loyal, J.:—The plaintiffs appeal from Revenue Canada's tax reassessment for the year 1983 adding to their income certain benefits received by the plaintiffs from their employer, Turbo Resources Ltd. The nature of these benefits, taxable under paragraph 6(1)(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") was purportedly by way of the forgiveness of certain loans made to the plaintiffs by their employer for purposes of buying shares in the company.
In the late 1970s, the oil and gas industry in Western Canada was experiencing a strong market for its products. Exploration, development, production and distribution programs were forging ahead and the total activity was reflected in the publicly-traded shares of the operating companies. It was a buoyant market for these shares and their values were steadily increasing.
As for most of the companies, Turbo Resources Ltd. ("Turbo") had established a stock option plan for its key employees comprising its management team. That was in 1972 and it was known as the Incentive Stock Option Plan. Its provisions were those common to such plans. The term was not to exceed five years and the amount of shares under option could be fully acquired by exercising the option with respect to a certain percentage of the shares spread evenly over the option period. Upon termination of employment, the option right of the employee lapsed as to all such optional shares not taken up.
In a rising market, the exercise of these options from time to time, at the option price, provided the employees with attractive benefits. These benefits, however, calculated on the basis of fair market value of the shares at the time, were deemed to be income in the hands of the employees under subsection 7(1) of the Income Tax Act.
The plan was later amended from time to time and in 1980-1981 Turbo adopted a new plan and called it the employee incentive stock option plan (1981). This plan, found in Schedule B of Turbo's Information Circular dated May 7, 1981 and for purposes of shareholder approval (plaintiffs' documents, vol. 1, tab 64, hereinafter 1-64) (all the documents in plaintiffs’ Book of Documents, Vol. 1 and Vol. 2 were admitted in evidence and constitute effectively all the pertinent documents before the Court) sets out the scheme of the incentive and the rights and obligations arising therefrom. The 1981 plan incorporated a single purchase scheme by way of company loan but was not otherwise substantially different from the original plan. The provisions material to the case before me were as follows:
1. The option period during which an option was exercisable could not exceed ten years and, in any event, terminated on the optionee leaving employment.
2. The option with respect to all (but not less than all) the optioned shares could be exercised within 60 days, provided that the purchase price be fully funded by a company loan, the loan itself, as well as its terms and conditions being at the discretion of the Board of Directors. This provision was called the First Option Privilege.
3. In the event the option was not exercised as to all the optioned shares, the option could be exercised before the end of each year of the grant, the number of shares available being determined by dividing the number of optional shares by the number of years in the option period, plus, at the Board's discretion, an accumulation for shares not taken up previously.
4. In the event of termination of employment the option was exercisable but only as to such shares in respect of which the option would have been exercisable under the immediately foregoing paragraph.
5. In the event a member of the Plan exercised the First Option Privilege, the obligatory loan from the company, subject to the discretion of the Board, was in accordance with the following conditions:
(a) the loan proceeds could only be used for that purpose;
(b) the loan was without interest and repayable over an approved number of years at the annual rate of 25% of the face amount divided by the approved loan period.
(c) at the election of the company, the balance of the loan became due and payable in the event of default or upon termination of employment.
(d) the optioned shares acquired by the employee would be secured by a pledge of the shares to the company, by the delivery of a Promissory Note and by an assignment to the company of 50% of any bonus moneys payable to the employee from time to time.
(e) at the end of each year, the company would release to the employee a number of shares based on the amount paid thereon during the year.
(f) a subsidiary of the company, Viscount Financial Services Ltd. had the right, but not the obligation, to purchase those shares at the option price which the employee, upon ceasing to be employed, was no longer entitled to have released from the company.
Events leading to the reassessments
The three plaintiffs before me were employees of Turbo or of one of its subsidiaries. Their respective appeals from reassessment were heard together and were said to be representative of a group of Turbo employees who participated in either the 1972 stock option plan or the stock option plan (1981). There is substantial evidence common to all three plaintiffs but nevertheless, for purposes of clarity, I should deal with each one of them individually.
The plaintiff Grant Lovig was in the marketing end of Turbo and in 1981, held the position of Manager, Prairie Region, dealing with the downstream end of Turbo operations. On April 29, 1981, having been given an opportunity to join the stock option plan (1981) he received from the vice-president and secretary of Turbo three agreements namely, the stock option agreement, the loan agreement and the viscount agreement (1-5, 1-6, 1-7).
The covering memorandum (1-1) explained the two elections available to Mr. Lovig under the plan as well as the different tax connotations involved. One election was to stay on the straight option route, exercisable as to 20 per cent of the optioned shares in each year of the five-year option period. The other election was to exercise a right to buy forthwith all the optioned shares and take out an interest-free loan from the company to pay for the shares. Mr. Lovig elected to buy the optioned shares outright and in due course, effective February 3, 1981, signed the three agreements above-mentioned. I shall refer to these agreements in greater detail later in these reasons.
