Citation: 2014 TCC 207
Date: 20140627
Docket: 2010-1972(IT)G
BETWEEN:
MICHEL MATHIEU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Paris J.
[1]
These are appeals from
reassessments made by the Minister of
National Revenue
(the Minister) for the 2004 to 2008 taxation years.
[2]
Some issues for the
2004 to 2008 taxation years were settled by the parties before the start of the
hearing in writing in a Partial Consent to Judgment filed by the parties
(Appendix A). The terms of consent will be included in the judgment in this
case.
[3]
The remaining issues
concern the 2004, 2005 and 2006 taxation years in which the appellant’s
deductions under paragraph 110(1)(d) of the Income Tax Act (the
ITA) were disallowed. That provision allows a deduction of 50% of an employment
benefit that is included in the taxpayer’s income under section 7 of the ITA,
which provides for the taxation of stock options granted by an employer to an
employee.
[4]
A deduction under
paragraph 110(1)(d) is only possible if the employer and employee are
dealing with each other at arm’s length. In this case, the Minister found that
the appellant and his employer Forages Garant & Frères inc. (Forages
Garant) were not dealing with each other at arm’s length and disallowed the
appellant’s deductions under paragraph 110(1)(d).
Issues
[5]
The first issue is whether
the appellant and Forages Garant were not dealing with each other at arm’s
length, justifying the Minister’s disallowance of the deductions.
[6]
If the Court decides
that the appellant and Forages Garant were not dealing at arm’s length, the
respondent and appellant agree that the benefits received by the appellant and resulting
from the stock options are not taxable under section 7 of the ITA. Therefore, a
second issue arises: should the value of the benefit received by the appellant
each year be added to his income under paragraph 6(1)(a) of the ITA?
Facts
[7]
The following facts are
taken from the Partial Agreement on the Facts filed at the hearing.
[8]
During the years at
issue, the appellant was employed by Forages Garant. As an employee, he was
eligible for Forages Garant’s stock option plan.
[9]
In 2004, 2005 and 2006,
Forages Garant issued notices to exercise stock options, and each year the
appellant chose to have Forages Garant redeem his options.
[10]
Forages Garant paid the
following amounts to the appellant for buying his options:
2004 $1,117,594
2005 $2,037,379
2006 $1,401,630
[11]
The appellant
indirectly held 37.5% of Forages Garant’s shares.
[12]
Doris Landry, who
married the appellant on August 19, 1972, indirectly held 6.25% of the shares
of Forages Garant.
[13]
Ken Mathieu, the adult
son of the appellant and Doris Landry, indirectly held 12.5% of the shares in
Forages Garant.
[14]
The interests of the
appellant, Doris Landry and Ken Mathieu in Forages Garant derive from the
following facts:
- 3153991 Canada Inc.
(315) held the entire share capital of Forages Garant.
- The shares of 315 were held as follows: 37.5% by 96052 Canada Inc.
(960), 25% by 4178688 Canada Inc. (417) and 37.5% by others.
- The appellant held 100% of the shares of 960.
- Doris Landry held 25% of the shares of 417, and Ken Mathieu held 50%
of the shares of 417.
- This situation is illustrated as follows:
[15]
The appellant and Doris
Landry stopped living together on October 1, 1990, and obtained a judgment of
separation as to bed and board on September 29, 1993. The judgment ratified a [Translation] “draft agreement and
agreement on corollary relief” between the appellant and Doris Landry dated May
17, 1993.
[16]
The appellant and Doris
Landry signed an agreement on corollary relief (the agreement) on January 10,
2008, whereby they stipulated that they had never gone back to living together
and that wanted to make the [Translation]
“effects of the dissolution of the matrimonial regime retroactive to the date
when they ceased living together, namely, October 1, 1990”. The Superior
Court of Québec ratified the agreement in the judgment of divorce dated March
27, 2008. The divorce took effect on April 27, 2008, and the certificate
of divorce of the appellant and Doris Landry was issued on May 15, 2008.
[17]
At all relevant times,
the appellant had a common-law partner.
Relevant legislation
[18]
Generally, when an
employer (a “qualifying person”) agrees to sell or to issue securities of the
corporation to one of its employees, subsection 7(1) of the ITA (which will be
discussed in more detail further in these reasons) provides that the employee
is deemed to have received a benefit either in the year when he exercised the
option and acquired the securities or in the year when he disposed of the
rights provided by the option. In each case, the employee is deemed to have received
a benefit from employment.
[19]
An employee who is
deemed by section 7 to have received a benefit and who is dealing with the
employer at arm’s length will be entitled (if certain conditions are met) to a
deduction under paragraph 110(1)(d). For the years at issue here in,
that provision provided the deduction of 50% of the amount of the benefit
deemed to have been received by the employee. The goal of this provision is to
tax the benefit at the same rate as capital gains.
