an employee and as though the employment were still in existence.

The appellant argues this does not apply to a Canadian resident taxpayer where the agreement was entered into by him while he was a non-resident with a non-resident employer and cites Henry Russell Hewitt v. M.N.R., [1989] 2 C.T.C. 2278; 89 D.T.C. 451, as the authority for this proposition. In that case, Mogan, T.C.J. states at page 2279 (D.T.C. 452) that the taxpayer, Hewitt, was not liable in respect to income which was not earned or did not accrue when the appellant was a resident in Canada. In fact that income accrued on May 25, 1984, while Mr. Hewitt was still in Libya when: ”. . . he signed all the documents connected with the amicable termination of his employment by Oasis Oil and requested a single cash payment out. . .”.

Thus, Mr. Hewitt exercised all his rights and entitlement to income and receipt thereof while a non-resident of Canada. He also directed where the cheque was to go at that time.

The appellant's second argument is that article XV of the Canada-United States Income Tax Convention, 1980 prohibits Canada from taxing any deemed benefit arising from the exercise by Dr. Tedmon of his options; in essence the appellant says that paragraph 1 of article XV provides that remuneration derived by a resident of the United States in respect to employment shall be taxable only in the United States unless the employment is exercised in Canada. "Derived" in the sense of the Convention is then argued to mean "accruing", based on M.N.R. v. Hollinger North Shore Exploration Co., [1963] S.C.R. 131; [1963] C.T.C. 51; 63 D.T.C. 1031 at 54 (D.T.C. 1033; S.C.R. 134), whereupon the appellant argues further that "derived" refers to the source of income, rather than the receipt of income: Bessemer Trust Co. v. M.N.R., [1972] C.T.C. 473; 72 D.T.C. 6404. The consequence of these steps is the proposal by the appellant that article XV refers to the residence of the taxpayer when the option is granted (which is the year the benefit is derived or accrued) with the result that the appellant is not taxable in Canada.

A third (alternate) argument is that subsection 48(3) of the Income Tax Act causes a value of the option to be taken at the time the appellant becomes a Canadian resident and thus, Dr. Tedmon should only be taxed on the increase in the value of the shares which occurred while he was a resident of Canada.

In reply, counsel for the respondent refers to subsection 5(1) of the Income Tax Act which states:

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 him in the year.

Mr. Justice Dickson of the Supreme Court of Canada said of this:

Subsection 5(1) of the Act is worth noting. It defines the taxpayer's income from employment as the salary, wages and other remuneration received. The liability is at the point of receipt.

[Emphasis added.]

Gene A. Nowegijick v. The Queen, [1983] C.T.C. 20; 83 D.T.C. 5041 (S.C.C.) at 23 (D.T.C. 5043).

Thus, Mr. Justice Dickson fixes the liability under subsection 5(1) as at the point of receipt. It is to be noted that paragraph 7(1)(a) refers to "the taxation year in which ne acquired the shares", rather than the taxation year in which he acquired the agreement or option. Dr. Tedmon acquired the shares when he exercised the option while a resident of Canada in 1988.

The counsel for the respondent deals with the appellant's second argument by quoting article XV as to the following:

. . . salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State.

He then says that at the time of exercise of the option Dr. Tedmon was a resident of Canada, was not employed in the United States, and is taxable pursuant to section 7 of the Act.

The Court accepts the respondent's argument on this point, having regard to the provisions of subsection 7(1) and subsection 5(1) and to the determination of Mr. Justice Dickson already quoted.

The appellant's alternate argument that the option was capital and not income on immigration has been dealt with by the Federal Court of Appeal when it approved the Trial Division's statements in Vincent N. Hurd v. The Queen, [1981] C.T.C. 209; 81 D.T.C. 5140 at 214 (D.T.C. 5143). There, the majority adopted the following quotation:

. . . plaintiffs transaction was neither a sale nor an exchange of capital assets. He acquired shares at a price previously set under an option and thus benefited from their increased value, a benefit taxable under this Act as having been made by virtue of his employment in Canada. The mere fact that he only exercised his option after he left Canada does not transform the taxable benefit into something else.

The appellant exercised his option and received a benefit from his previous employment while he was a resident in Canada. This falls within the ordinary meaning of section 7 of the Income Tax Act read within the context of the Act and the Convention.

The appeal is dismissed.

Appeal dismissed.