For the present, however, I should indicate that on executing the agreements, Mr. Lovig became nominally entitled to or owner of 2,000 common shares in Turbo at the option price of $23.85 per share. At the same time, he became liable to the company for a loan of $47,700 being the entire purchase price of the optioned shares. To secure that loan, Mr. Lovig signed a promissory note for it, assigned Turbo 50 per cent of any bonus payable to him over the next five years, pledged all the shares as further security and concurrently granted an option to Viscount Financial Services Ltd., a Turbo subsidiary, to buy back his unreleased shares at the original option price in the event that he ceased to be employed by Turbo.
On or about October 31, 1982, Mr. Lovig left Turbo’s employ. According to the agreements he had signed, he no longer became entitled to those optioned shares which had not been released to him. Concurrently, the full amount of his debt to Turbo of $47,700 became due and payable. Of far greater importance, however, was that by that time, the market value of the Turbo shares to which he was purportedly entitled had fallen drastically in value. That period of time coincided with an inexorable fall in the whole industry. After allowing for a three for one split in Turbo shares, Mr. Lovig found himself nominally entitled to 6,000 shares and by February 1983, the stock market price for his shares was 80 cents.
Turbo felt obliged to take action. Its incentive stock purchase plan was turning out to be not an incentive plan at all. Together with Mr. Lovig, many employees who had joined the plan found themselves with shares of a company which were practically worthless but at the same time, found themselves bound by the company loan, the amount of which was based on the original option price.
Turbo found a formula to alleviate the situation. It decided to forgive any amount outstanding on the loans. After making all the necessary calculations, Turbo found that some $36,154 of Mr. Lovig's debt would be forgiven.
In due course, Revenue Canada got wind of this and on September 19, 1988, the Minister reassessed Mr. Lovig for his 1983 taxation year by adding to his income the net amount of the forgiven loan. After calculating the discount value of the $36,154 which purportedly was not due until 1986, the amount reassessed was fixed at $25,055. The Minister took the view that this amount constituted a benefit to the taxpayer pursuant to paragraph 6(1)(a) of the statute. This is the reassessment under appeal.
In the companion case, Richard K. Jaggard joined the stock option plan effective January 8, 1980. This option was for 2,500 shares at $15 a share. He executed a buy-sell agreement as well as an option agreement on the amount of $37,500. He left his employment with Turbo on March 31, 1982. Mr. jaggard suffered through the same experience as his colleagues, and was relieved of the net amount of his outstanding loan which, after similar calculation, was fixed at $29,820. After discounting for the unexpired period of the interest free loan, the Minister fixed this benefit in the amount of $29,320 and on September 27, 1988, reassessed Mr. Jaggard accordingly.
The third plaintiff before me, Marion Wargacki, joined the 1972 plan on September 6, 1978. He was given an option to buy 2,000 warrants to purchase Class "B" common shares in the company at the price of $2 per warrant or a total consideration of $4,000. He entered into a purchase and sale agreement whereby he undertook to pay the sale price in four annual payments of 25 per cent each beginning June 30, 1979 and terminating June 30, 1982. He also granted to Turbo Properties Ltd. an option to purchase any unpaid warrants at the original price of $2 each exercisable upon death or termination of employment.
By 1983, the loan outstanding had been reduced from $4,000 to $2,000. By that time, whatever warrants Mr. Wargacki might have owned or been entitled to had no value at all. Turbo forgave the sum of $2,000. On September 22, 1988, on deciding that this amount constituted a benefit to the taxpayer under paragraph 6(1)(a) of the Act, the Minister reassessed Mr. Wargacki accordingly.
Substantial oral evidence was adduced in the course of the trial. There was the evidence of the plaintiffs themselves as well as expert evidence from both plaintiffs and defendant Crown. Some 80 documents were also submitted. As the oral evidence constantly referred to these documents, I should perhaps deal with them first, otherwise oral evidence thereon might be difficult to follow.
In the case of Mr. Lovig, the key documents would appear to be the resident Canadian option agreement, the viscount option agreement and the loan agreement, all dated February 3, 1981. These documents are hereunder recited in extenso:
RESIDENT CANADIAN OPTION AGREEMENT (1-5)
MEMORANDUM OF AGREEMENT made the 3rd day of February, A.D. 1981,
TURBO RESOURCES LTD., a body corporate, having its Head Office at the City of Calgary, in the Province of Alberta, (hereinafter called the "Company")
OF THE FIRST PART
Grant D. Lovig
(hereinafter called the"Employee")
OF THE SECOND PART
WHEREAS the Company has established an Incentive Stock Option Plan for its key employees and for key employees of subsidiaries of the Company;
AND WHEREAS the Employee is a key employee of the Company (or a subsidiary of the Company);
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of other good and valuable consideration and the sum of One Dollar ($1) now paid by the Employee to the Company (the receipt whereof is hereby by the Company acknowledged), it is agreed by and between the parties hereto as follows:
1. In this agreement the term "share" or"shares" shall mean, as the case may be, one or more of the shares in the capital stock of the Company designated "common shares” as constituted at the date of this agreement and the term a "subsidiary" means a company, the voting shares of which are owned by another company in excess of fifty per cent (50%) and extends to a subsidiary of a subsidiary.