[20]
For 2004, 2005 and
2006, the relevant portion of paragraph 110(1)(d) reads as follows:
(d) Employee options – an amount equal to 1/2 of the amount of the benefit
deemed by subsection 7(1) to have been received by the taxpayer in the
year in respect of a security that a particular qualifying person has agreed
after February 15, 1984 to sell or issue under an agreement, or in respect
of the transfer or other disposition of rights under the agreement, if
(i) the security
.
. .
(B) would
have been a prescribed share if it were issued or sold to the taxpayer at the
time the taxpayer disposed of rights under the agreement,
. . .
(ii) where rights under the agreement were not acquired by
the taxpayer as a result of a disposition of rights to which subsection 7(1.4)
applied,
. . .
(B) at the time
immediately after the agreement was made, the taxpayer was dealing at arm’s
length with
(I) the particular qualifying person,
. . .
[21]
The provisions with respect
to determining the existence of an arm’s length relationship for the purposes
of the ITA are found in section 251. Subsection 251(1) provides that “related
persons shall be deemed not to deal with each other at arm’s length”, and
subsection 251(2) includes in the definition of “related persons” “individuals
connected by . . . marriage”.
[22]
In accordance with
subsection 251(2), the definition of “related persons” also includes a
corporation and a person who is a member of a related group that controls the
corporation.
[23]
Subsection 251(4)
provides that a “related group” is a “group of persons each member of which is
related to every other member of the group”.
[24]
Finally, 251(6)(b)
provides that, for the purposes of the ITA, “persons are connected by marriage
if one is married to the other or to a person who is so connected by blood
relationship to the other”.
[25]
The relevant parts of
section 251 read as follows during the relevant years:
251. (1) Arm’s length. For the purposes of this Act,
(a)
related persons shall be deemed not to deal with each other at arm’s length;
. . .
(2)
Definition of “related persons”. For the purpose of
this Act, “related persons”, or persons related to each other, are
(a)
individuals connected by blood relationship, marriage or common-law partnership
or adoption;
(b) a
corporation and
(i) a person who
controls the corporation, if it is controlled by one person,
(ii) a person who
is a member of a related group that controls the corporation, or
(iii) any person
related to a person described in subparagraph 251(2)(b)(i) or 251(2)(b)(ii);
and
(c) any
two corporations
(i) if they are
controlled by the same person or group of persons,
(ii) if each of
the corporations is controlled by one person and the person who controls one of
the corporations is related to the person who controls the other corporation,
(iii) if one of
the corporations is controlled by one person and that person is related to any
member of a related group that controls the other corporation,
(iv) if one of
the corporations is controlled by one person and that person is related to each
member of an unrelated group that controls the other corporation,
(v) if any member
of a related group that controls one of the corporations is related to each
member of an unrelated group that controls the other corporation, or
(vi) if each
member of an unrelated group that controls one of the corporations is related
to at least one member of an unrelated group that controls the other
corporation.
. . .
(4)
Definitions concerning groups. In this Act,
“related
group” “related group” means a group of persons
each member of which is related to every other member of the group;.
. . .
(5) Control
by related groups, options, etc. For the purposes
of subsection 251(2) and the definition “Canadian-controlled private
corporation” in subsection 125(7),
(a) where
a related group is in a position to control a corporation, it shall be deemed
to be a related group that controls the corporation whether or not it is part
of a larger group by which the corporation is in fact controlled;
. . .
(6) Blood
relationship, etc. For the purposes of this Act,
persons are connected by
. . .
(b)
marriage if one is married to the other or to a person who is so connected by
blood relationship to the other;
. . .
First issue: arm’s
length dealing
[26]
The issue in this case
is whether the appellant and Doris Landry were connected by marriage during the
relevant period. If so, they would be deemed to have formed, together with Ken
Mathieu, a related group under subsection 251(4) of the ITA because each
of them would be deemed to be related to every other member of the group. Given that this related group would be
deemed to be controlling Forages Garant, every member of this group would be deemed
to be related to Forages Garant, and therefore the appellant and Forages Garant
would be deemed to not be dealing at arm’s length.
The appellant’s
position
[27]
Counsel for the
appellant stated that a contextual and purposive analysis of the term “connected
by marriage” shows that Parliament did not intend to include situations when a
separation from bed and board has been obtained. According to him, it is clear
that the appellant and Doris Landry had not been “connected” by marriage since
1990, when they stopped living together, or, at the very least, since 1993,
when they obtained a judgment of separation as to bed and board and provided
for all of the civic and family consequences of the breakdown of their marriage.
[28]
The appellant argues
that the Court must accept an interpretation of the phrase “connected by
marriage” in section 251 of the ITA that is, according to him, more consistent
with the scheme of the ITA and with Parliament’s objective. Indeed, he suggests
that the Court take into account the substance, and not the form of the
relationship between the appellant and Doris Landry during the relevant period.
