Bonner, T.C.C.J.:—This is an appeal from an assessment of income tax for the 1988 taxation year. On assessment the Minister of National Revenue ("Minister") included in income pursuant to subsection 7(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") benefits which he found that the appellant had received upon the acquisition of 29,000 shares of Granville Resources Inc. ("Granville") and 120,000 shares of Jantar Resources Corporation ("Jantar"). The appellant, who was an employee of Granville and a director of Jantar, acknowledged that he was taxable under subsection 7(1) in respect of the acquisition of 9,000 shares of Granville and 30,000 shares of Jantar. As to the remaining shares (the disputed shares) the appellant's position was that no benefit was received by him and that any benefit apparently received by him was not his either in law or in equity. He asserted that the benefits in issue belonged to one John W. White ("White"). The issue is whether the appellant's assertion has been established.
The whole problem arose from an attempt to circumvent the rules of the Vancouver Stock Exchange (V.S.E.). Those rules prevented White, a stock promoter, from acquiring shares of Jantar and Granville directly from those companies under option agreements between himself and the companies. White effectively controlled both Jantar and Granville and traded in their shares. The appellant worked as bookkeeper and office manager of companies in a group controlled by White and was at least subordinate if not subservient to White.
The rules which prevented White from acquiring shares by way of option did not prevent the appellant from doing so. White approached the appellant and suggested that options be granted to the appellant to acquire shares of Jantar and Granville. Under the scheme as proposed some of the shares to be issued following exercise of the options were to be "for the benefit of” the appellant. The rest, namely the disputed shares, were to be for the benefit of White.
The appellant testified that he was to have no control over the disputed shares. White alone was to dictate the timing of the exercise of the options to acquire those shares. The appellant testified further that he was "aware" that the scheme was contrary to the rules of the V.S.E. but that he could see more good coming out of the scheme than harm. He offered a rationalization that, as far as the companies were concerned, arrangements of this type were common and made it easier to raise funds to keep the staff paid and to enable White to promote the shares and receive benefits therefrom. White was more blunt. He testified that he needed "... to gather up sufficient shares . . . to produce a gain, to make it worth my while”.
The shares were issued pursuant to option agreements which appear to have been straightforward. By agreement dated ' as of” January 26, 1987 between Granville and the appellant, Granville granted to the appellant, who was described in the agreement as "the Employee" and who, according to a recital, was employed as"accountant/office manager of the company”, an irrevocable and non-assignable option to purchase 29,000 shares of Granville at $0.40 each. By agreement dated "as of" September 8, 1987 between Jantar and the appellant, Jantar granted to the appellant, who was described in the agreement as "the Director” and who according to a recital was a director of Jantar, an irrevocable non-transferable and non-assignable option to purchase 120,000 shares of Jantar for $.54 each. White was not a party to either agreement. Nothing in either agreement suggested that the appellant was acquiring any of the shares in the capacity of agent or trustee or nominee for White.
The appellant exercised the Jantar option in January of 1988 and the Granville option in March of 1988. In each case the value of the shares at the time of the exercise of the option exceeded the price paid by the appellant under the option agreements. Upon receipt by the appellant of certificates for the disputed shares he endorsed them in street form and deposited them with brokers to the credit of accounts in the name of companies in which White had an interest.
Paragraph 7(1)(a) of the Act reads:
7. (1) 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;
It would seem, at least at first blush, that section 7 applies. Indeed, the appellant did not suggest that it did not apply to those shares which he acknowledged had been acquired by him under the two agreements. However, in relation to the inclusion in the appellant's income of a benefit arising from the acquisition of the disputed shares the following contentions were advanced:
(a) it is not form but substance which governs and, in substance, the appellant did not receive the economic benefit which is a prerequisite to taxability under subsection 7(1);
(b) the appellant acted as White's trustee or agent in acquiring the disputed shares;
(c) the appellant realized a loss on the transfer of the shares to White which loss was equal to the benefit received by the appellant upon the exercise of the option to acquire them.
I will deal first with the assertion that the appellant acted as White's trustee. Counsel for the appellant, speaking of the appellant and of the disputed shares said in argument:
. . . he never had control over them. He never had control over them. There was no way that he could do this under his arrangement. That's what a true trust arrangement is. It would have been criminal of him. He would have gone to jail. Let's not talk about a little slap on the wrists from the Stock Exchange, even if they bothered to do that. I mean he had entered into a trust agreement with his employer and that's exactly what happened. It wasn't his. It never was his.
In my view there is no basis for saying that the shares were impressed with a trust at the time they were issued to the appellant. The appellant received all of the shares in his own right. It was he who was employee of Granville and director of Jantar. He was not employed by White. White was not a party to the option agreements. Although it seems clear that it was White who caused Granville and Jantar to grant the options to the appellant, that circumstance does not on any theory of law that I can think of constitute the appellant as the trustee of the options or of the shares acquired pursuant to them. There was no evidence indicating that the consideration for the issuance of the disputed shares was paid by White to the two companies. Counsel for the appellant did not refer to any authority supporting the contention that a trust arose.
The theory that the appellant acted as White's agent in acquiring the shares is inconsistent with the evidence. In the case of Granville and as well in the case of Jantar there were two separate contracts; one between the appellant and the company pursuant to which the options were granted to the appellant and another between the appellant and White pursuant to which the disputed shares were acquired by White from the appellant for a consideration equal to the appellant's cost. The appellant testified:
I gave Mr. White the right to acquire 20,000 shares from me via an agreement that Mr. White and I had. As far as the assignment as those specific options go, I would say that I did not assign these specific shares.