2. The Company hereby grants to the Employee, subject to the terms and conditions hereinafter set out, an irrevocable option to purchase 2,000 shares of the Company (the said 2,000 shares being hereinafter referred to as the "optioned shares”), at the price of $23.85 per optioned share.
3. The Employee shall, subject to the terms and conditions hereinafter set out, have the right to exercise the option hereby granted with respect to all (but not less than all) of the optioned shares at any time up to 4 P.M. (Calgary Time) on the sixtieth day after the date hereof (hereinafter called the "first expiry time”).
4. In the event that all of the optioned shares are not purchased prior to the first expiry time, then this option is hereby extended so that the Employee shall, subject to the terms, restrictions and conditions hereinafter set out, have the right to exercise the option hereby granted with respect to all or any part of the optioned shares at any time or from time to time during a period commencing on the first anniversary of the date hereof and ending 4 P.M. (Calgary Time) on the fifth anniversary of the date hereof (hereinafter referred to as the “option period"). On the expiration of the option period (hereinafter referred to as the “final expiry time") the option hereby granted shall forthwith expire and terminate and be of no further force or effect whatsoever as to such of the optioned shares in respect of which the option hereby granted has not then been exercised.
5. Subject to the provisions of paragraphs 6 and 7 hereof, the Employee shall be entitled to purchase during the option period a number of shares determined as follows:
(i) 20% of the optioned shares on and at any time after the first anniversary of the date hereof;
(ii) 20% of the optioned shares on and at any time after the second anniversary of the date hereof;
(iii) 20% of the optioned shares on and at any time after the third anniversary of the date hereof;
(iv) 20% of the optioned shares on and at any time after the fourth anniversary of the date hereof;
(v) 20% of the optioned shares on and at any time after thirty (30) days prior to the final expiry time.
6. In the event of the death of the Employee after the first expiry time and prior to the final expiry time while in the employment of the Company or a subsidiary of the Company, the option hereby granted may be exercised, only as to such of the optioned shares in respect of which such option has not previously been exercised and to which the Employee would have then been entitled to purchase pursuant to the provisions of paragraph 5 hereof, by the legal personal representatives of the Employee at any time up to and including (but not after) a date six (6) months following the date of death of the Employee or prior to the final expiry time, whichever is the earlier.
7. In the event that the Employee should cease to be an employee of the Company or a subsidiary of the Company (for reasons other than death) prior to the final expiry time, the option hereby granted may be exercised, only as to such of the optioned shares in respect of which such option has not been previously exercised and to which the Employee would have then been entitled to purchase pursuant to the provisions of paragraph 5 hereof, at any time up to and including (but not after) thirty (30) days following the date that the Employee ceased to be employed as aforesaid or prior to the final expiry time, whichever is the earlier, provided always that a transfer of employment from a subsidiary to the Company or from the Company to a subsidiary shall not be termed to be cessation of employment.
8. Subject to the provisions of paragraphs 5, 6 and 7 hereof, the option hereby granted shall be exercisable as provided for herein by the Employee or his legal personal representatives giving a notice in writing addressed to the Company at its Head Office in the City of Calgary, in the Province of Alberta, and delivered to the Secretary of the Company, which notice shall specify therein the number of optioned shares in respect of which such notice is being exercised and shall be accompanied by payment (by cash or certified cheque) in full of the purchase price for such number of optioned shares so specified therein. Upon any such exercise of option as aforesaid, the Company shall forthwith cause the transfer agent and registrar of the Company to deliver to the Employee or his legal personal representatives (or as the Employee may otherwise direct in the notice of exercise of option) within ten (10) days following receipt by the Company of any such notice of exercise of option a certificate or certificates in the name of the Employee or his legal personal representatives representing in the aggregate such number of optioned shares as the Employee or his legal personal representatives shall have then paid for. 9. Nothing herein contained or done pursuant hereto shall obligate the Employee to purchase and/or pay for any optioned shares except those optioned shares in respect of which the Employee shall have exercised his option to purchase hereunder in the manner hereinbefore provided.
10. In the event of any sub-division, re-division or change of the shares of the Company at any time prior to the final expirytime into a greater number of shares, the Company shall deliver at the time of any exercise thereafter of the option hereby granted such additional number of shares as would have resulted from such sub-division, re-division or change if such exercise of the option hereby granted had been prior to the date of such sub-division, redivision or change.