[29]
He notes that, in
Quebec, it is recognized that spouses may completely sever their marital
relationship without obtaining a formal divorce, in choosing to become separated
from bed and board. In support of that proposition, he cites Droit de la
famille – 2285
at page 12:
[Translation]
In
fact, as I noted earlier, the Code sets off the process of accumulating family
patrimony on the date of marriage and continues it without disruption until its
official breakdown. Nothing between these two times disrupts or suspends it. However,
there are times when spouses decide to sever their marital relationship generally,
completely and irrevocably although without having this new status formally
recognized by a court decision. It is conceivable that, in such a case, it may
become inequitable that the family patrimony accumulated by one of the two spouses
after such a severance may continue to grow for the benefit of his or her
former spouse only because no judgment has sanctioned such a status change,
which the two parties wanted to become permanent. . . . Such a disruption of
married life must be irrevocable and, most importantly, complete, such that the
spouses consider themselves to be and are, from then on, in all aspects of
their lives, completely independent, as they would be if the breakdown of their
marriage was sanctioned by a judgment. Fairness, which must prevail in these
matters, demands it.
[30]
Counsel for the
appellant cites a case decided by the Supreme Court of Canada, Éric v. Lola, for the
proposition that, in Quebec, the breakdown of a marriage may take the form of a
separation from bed and board. At paragraph 82 of that judgment the Supreme
Court stated the following:
82 As
a result of the reforms outlined above, marriage is now subject to a legal
framework that governs the mutual relationships of spouses. This framework is
made up of a primary regime and a legal or conventional matrimonial regime the
effects of which are felt both during the marriage and when it ends. However,
before looking at the effects of each of these regimes during and after
marriage, I note that, aside from the death of a spouse, marriage can end as a
result of separation from bed and board under the Civil Code of Québec or
divorce under the Divorce Act . . . .
[31]
Counsel for the
appellant also notes that the Superior Court of Quebec ruled that the phrase [Translation] “former spouse” does not
refer only to a divorced spouse.
[32]
He also cites on
article 518 of the Civil Code of Québec (C.C.Q.), which
provides that divorce carries with it the dissolution of the matrimonial
regime, but allows the court to make the effects of the dissolution of the
regime, as between the spouses, retroactive to the date on which the spouses
ceased to live together. He submits that, this means that separation from bed
and board may be considered as a permanent breakdown of the marriage.
[33]
In addition, counsel
for the appellant cites various Quebec acts in which the words “spouse” and “former
spouse” are defined in a way that leads one to understand that a separation
from bed and board terminates the matrimonial relationship between spouses. For
example, the Act Respecting the Québec Pension Plan provides
at section 102.2 that “two married persons separated from bed and board”
are considered to be “former spouses”. Under the Regulation respecting the
application of the Health Insurance Act, two married persons must live together to
be considered “spouses”. Similar provisions are found in the Individual and
Family Assistance Act,
the Labour Standards Act,
and the Supplemental Pension Plans Act.
[34]
With respect to the
ITA, counsel for the appellant submits that Parliament recognizes that married
persons who live separate and apart as a result of the breakdown of their
marriage have undergone a breakdown of their marriage without being divorced. The
concept of “breakdown of marriage” appears repeatedly in the ITA in order to
provide to the parties a different tax treatment from that which would be used
had there not been a separation.
[35]
Counsel for the
appellant cites Caron c. Québec, where the Court of Québec ruled on the
application of section 14.4 of the Tax Administration Act, which
renders a person liable for the tax debt of another person when there has been
a transfer of property. Among others, this provision applies to those who do
not deal at arm’s length with the transferor. In Caron, the appellant
was separated from bed and board from her former spouse (the transferor), but
they were not divorced. The Court stated that, in that case,
[Translation]
even if, in the absence of divorce, the marriage bond remains, this
single bond is not sufficient to establish non-arm’s length dealing when
section 2.2.1 of the Taxation Act makes it possible to defeat the solidarity
between spouses set out in sections 14.4 and 14.5 of the Act respecting
the ministère du Revenu.
[36]
In conclusion, counsel
for the appellant alleges that Doris Landry and the appellant were no longer “connected”
by marriage within the meaning of paragraph 251(2)(a) of the ITA as
of 1990, or, at the very least, as of 1993, so that Forages Garant and the
appellant were dealing with each other at arm’s length from 2004 to 2006.
Analysis: arm’s
length dealing
[37]
Paragraph 251(2)(a)
of the ITA provides that persons connected by marriage are considered to be
related persons, and, according to paragraph 251(1)(a) of the ITA,
related persons are deemed to not be dealing with each other at arm’s length.