[Emphasis added.] At another point the appellant testified:
Because the original option agreement which was exercised by myself is in direct relationship with the company and is duly shown in the notes, but we had an ancillary agreement between myself and Mr. White and Granville Resources was not involved in any other way, with the exception that it was shares in that company.
[Emphasis added.] At yet another point the appellant said:
. . . the agreement was a private agreement between Mr. White and myself. It had nothing to do with Granville Resources, and therefore I felt—well, it was not necessary to include in the Notes to the Financial Statement.
[Emphasis added.] White testified:
I had an option with Mr. Stafford for 20,000 shares.
As well the appellant signed “letter agreements" with White in which he purported to grant to White "... the right to acquire from (the appellant) certain shares which (the appellant) may purchase in . . .” Granville in one letter agreement and Jantar in the other. Now these letter agreements were drawn up after the issuance of the assessment now under appeal and were back dated to 1987 but the appellant did testify that they reflected the arrange- ment between himself and White. Thus, on the appellant's own evidence, White was not a party to the option agreements between the appellant and Granville in one case and Jantar in the other. The appellant stood alone in exercising the options, acquiring the shares and incurring liability under subsection 7(1). Had the appellant acted as White's agent in acquiring the shares from the two companies it would have been quite unnecessary to agree to sell the disputed shares to White. They would have belonged to White already.
It must be remembered that it was not in White's interest to create an agency relationship because, if the appellant had acted as White's agent, then it would have been White as principal who acquired the disputed shares from the two companies and a breach of the rules of the V.S.E. would merely have been concealed, not avoided.
I turn next to the argument as to form and substance. Any conclusion as to the substance of a transaction must rest not on words chosen by the parties to describe the transaction or on some loose or imprecise view of what the transaction amounted to. Rather they must rest on the legal nature of the transaction:
. . . the substance is that which results from the legal rights and obligations of the parties ascertained upon ordinary legal principles..... (The Commissioners of Inland Revenue v. The Duke of Westminister,  A.C. 1 at 20-21 per Lord Tomlin)
Counsel for the appellant referred to the decision of this Court in Ralph F. Ingram v. M.N.R.,  2 C.T.C. 2259, 91 D.T.C. 939, and suggested that the Court there looked at substance rather than form. He argued that:
there's nowhere in the Income Tax Act where you are taxed unless you are doing something fraudulent or something wrong on moneys that you receive that weren't yours. These moneys were never his.
Counsel submitted further that “you have to have some economic benefit to pay tax on something you get” and that "there was no economic benefit from this. There was no income for Mr. Stafford to declare”.
and finally that:
the bottom line is the income, that's all that matters. The documents, the form of it, matters nothing. All that matters is the proceeds.
I do not find this line of argument persuasive. It misapplies the doctrine of form and substance and ignores the plain language of section 7 of the Act. The appellant did in point of fact acquire shares under each of the option agreements and, by virtue of paragraph 7(1)(a), he is deemed to have received the benefit which was included in his income. The option agreements between the appellant and Granville on the one hand and Jantar on the other were not shams. The options granted to the appellant by those agreements could not be assigned and were not assigned. Shares were duly issued to the appellant in accordance with the terms of those agreements. In short these are not transactions whereby in substance White, cloaked and disguised as the appellant, received shares from Granville and Jantar pursuant to option agreements. Appearance and reality were the same. White received the disputed shares all right but he received them from the appellant who, by the time he transferred the shares to White, had already incurred liability under section 7.
Counsel's theory that there must be a benefit to the taxpayer from the overall operation for section 7 to apply is inconsistent with the plain language of that provision. Section 7 does not contemplate the calculation of the benefit by reference to the price realized by the employee on the disposition by him of the shares. The argument that the appellant suffered a loss on the transfer of the disputed shares to White is analogous to that rejected in Mersey Docks & Harbour Board v. Lucas (1883), 2 T.C. 25, per Lord Blackburn, at page 33:
There is no ground whatever for saying it, that I can see; there is nothing in the nature of things, there is nothing in the words of the Act, to say that when an income has been actually earned, when an actual profit upon which the tax is put has been earned and received by any person or corporation, Her Majesty's right to be paid the tax out of it in the least degree depends upon what they are to do with it afterwards...
While counsel for the appellant was not able to identify the source of the loss I observe that subsection 8(2) of the Act would appear to prohibit any deduction in the computation of income from employment.
The decision in Ingram is plainly distinguishable. In that case, although there were superficial similarities of fact, it was held on the evidence that the taxpayer who received and exercised the stock option benefits was "either a trustee or an agent in fact if not in law" (page 2263 (D.T.C. 942)).
In light of submissions made I will observe that there is one set of rules for the taxation of income and that those rules apply with equal force to all transactions whether above-board or shady in nature. The Act is not a tool to be used or misused in an effort to enforce the rules of the V.S.E. or to penalize breaches of those rules. However I see no basis for concluding that it has been misapplied in this case. Persons who seek to achieve a certain result and who, for that reason, arrange their legal relationships in a certain way bear a considerable burden when they assert that the relationships are to be ignored for other purposes. It is not enough to say "I was only fooling”.
Finally I will observe that section 7 forms part of the statutory scheme for the taxation of employees on income from employment. It follows of course that section 7 has application only when the agreement between corporation and employee is entered into between corporation and employee as employee. I have considered whether on that basis it could be said that section 7 did not apply to the acquisition of the disputed shares but I have concluded that it did so apply because the granting of the options to the appellant was based on his status or position with Granville and Jantar. It is irrelevant that the appellant intended to confer a different benefit on White by conveying the disputed shares to White at cost.
For the foregoing reasons the appeal will be dismissed with costs to the respondent.