In the event of any consolidation or change of the shares of the Company at any time prior to the final expiry time into a lesser number of shares, the number of shares deliverable by the Company on any exercise thereafter of the option hereby granted shall be reduced to such number of shares as would have resulted from such consolidation or change if such exercise of the option hereby granted had been prior to the date of such consolidation or change. 11. The Employee shall have no rights whatsoever as a shareholder in respect of any of the optioned shares (including any right to receive dividends or other distributions therefrom or thereon) other than in respect of optioned shares in respect of which the Employee shall have exercised his option to purchase hereunder and which the Employee shall have actually taken up and paid for.
12. Time shall be of the essence of this agreement.
13. This agreement shall enure to the benefit of and be binding upon the Company, its successors and assigns, and the Employee and his legal personal representatives to the extent provided in paragraph 6 hereof. This agreement shall not be assignable by the Employee or his legal personal representatives.
IN WITNESS WHEREOF this agreement has been executed by the parties hereto.
VISCOUNT OPTION AGREEMENT (1-6)
THIS AGREEMENT made the 3rd day of February, A.D. 1981.
Grant D. Lovig
(hereinafter called the"Employee")
OF THE FIRST PART
VISCOUNT FINANCIAL SERVICES LTD., a body corporate, with offices in the City of Calgary, in the Province of Alberta, (hereinafter referred to as the ” Company")
OF THE SECOND PART
WHEREAS the Company is a company employed by Turbo Resources Ltd. ("Turbo") to inter alia further the development of employee incentives for Turbo;
AND WHEREAS the Employee acquired from Turbo an option to purchase 2,000 common shares of Turbo (hereinafter referred to as the "optioned shares");
AND WHEREAS the Employee exercised his option to purchase the optioned shares and, pursuant to an agreement between the Employee and Turbo, dated as of the date of this agreement, borrowed the entire purchase price for the optioned shares from Turbo (hereinafter referred to as the "Loan Agreement"), a condition of such borrowing being the entering into of the within agreement by the Employee;
NOW THEREFORE THIS AGREEMENT WITNESSETH in consideration of the sum of One Dollar ($1) and other good and valuable consideration paid by the Company to the Employee (receipt whereof is hereby acknowledged by the Employee), the parties hereto agree as follows:
1. The Employee hereby grants to the Company the right, exercisable solely in the discretion of the Company as hereinafter provided, to purchase from the Employee at a price of $23.85 per share (the “Per Share Purchase Price”), a number of optioned shares equal to the total number of optioned shares, less the number of shares released to the Employee, and to which the Employee is entitled to have released at the time of cessation of employment, pursuant to the provisions of the Loan Agreement, as at the date of the exercise of this option.
2. This option may be exercised by notice in writing directed to the Employee at the last known address of the Employee as disclosed by the records of the Company during a period commencing on the date of the Employee's termination of employment with the Company or a subsidiary for any reason whatsoever and ending at 5:00 P.M. (Calgary Time) on the ninetieth day thereafter. For the purposes hereof, a transfer of employment from a subsidiary to the Company or vice versa shall not be deemed termination of employment.
Notwithstanding anything herein to the contrary, this option shall have no further force and effect after 5:00 o’clock P.M. (Calgary Time on the ninetieth day following the expiration of five (5) years from the date hereof (the"Expiry Time").
3. Notice may be given to the Employee by mailing the same registered mail, postage prepaid, to the Employee's address as above stated or by delivering same to the Employee personally. The said notice if delivered shall be deemed to have been given on the date on which it was delivered, and if mailed shall be deemed to have been given on the date on which it was mailed.
The notice shall be accompanied by the Company's cheque, payable to the Employee, in an amount equal to the Per Share Purchase Price multiplied by the number of shares purchased, less an amount equal to any moneys which may then be owing to the Company or a subsidiary of the Company under the Loan Agreement.
4. For the purposes of this agreement, the term ” subsidiary” means a company, the voting shares of which are owned by another company in excess of fifty (50%) per cent, and extends to a subsidiary of a subsidiary.
5. In the event of any sub-division, re-division or change of the shares of the Company at any time prior to the Expiry Time into a greater number of shares, the Company shall deliver at the time of any exercise thereafter of the option hereby granted such additional number of shares as would have resulted from such sub-division, re-division or change if such exercise of the option hereby granted had been prior to the date of such sub-division, re-division or change.
In the event of any consolidation or change of the shares of the Company at any time prior to the Expiry Time into a lesser number of shares, the number of shares deliverable by the Company on any exercise thereafter of the option hereby granted shall be reduced to such number of shares as would have resulted from such consolidation or change if such exercise of the option hereby granted had been prior to the date of such consolidation or change.
6. The Employee agrees to execute such further and additional documents as may be necessary to give full effect to the within agreement.
7. This agreement shall enure to the benefit of the Company and its successors and assigns and shall be binding upon the Employee, his heirs, executors and administrators.