[38]
The issue in this case
is whether two married persons stop being individuals “connected by marriage”
within the meaning of paragraph 251(2)(a) of the ITA when they are
separated from bed and board.
[39]
The appellant stated
that a contextual and purposive analysis of the expression “connected by
marriage” shows that Parliament did not intend to include situations where a
separation from bed and board has been issued.
[40]
I am not satisfied that
the appellant’s approach is consistent with the rule applicable to the
construction of fiscal legislation, as explained by the Supreme Court of Canada
in Placer Dome Canada Ltd. v. Ontario (Minister of Finance). The Supreme Court reiterated the importance
of the textual aspect of interpreting taxation statutes. At paragraph 21 of
this judgment, the Supreme Court stated the following:
. . .
“the words of an Act are to be read in their entire context and in their
grammatical and ordinary sense harmoniously with the scheme of the Act, the
object of the Act, and the intention of Parliament” (p. 578): see 65302
British Columbia Ltd. v. Canada, 1999 CanLII 639 (SCC), [1999] 3 S.C.R.
804, at para. 50. However, because of the degree of precision and detail
characteristic of many tax provisions, a greater emphasis has often been placed
on textual interpretation where taxation statutes are concerned: Canada
Trustco Mortgage Co. v. Canada, 2005 SCC 54 (CanLII), [2005] 2 S.C.R. 601,
2005 SCC 54, at para. 11. Taxpayers are entitled to rely on the clear meaning
of taxation provisions in structuring their affairs. Where the words of a
statute are precise and unequivocal, those words will play a dominant role in
the interpretive process.
[Emphasis added.]
[41]
In my view, a textual
analysis of paragraphs 251(1)(a), (2)(a) and (6)(b) does
not reveal any ambiguity in the phrase “connected by marriage” because
paragraph 251(6)(b) provides that persons are connected by marriage “if
one is married to the other”. Thus,
the bonds of marriage are those that exist if the persons concerned are married
and the bonds connect the married persons.
[42]
In Canada, a marriage
is dissolved only by divorce or the death of one of the spouses. The
dissolution of marriage by divorce is provided for in section 14 of the Divorce
Act:
14. On taking effect, a divorce granted
under this Act dissolves the marriage of the spouses.
[43]
In Quebec, article 516
of the C.C.Q. provides as follows:
516. Marriage is dissolved by the death of either spouse or by divorce.
[44]
Even though, in
practice, a separation from bed and board reflects a permanent breakdown of the
marriage, it does not, strictly speaking, break the marital bond and is not
equivalent to a divorce: article 507 C.C.Q. reads as follows:
507.
Separation from bed and board releases the spouses from the obligation to live
together; it does not break the bond of marriage.
As stated by the Supreme Court of Canada in
Éric v. Lola,
87. . . . Since
separation from bed and board — although it loosens the marital bond by
releasing the spouses from the obligation to live together — does not terminate
the marriage, it does not terminate the other effects of marriage . . . .
[45]
In addition, it cannot
be concluded, on the basis of the context of the ITA, that Parliament intended
to exclude spouses separated from bed and board from the phrase “connected by
marriage” found at paragraph 251(2)(a). When Parliament wanted to take
into account in the ITA situations where spouses are still married but live
separate and apart, it did so by using language such as “living separate and
apart because of the breakdown of their marriage” in the definition of support
amount in subsection 56.1(4), or “separated and living apart as a result of the
breakdown of their marriage” at subsection 160(4). It also seems to me that, under subsection
251(6), due to the mere fact of being married, persons are connected by
marriage.
[46]
Finally, although
neither the appellant nor the respondent has referred to the object of paragraph
251(1)(b) of the ITA, it seems to me that Parliament wanted to define
certain categories of persons who, because of their relationships, are likely not
to act in their best commercial interests. Parliament intended to create a rule
that is simple to apply. It is not incompatible with this goal to include all
married persons.
Second issue: inclusion in income
[47]
Having concluded that
the appellant was not dealing at arm’s length with Doris Landry, and therefore,
with Forages Garant, I must now decide whether the amounts received by the
appellant from Forages Garant for disposing of his stock options are taxable.
[48]
The starting point for
analyzing the tax treatment of a benefit resulting form a stock option granted
to an employee is found at section 7 of the ITA.
[49]
In general, section 7
sets out that a stock option granted by an employer to its employee gives rise
to an employment benefit, but that the benefit is not acknowledged at the time
the option is granted. If the employee exercises the option, the benefit is
deemed to have been received at the time when the employee exercises it:
paragraph 7(1)(a) (except when the employer is an arm’s length Canadian‑controlled
private corporation: subsection 7(1.1), which is not relevant in this case).
[50]
Paragraphs 7(1)(b)
to (d) apply to scenarios where the employee transfers or disposes of
the rights provided by the option without acquiring shares.