IN WITNESS WHEREOF the parties hereto have executed this Agreement effective as of the day, month and year first above written.
LOAN AGREEMENT (1-7)
THIS AGREEMENT made the 3rd day of February, A.D. 1981.
TURBO RESOURCES LTD., a body corporate, having its Head Office at the City of Calgary, in the Province of Alberta, (hereinafter called the "Company")
OF THE FIRST PART
Grant D. Lovig
(hereinafter called the "Employee")
OF THE SECOND PART
WHEREAS prior hereto the Company granted to the Employee (pursuant to an Employee Incentive Stock Option Plan) an option to purchase 2,000 common shares of the Company (hereinafter referred to as the "optioned shares") and under the terms of the option the Employee could elect either to purchase all of the optioned shares within sixty (60) days from the date of the option (the "first option privilege”) or the optioned shares over a period of five (5) years as to twenty per cent (20%) per year;
AND WHEREAS the Employee has elected to exercise the first option right and in order to do so has applied to the Company for a loan in the amount of $47,700 (being the entire purchase price of the optioned shares) on an interest free basis.
AND WHEREAS the Company has, in accordance with a stated policy, agreed to facilitate the Employee's exercise of the first option privilege on the terms and conditions hereinafter set forth:
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the premises and the sum of One Dollar ($1) paid by each of the parties hereto to the other (receipt of which is hereby acknowledged by each of the parties hereto), the parties hereto covenant and agree as follows:
The Company hereby agrees to loan to the Employee the sum of $47,700 (the said "Loan") for the purpose of enabling the Employee to purchase 2,000 Common Shares of the Company pursuant to the first option privilege hereinbefore recited.
The term of the Loan shall be five (5) years from the date hereof (the “ Final Due Date") and the Employee agrees that on each anniversary of the date hereof the Employee shall pay to the Company an amount equal to five per cent (5%) of the said Loan, the first payment to commence on the first anniversary date of the date hereof, provided that any balance outstanding on the Final Due Date shall thereupon become due and payable.
In the event that the Employee should default in any payment as aforesaid, then the Company may at its election declare the entire balance outstanding due and payable with interest thereon at the rate of fifteen per cent (15%) per annum until paid.
The Company may accept prepayment of all or part of the Loan (but the Employee shall not have the right to prepay without the consent of the Company); provided, always, that the prepayment may only be to the extent that would result in a sum of not less than One Hundred Dollars ($100) being payable at the date provided herein for final payment.
5. Acceleration of Payment in Certain Events
Notwithstanding anything herein to the contrary, it is understood and agreed between the parties that the entire balance herein shall become due and payable in the event of death of the Employee or in the event that the Employee is no longer employed by the Company or a subsidiary of the Company. In the event that the entire balance owing hereunder should become due and payable by reason of death, then no interest will be charged for a period of six (6) months following the date of death. Except as aforesaid, interest will be payable at the said rate of fifteen per cent (15%) per annum upon the entire balance being declared due and payable.
The Employee agrees that concurrent with the making of the within Loan he will secure repayment thereof
(a) by executing and delivering a demand Promissory Note in the amount of the Loan in form attached hereto as Schedule "A";
(b) by delivering the certificates evidencing the shares of the Company purchased by him pursuant to the exercise of the first option privilege (hereinafter referred to as the "Pledged Shares") to the Secretary of the Company, together with an executed Stock Transfer Power of Attorney attached, and the Company shall (except as herein provided) have the right to hold such shares as security for repayment of the Loan, with full power to sell such shares and to apply the proceeds in payment of the balance owing on the Loan and any costs incurred relative to such sale and any balance then remaining to be paid to the Employee or as the Employee may direct;
(c) by delivering to the Company, an irrevocable assignment, direction and authorization (in form attached hereto as Schedule "B") permitting the Company during the currency of this Loan to apply fifty per cent (50%) of the gross bonus moneys payable from time to time by the Company to the Employee against the Loan indebtedness hereunder, such application to be, firstly, against any payments then due hereunder and, secondly, in reduction of the balance outstanding on the Loan, said reduction being deemed a prepayment as contemplated by this agreement.
7. Release of Shares
(a) Notwithstanding anything in paragraph 6 contained to the contrary and subject to the provisions of sub-paragraph (b) of this paragraph 7 and of paragraph 9(b) hereof, the Employee shall be entitled to the release of and the Company shall release to the Employee on each anniversary of the date hereof during the Loan period, a number of shares equal to a number of shares determined by the following calculation:
Total Amount paid on Loan ,
Pledged Shares - Number of Shares Released Total amount of Loan
provided that in no event shall the Company be required to release, nor shall the Employee be entitled to have released, more than;
(i) 20% of the Pledged Shares prior to the first anniversary date;
(ii) 40% of the Pledged Shares prior to the second anniversary date;
(iii) 60% of the Pledged Shares prior to the third anniversary date;
(iv) 80% of the Pledged Shares prior to the fourth anniversary date.
(b) In the event that the Employee should cease to be employed by the Company or any of its subsidiaries for any reason (including death) following the expiration of one (1) year from the date hereof, then such Employee shall be entitled to the release of and the Company shall release to the Employee, subject to the prior payment on the Loan of 20% thereof for each full year from the date hereof, a number of Pledged Shares equal to twenty per cent (20%) of the Pledged Shares for each full year period which has expired following the date hereof, less any of the Pledged Shares previously released to him.
8. Option Obligations
(a) The Employee agrees that contemporaneously with the receipt of the Loan proceeds and with a view to maximizing shares available under the Employee Incentive Stock Option Plan established by the Company to other employees of the Company, it will grant to Viscount Financial Services Ltd., (“Viscount”), (a company employed by the Company to further the development of employee incentives for the Company), a right to purchase, in the event of his ceasing to be employed by the Company or a subsidiary for any reason, that number of shares which the Employee was not entitled to have released from the Company as herein before provided and the purchase price for such shares shall be the purchase price paid by the Employee upon the exercise of the First Option Privilege. The option to Viscount as aforesaid shall be exercisable within ninety (90) days following the employee's termination of employment with the Company or a subsidiary. The option shall be in form and content as set forth in Schedule "C" attached hereto.
(b) The parties hereto agree that notice in writing by the Company to Viscount of the cessation of employment of the Employee shall be conclusive and the option right afforded to Viscount by the Option Agreement granted by the Employee as hereinbefore provided shall become effective.
(a) In the event that Viscount shall have exercised the option granted to it by the Employee pursuant to the terms of this agreement, then in the event that there are any moneys owing by the Employee to the Company under this loan, the Company may, and it is hereby empowered, to receive from Viscount such of the moneys payable on the option as may be required to retire the indebtedness outstanding hereunder and such amount so received shall accordingly be applied against the balance outstanding on the within Loan.
(b) Notwithstanding anything in this agreement to the contrary, it is understood and agreed that the Company shall be entitled to hold sufficient shares to meet the option requirements set forth in the said option agree- ment attached hereto as Schedule "C", notwithstanding the provisions of paragraph 6.
(c) The Company is hereby empowered and authorized to transfer and convey to Viscount Financial Services Ltd. such of the optioned shares as Viscount Financial Services Ltd. may be entitled under the said option upon receipt from Viscount Financial Services Ltd. of the purchase price therefor.
(d) For the purposes of this agreement, the term “subsidiary” means a company, the voting shares of which are owned by another company in excess of fifty per cent (50%), and extends to a subsidiary of a subsidiary.
(e) The Employee agrees to execute such further and additional documents as may be necessary to give effect to this agreement.
(f) This agreement shall enure to the benefit of and be binding upon the respective parties hereto and their respective successors and/or assigns.
IN WITNESS WHEREOF the parties hereto have hereunto affixed their hands and seals or affixed its corporate seal attested by the hands of its proper officers duly authorized in that behalf as of the day and year first above written.
Attached to the Loan Agreement as Schedules were a demand Promissory Note in the amount of $47,700 together with interest thereon at 15% per annum after but not before maturity. There was as well an irrevocable assignment or direction by Mr. Lovig to apply 50% of any bonus thereafter payable to him in reduction of the loan.
Mr. Lovig also identified a memorandum dated April 29, 1981 from Mr. Gish, Corporate Vice-President Secretary of Turbo relating to the Plan. That memorandum is reproduced here: (1-1)
April 29, 1981
To: Grant Lovig Marketing From: Norm Gish Corporate
|Re:||Grant of Stock Option Under the Key Employee Incentive Stock Option|
I regret the delay in getting the documentation to you regarding your stock option but we have had some difficulty in providing for the loan arrangement. However it has been worth pursuing as it has considerable benefit to those employees electing to go this route.
There are three agreements enclosed in duplicate.
1. The Stock Option Agreement.
2. The Loan Agreement.
3. The Viscount Option.
The election to stay on the straight stock option plan requires execution of the Stock Option Agreement only. Under the straight stock option plan you may purchase up to 20% of your optioned shares on or after each anniversary date on a cumulative basis. In this case as and when you exercise your options the difference between the option price and the market price of the shares on the day you exercise the option is deemed ordinary income and you pay tax in that year accordingly. The cost base is then adjusted to this figure and if you hold the shares and sell them later any difference between the new cost base and the market price when you sell the shares is capital gain. If the market price of Turbo shares drops below the option price you are under no obligation to purchase the shares and can simply let the option lapse.