[51]
Paragraph 7(1)(b)
deals with a transfer of rights by an employee to an arm’s length person.
[52]
Paragraph (c)
applies when an employee transfers the stock option to a non‑arm’s length
person who acquires shares under the option.
[53]
Paragraph (d)
provides for the case where, following one or more transactions between non-arm’s
length persons, the rights under the option are subsequently transferred to an arm’s
length person.
[54]
During the relevant
years, paragraphs 7(1)(a) to (d) read as follows:
7. (1) Agreement to issue securities to employees — Subject to subsections (1.1) and (8),
where a particular qualifying person has agreed to sell or issue securities of
the particular qualifying person (or of a qualifying person with which it does
not deal at arm’s length) to an employee of the particular qualifying person
(or of a qualifying person with which the particular qualifying person does not
deal at arm’s length),
(a) if
the employee has acquired securities under the agreement, a benefit equal to
the amount, if any, by which
(i) the value of the securities at the time the employee acquired them
exceeds the total of
(ii) the amount paid or to be paid to the particular qualifying person by the
employee for the securities, and
(iii) the amount, if any, paid by the employee to acquire the right to acquire
the securities
is deemed to have been received, in the taxation year in which the employee
acquired the securities, by the employee because of the employee’s employment;
(b) if
the employee has transferred or otherwise disposed of rights under the
agreement in respect of some or all of the securities to a person with whom the
employee was dealing at arm’s length, a benefit equal to the amount, if any, by
which
(i) the value of the consideration for the disposition
exceeds
(ii) the amount, if any, paid by the employee to acquire those rights
shall be deemed to have been received, in the taxation year in which the
employee made the disposition, by the employee because of the employee’s
employment;
(c) if
rights of the employee under the agreement have, by one or more transactions
between persons not dealing at arm’s length, become vested in a person who has
acquired securities under the agreement, a benefit equal to the amount, if any,
by which
(i) the value of the securities at the time the person acquired them
exceeds the total of
(ii) the amount paid or to be paid to the particular qualifying person by the
person for the securities, and
(iii) the amount, if any, paid by the employee to acquire the right to acquire
the securities,
is deemed to have been received, in the taxation year in which the person
acquired the securities, by the employee because of the employee’s employment,
unless at the time the person acquired the securities the employee was
deceased, in which case such a benefit is deemed to have been received by the
person in that year as income from the duties of an employment performed by the
person in that year in the country in which the employee primarily performed
the duties of the employee’s employment;
(d) if
rights of the employee under the agreement have, by one or more transactions
between persons not dealing at arm’s length, become vested in a particular
person who has transferred or otherwise disposed of rights under the agreement
to another person with whom the particular person was dealing at arm’s length,
a benefit equal to the amount, if any, by which
(i) the value of the consideration for the disposition
exceeds
(ii) the amount, if any, paid by the employee to acquire those rights
shall be deemed to have been received, in the taxation year in which the
particular person made the disposition, by the employee because of the employee’s
employment, unless at the time the other person acquired the rights the
employee was deceased, in which case such a benefit shall be deemed to have
been received by the particular person in that year as income from the duties
of an employment performed by the particular person in that year in the country
in which the employee primarily performed the duties of the employee’s
employment; and
[55]
If the appellant and
Forages Garant are dealing with each other at arm’s length, the parties agree
that the amounts received by the appellant would be taxable under paragraph
7(1)(b). They also agree that, if they are not dealing at arm’s length,
the payments received by the appellant are not taxable under section 7.
[56]
However, the respondent
alleges that the benefits resulting from dispositions of stock options by the
appellant are nonetheless taxable under paragraph 6(1)(a) of the ITA as employment
benefits. Paragraph 6(1)(a) provides for the taxation of “the value of
board, lodging and other benefits of any kind whatever received or enjoyed by
the taxpayer in the year in respect of, in the course of, or by virtue of an
office or employment” except for certain benefits listed.
[57]
The appellant submits that
the application of paragraph 6(1)(a) is precluded by paragraph 7(3)(a).
Paragraph 7(3)(a) reads as follows:
(3) Special
provision — If a particular qualifying person has
agreed to sell or issue securities of the particular person, or of a qualifying
person with which it does not deal at arm’s length, to an employee of the
particular person or of a qualifying person with which it does not deal at arm’s
length,
(a) except
as provided by this section, the employee is deemed to have neither received
nor enjoyed any benefit under or because of the agreement; and
Respondent’s submissions
[58]
The respondent is of
the view that the general provision, that is, paragraph 6(1)(a) of
the ITA, prevails over section 7. The respondent cites Canada v. Chrysler, in
support of the proposition that the general provision applies automatically and
that the general provision ceases to apply only if the conditions of the
specific provision are met.
[59]
The respondent also submits
that, for section 7 to apply, all of the conditions listed in it – not just
those found in the opening words – must be met. To that effect, the respondent submits
that, in the English version of this section (unlike in the French version),
the opening words are separated from the body of the provision only
by a comma and that the same sentence that starts in the opening continues
through the various paragraphs. Thus, the respondent is of the view that the
inclusion of the conditions in the opening is insufficient to conclude that
section 7 applies: one of the conditions at paragraphs 7(1)(a) to (e)
must also be met.
[60]
The respondent also
cites Robertson v. Canada and Henley v. Canada, where
the Federal Court of Appeal concluded that, since the conditions set out in
section 7 were not met, the benefit was therefore taxable under
paragraph 6(1)(a) of the ITA. In short, if the conditions for applying
the specific provision are not met, the general provision applies.
[61]
The respondent submits that,
if section 7 did not exist, the employee would be allowed a taxable benefit
under paragraph 6(1)(a) of the ITA. Thus, the respondent argues that
paragraph 7(3)(a) aims to prevent double taxation. In other words,
section 7 does not exclude the application of section 6, but excludes only
the double application of both sections 6 and 7. Thus, section 7 takes
precedence only as long as section 7 provides for the inclusion of the
benefit.
[62]
In the same vein, the
respondent submits that paragraph 6(1)(a) must be interpreted and
applied as broadly as possible under The Queen v. Savage. The
respondent also argues that, when Parliament seeks to exclude a benefit under
paragraph 6(1)(a), it does so expressly. However, Parliament does not
state anywhere that an amount paid following the redemption of stock options is
not a taxable benefit.
[63]
The respondent also cites
section 12 of the Interpretation Act, which reads as follows:
12. Every enactment is deemed remedial, and shall be
given such fair, large and liberal construction and interpretation as best
ensures the attainment of its objects.
[64]
According to the
respondent, the object of the ITA is to tax a person’s income. The scheme of
the ITA is that any employee who acquires any salary, wages or remuneration
must include it in his income. For that reason, the non-taxation of the
benefits in this case would be absurd, and such an interpretation is to be
avoided.
[65]
The respondent cites subsection
45(3) of the Interpretation Act, supra, and argues that paragraph
7(1)(b.1) clarified the ITA.
[66]
The respondent submits
that section 7 is an incentive measure and aims to make acquiring a corporation’s
securities more accessible to employees.
Appellant’s submissions
[67]
The appellant submits that
section 7 of the ITA is a complete code with regard to taxing benefits received
under options granted by an employer to his or her employee for purchasing
shares of the employer or a related person, but that section 7 does not
provide for taxable benefits in the appellant’s case.
[68]
The appellant submits
that from the moment one cites the introductory part of subsection 7(3),
one cannot have recourse to other provisions of the ITA to tax the benefit received
under a stock option. As a result, the benefit realized by the appellant under the
stock options is not taxable.
Analysis: inclusion in income
[69]
It is clear from
reading section 7 that it is a code for taxing employee stock options and that,
hence, this section is a special provision in the ITA relative to a particular
employment benefit.
[70]
Therefore, the generalibus
specialia derogant principle would apply with the result that the special
provision would override the general provision: paragraph 6(1)(a). As Justice Strayer stated in Chrysler,
7 . . .
The common law has well established that wherever there is a particular
provision and a general provision in the same statute and the latter if taken
in its broadest sense would overrule the former, then the particular provision
must be given effect and the general provision must be taken not to apply in
these specific circumstances . . . .
[71]
It is true, as the
respondent submits that, if the pre-conditions for the application of a special
provision are not met, the general provision may apply. Indeed, that is what
happened in the two cases of the Federal Court of Appeal cited by the
respondent, Henley and Robertson.
[72]
In both cases, all the
criteria stated in the opening of subsection 7(1) were not met, and for that
reason the Minister was able to tax the benefits received by the taxpayers
under paragraph 6(1)(a).
[73]
In Henley, the
employee received warrants for shares of a company that was not related to the
employer. For section 7 to apply, the shares provided for by the stock option
agreement must be the shares of the employer or a related company.
[74]
In Robertson,
the employer was an individual and therefore the phrase “qualifying person” in
the opening of subsection 7(1) did not apply to him. On the basis of the
definition at subsection 7(7), a “qualifying person” is a corporation or a
mutual fund trust. In addition, the appellant in Robertson did not
dispute that he had received a benefit under subsection 5(1) and paragraph
6(1)(a).
[75]
However, there is an
important distinction to be made between these cases and the circumstances in
this case. In Henley and Robertson, the Federal Court of Appeal
did not have to rule on the application of subsection 7(3). The conditions of
application of subsection 7(1), which the taxpayers in Henley and Robertson
did not meet, were in the opening part of subsection 7(1). Since the conditions
specified in the opening of subsection 7(1) are the same as those found at
subsection 7(3), the taxpayers clearly did not meet the conditions for the
application of subsection 7(3).