The election to exercise the one time option to purchase all the shares and take out an interest free loan from the Company to pay for the shares has different tax and other consequences. In this case the option price and the market price at the time of exercise are usually similar because of the time frame involved and therefore the tax impact is less severe. Most of the difference, which must be taken into ordinary income at the time of exercising the option, results from the grant being at 10% below the market price of the shares. When the shares are eventually sold the difference is capital gain not ordinary income. However in this case the employee takes the risk should the market price of the shares drop below the option price. The loan arrangement provides for the shares to be held as security for the loan with a release of up to 20% of the shares after each anniversary date provided such proportion of the loan has been paid off. The employee must pay towards the loan each year an amount which is the greater of either 50% of the gross amount of bonus paid to the employee or 5% of the full amount of the loan. Provision has also been made for Viscount Financial Services to have an option to buy-back the appropriate number of shares at the original option price should the employee leave the Company.
The share option agreements are dated either September 18, 1980 or February 3, 1981 depending on the date of grant for your option. The directors have extended the 60 day one-time period for utilization of the loan arrangement.
The date of the loan agreement and Viscount option agreement for those granted options on September 18, 1980 is January 13, 1981 when the closing price of the common shares was $24.125. For those involved this means a taxable benefit in 1981 of $0.625 per share ($24.125 — 23.50 = 0.625) and a new cost base of $24.125.
The date of the loan agreement and Viscount option agreement for those granted options on February 3, 1981 is the same date of February 3, 1981 when the closing price of the common shares was $25.75. For those involved this means a taxable benefit in 1981 of $1.90 per share ($25.75 — $23.85 = 1.90) and a new cost base of $25.75.
Please complete the agreements as appropriate and return both copies to me. Following execution by the Company a copy will be returned to you.
If you have any further questions please contact Fred Youck or myself. You will appreciate that the advice on the tax consequences of either the straight stock option plan or the option and purchase arrangement are for information purposes only and you may wish to consult your own tax advisor. Norman R. Gish
Vice-President & Secretary
Mr. Lovig also identified other memoranda from Mr. Gish dated May 14, 1981 (1-3) and June 1, 1981 (1-4) which again referred to the stock option plan and the plaintiff's participation in it.
Mr. Lovig's oral testimony with respect to the agreements was first of all to acknowledge that he had been pleased to be regarded as a key employee and to be offered participation in the stock option plan. He had received all the agreements on May 5, 1981. At first, he thought there was a mistake. He had asked Mr. Youck, working under Mr. Gish, to explain the viscount agreement. It had been explained to him that this agreement was in respect of the possibility of his leaving his employment prior to the end of the five-year option period. Mr. Lovig had also been assured by a Mr. Anderson that the agreements properly reflected the proposals originally explained to him. Mr. Lovig realized that he was committed to pay for his 2,000 shares (now 6,000 after a 3 for 1 split) over a five-year period, but was troubled by the provisions relating to his leaving the company.
Mr. Lovig acknowledged that he had been made aware that the plan offered certain tax advantages. It had been explained to him that the plan was structured in such a way that any profit realized on the eventual disposition of the optioned shares would be treated as capital gain and not, as in the case of the ordinary option, as income in his hands. He conceded that he faced considerable exposure in buying shares on a 100 per cent margin, but, in the euphoria surrounding the oil industry stock market at that time, he had not dwelt very seriously on the risk involved.
Mr. Lovig also stated that he had in fact not applied for a loan and had not received the equivalent amount in money. He also said that the company had waived the five per cent payment requirement during the first year of the option period, but 50 per cent of a bonus payable to him in that year had been credited to the loan. Yet, he had not received any share certificate representing the number of shares which should have been thereby released.
On leaving the company on October 31, 1982, Mr. Lovig had not understood that he owed money to Turbo or that the loan agreement he had signed was properly a loan. He understood that he was covered by paragraph 7(b) of the loan agreement relating to cessation of employment, that he was only entitled to those shares which he had fully paid and that was the end of his obligations.
When a rapidly falling market in the value of the shares had prompted Turbo to adopt the forgiveness plan, he had not felt that it applied to him. He had nevertheless gone along with it, but had not raised with anyone the issue as to whether or not there was any debt to forgive.
The evidence of the plaintiff Richard Jaggard was in the same vein. He had been invited to join the 1972 Plan late in 1979 and had signed certain Agreements as of January 8, 1980 in respect of 2,500 shares at the option price of $15 a share and had indebted himself in an amount of $37,500. This loan, bearing no interest, was repayable at the option of the employee at a rate of 25 per cent per year for each of the years 1980, 1981 and 1982, with whatever balance then outstanding becoming due and payable on January 8, 1983. That agreement was entitled "Turbo Class B Common Share Purchase and Sale Agreement" and is recited hereunder:
TURBO CLASS “B” COMMON SHARE PURCHASE AND SALE AGREEMENT (1-28)
THIS AGREEMENT made as of the 8th day of January A.D. 1980.