[76]
Contrary to the
situation in Henley and Robertson, the appellant meets the
conditions in the opening part of subsection 7(1), which is to say that he
meets all of the application conditions set out in the opening of subsection
7(3): Forages Garant is a qualifying person (in accordance with the definition
at subsection 7(7)), which has agreed to issue its securities to its employee
(the appellant).
[77]
I do not agree with the
respondent that one of the conditions listed at paragraphs 7(1)(a)
to (d) must also be met before subsection 7(3) is overridden. Subsection
7(3) does not mention any of those conditions. Thus, in the appellant’s case,
the generalibus specialia derogant principle applies, and
subsection 7(3) overrides the general provision, paragraph 6(1)(a).
In accordance with paragraph 7(3)(a), the appellant is deemed to not
have received a benefit under the stock option agreement with Forages Garant,
unless otherwise specified at section 7. The parties had already agreed that
section 7 does not provide for the taxation of the benefit received by the
appellant during the relevant years.
[78]
It is true, as stated
by the respondent, that subsection 7(3) is aimed at preventing the double
taxation of benefits related to stock options granted to employees, but, at the
same time, it must be acknowledged that Parliament also chose to specify at
section 7 which benefits related to options would be taxed and when they
would be deemed to have been realized by employees.
[79]
The respondent has not
shown that there was an ambiguity at paragraph 7(3)(a) or at
subsection 7(1) with regard to the benefits that Parliament chose to tax, and,
in my view, the language used in these provisions is clear and unequivocal. The
fact that the benefits received by the appellant will not be taxed is due to a
loophole in the legislation, but it is not the role of the Court to interpret
tax provisions in a way that protects the tax authorities. The Federal Court of
Appeal recently ruled to that effect in Canada v. Quinco Financial Inc. at
paragraphs 8 and 9:
[8]
Overall, the Act consists of clear, precise rules to facilitate ease of
application, consistency and predictability. This underscores the dominance of
the plain meaning of the text of the Act in the process of interpreting
provisions of the Act.
[9]
There may be cases where precisely-worded provisions or their interaction
creates an advantage or a windfall for a registrant under the Act. But we do
not interpret taxation provisions in a tendentious or result-oriented way to
enhance the federal treasury: Shell Canada, supra at paragraphs
39 and 40. Instead, absent words allowing us to address situations of abuse or
windfall, where the provisions are precisely-worded, clear and unambiguous,
they must be given their plain effect.
[80]
In 2010, Parliament
amended the ITA to introduce the new paragraph 7(1)(b.1). This paragraph is a copy of paragraph (b),
but it applies in cases where the employee and the issuing corporation are not
dealing with each other at arm’s length. In other words, it would apply where there is a
transfer of rights provided by a stock option, where the employee transfers his
or her rights to the employer (or a related person) with whom he is not dealing
at arm’s length. In that case, the employee would be deemed to have received a
benefit because of his employment. The new paragraph 7(1)(b.1)
reads as follows:
(b.1) if the employee has
transferred or otherwise disposed of rights under the agreement in respect of
some or all of the securities to the particular qualifying person (or a
qualifying person with which the particular qualifying person does not deal at
arm’s length) with whom the employee was not dealing at arm’s length, a benefit
equal to the amount, if any, by which
(i) the value of the consideration for the disposition
exceeds
(ii) the amount, if any, paid by the employee to acquire those rights
is deemed to have been received, in the taxation year in which the employee
made the disposition, by the employee because of the employee’s employment;
[81]
The respondent submits
that the amendment was a clarification of the ITA, as indicated in Annex 5 of
the 2010 Budget:
Budget 2010 also proposes to
amend the income tax rules to clarify that the disposition of rights under a
stock option agreement to a non-arm’s length person results in an employment
benefit at the time of disposition (including cash out). Although the
Government considers that these benefits are taxable in these circumstances
under existing tax rules, the Government also believes that clarification of
these rules is warranted.
[82]
The respondent also cites
subsection 45(2) of the Interpretation Act, which reads as follows:
45. (2) The
amendment of an enactment shall not be deemed to be or to involve a declaration
that the law under that enactment was or was considered by Parliament or other
body or person by whom the enactment was enacted to have been different from
the law as it is under the enactment as amended.
[83]
Although the mere fact
that the Act was amended does not give rise to a presumption of an intention to
amend the Act, the Court must take into account the nature of the amendment and
of the circumstances surrounding it in deciding whether the goal of the
amendment was to change the Act. In Silicon Graphics Ltd. v. The Queen, the
Federal Court of Appeal ruled as follows:
[43]
However, the Interpretation Act does not preclude the Court from drawing
an inference that amendments to legislation are intended to change the
legislation where the internal and external evidence warrants such a
conclusion. It has been suggested that there is a presumption that changes to
the wording of legislation are purposeful and that the provisions of the Interpretation
Act referred to above do not preclude the Court from acknowledging that, in
principle at least, the foremost purpose of amendments is to bring about a
substantive change in the law. See R. Sullivan, ed., Driedger on the
Construction of Statutes, 3rd ed. (London: Butterworths, 1994), at page
451.
[84]
In my view, the
introduction of the new paragraph 7(1)(b.1) made a change to the ITA,
not a mere “clarification”. First, the respondent is not disputing that the
benefits received by the appellant are not taxable under section 7 (the version
in effect during the years at issue), but she maintains that paragraph 6(1)(a)
applies to include the benefits in the appellant’s income. However, there is an important difference
between the application of paragraph 6(1)(a) and of the new
paragraph 7(1)(b.1). Paragraph 6(1)(a) would add the benefit
to the appellant’s income at the time when the stock option is granted, not
when the right is disposed of, as paragraph 7(1)(b.1) now provides. Thus,
the addition of paragraph 7(1)(b.1), at the very least, amends the
time when the benefit is included in the employee’s income.
[85]
Even more important is
the effect of subsection 7(3) of the ITA, which is that section 7 is a
complete code for the taxation of benefits received under stock options granted
by an employer to its employee. Since the respondent does not dispute that, for
the years at issue, section 7 did not apply to the benefits received by the
appellant, it is clear that the addition of paragraph 7(1)(b.1) results
in a change in section 7, not a clarification.
[86]
Finally, we must ask
ourselves whether the interpretation stemming from the ordinary meaning of the
words of section 7 may be disregarded due to an absurd result. The statutory
interpretation principle that an interpretation that leads to an absurd result
should be avoided is well established. The validity of this principle is
acknowledged by the Supreme Court of Canada in Re Rizzo & Rizzo Shoes
Ltd.,
among others, where the Court stated the following:
27. . . . It is a well
established principle of statutory interpretation that the legislature does not
intend to produce absurd consequences. According to Côté, supra,
[Pierre-André Côté, The Interpretation of Legislation in Canada, 2nd ed.
(Cowansville: Yvon Blais, 1991)], an interpretation can be considered absurd if
it leads to ridiculous or frivolous consequences, if it is extremely
unreasonable or inequitable, if it is illogical or incoherent, or if it is
incompatible with other provisions or with the object of the legislative
enactment (at pp. 378-80). Sullivan echoes these comments noting that a label
of absurdity can be attached to interpretations which defeat the purpose of a
statute or render some aspect of it pointless or futile (Sullivan, Construction
of Statutes, supra, [Ruth Sullivan, Driedger on the Construction
of Statutes, 3rd ed. (Toronto: Butterworths, 1994)]. at p. 88).
[87]
However, the courts
have no licence to interpret legislation, however harsh or absurd a result it
may lead to, until it is first shown that the words in question are capable, in
the context in which they are used, of having more than one meaning. Ruling for
the majority of the Supreme Court of Canada in R. v. Mclntosh, the former Chief Justice Lamer stated the following:
34 . . . where, by the use of clear and
unequivocal language capable of only one meaning, anything is enacted by the
legislature, it must be enforced however harsh or absurd or contrary to common
sense the result may be (Maxwell on the Interpretation of Statutes, supra,
at p. 29). The fact that a provision gives rise to absurd results is not, in my
opinion, sufficient to declare it ambiguous and then embark upon a
broad-ranging interpretive analysis.
. . .
36 Thus, only where a statutory provision is ambiguous, and
therefore reasonably open to two interpretations, will the absurd results
flowing from one of the available interpretations justify rejecting it in
favour of the other. . . .
[Emphasis added.]
[88]
In a similar vein, Judge
Bowman stated in Datacalc Research Corp. v. Canada:
54 In any event, I do not think
that the fact that a statutory provision can in some circumstances lead to an
unjust or inconvenient or even absurd result can justify ignoring it or not
applying it to a different set of circumstances. . . . To modify the plain
legislative language so that it conforms to the judge’s notion of what is more
reasonable or more fair or less absurd would be to usurp the role of Parliament.
[Emphasis added.]
[89]
In this case, the
wording of paragraph 7(3)(a) is clear, and there is no need to resort to
the presumption that its interpretation is likely to lead to absurd results.
[90]
Hence, I conclude that
the amounts received by the appellant from Forages Garant in relation to the
stock option should not be included in the appellant’s income for 2004, 2005
and 2006.
[91]
The appeal is allowed
in accordance with these reasons and with the partial consent to judgment filed
by the parties, with costs to the appellant.
Signed at Ottawa, Canada, this 27th day of
June 2014.
“B. Paris”
Translation certified true
on this 4th day of February 2015
François Brunet, Revisor
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