VISCOUNT FINANCIAL SERVICES LTD. a body corporate having its head office at the City of Calgary, in the Province of Alberta,
(hereinafter called the ” Company")
OF THE FIRST PART
Richard K. Jaggard
223 Deer Side Place S.E. CALGARY, Alberta T2J 5L6
(hereinafter called the "Employee")
OF THE SECOND PART
WHEREAS the Company wishes to sell to the Employee and the Employee wishes to purchase from the Company 2,500 Class "B" Common Shares of Turbo Resources Ltd. (hereinafter called the "Shares");
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the sum of ONE ($1) DOLLAR and other good and valuable consideration paid by the Employee to the Company (receipt whereof is hereby acknowledged by the Company), and in consideration of additional sums of money to be paid by the Employee to the Company as hereinafter set forth, the parties hereto agree as follows:
1. The Company hereby sells, transfers, bargains and assigns to the Employee and the Employee hereby purchases from the Company the Shares, title to the Shares to pass as of the date of this Agreement.
2. The Employee agrees to pay to the Company the sum of FIFTEEN ($15) DOLLARS for each of the 2,500 Shares, being in total the sum of $37,500 (hereinafter called the "Total Purchase Price").
3. The Total Purchase Price shall be paid by the Employee to the Company by bank draft, certified cheque or cash at the office of the Company in Calgary, Alberta in the following manner:
(a) On or after January 8, 1980 the Employee shall have the right but not the obligation to pay twenty-five (25%) per cent of the Total Purchase Price;
(b) On or after January 8, 1981 the Employee shall have the right but not the obligation to pay an additional twenty-five (25%) per cent of the Total Purchase Price;
(c) On or after January 8, 1982 the Employee shall have the right but not the obligation to pay an additional twenty-five (25%) per cent of the Total Purchase Price;
(d) The Total Purchase Price or any amount not then paid shall be due and payable in any event on January 8, 1983, without interest.
4. The Employee shall not have the right to prepay all or any portion of the Total Purchase Price without the prior written consent of the Company being first had and obtained.
5. The Company shall be entitled to hold the Shares in escrow and as collateral security for the due and timely payment of the Total Purchase Price; provided however that upon the making of any payment authorized by Clause 3 hereof the Employee shall be entitled to receive and the Company shall deliver to the Employee such of the Shares then being held by the Company in escrow as the Employee shall have then paid for at the rate of one (1) Share for each FIFTEEN ($15) DOLLARS paid.
6. In the event that the Employee fails to pay the Total Purchase Price on or before January 8, 1983, the Company shall be entitled to enforce payment of the total purchase price or any amount then outstanding by any means authorized by law and, in addition, shall be entitled after that date to sell all or any of the Shares then held by it in escrow on behalf of the employee and shall apply the sale proceeds thereof against the amount of the Total Purchase Price then outstanding with any surplus being paid to the Employee.
7. The rights of the Employee under this Agreement shall not be transferrable or assignable by the Employee in whole or in part without the prior written consent of the Company.
8. Time shall be of the essence of this Agreement.
IN WITNESS WHEREOF the parties hereto have executed this Agreement effective as of the day, month and year first above written.
That agreement was supplemented by a Buy-Sell Agreement as follows:
BUY-SELL AGREEMENT (1-29)
THIS AGREEMENT made as for the 8th day of January A.D., 1980
VISCOUNT FINANCIAL SERVICES LTD. a body corporate having its head office at the City of Calgary, in the Province of Alberta,
(hereinafter called the ” Company")
OF THE FIRST PART
Richard K. Jaggard
223 Deer Side Place S.E. CALGARY, Alberta T2J 5L6
(hereinafter called the "Employee")
OF THE SECOND PART
WHEREAS the parties hereto have entered into a Turbo Class "B" Common Share Purchase and Sale Agreement (hereinafter called the" Share Purchase Agreement") effective as of the date of this Agreement;
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the sum of ONE ($1) DOLLAR and other good and valuable consideration paid by the Company to the Employee (receipt whereof is hereby acknowledged by the Employee), the parties hereto agree as follows:
1. The Employee hereby grants to the Company the right, exercisable solely in the discretion of the Company, to repurchase from the Employee at the price of FIFTEEN ($15) DOLLARS per Share, any of the Shares for which the Employee has not yet paid the Company (pursuant to the provisions of Clause 3 of the Share Purchase Agreement) upon the first occurrence of any of the following events:
(a) Upon the expiration of a period of one (1) year from the death of the Employee;
(b) Upon the expiration of three (3) months after the termination of employment of the employee with either the Company, any of its subsidiaries or affiliates or its parent company because of permanent disability or retirement under a retirement plan of the Company of its subsidiary; provided that in the event that the Employee dies within such three (3) month period, the provisions in paragraph (a) hereof shall apply; or
(c) Upon the termination of the Employee's employment with the Company, any of its subsidiaries or affiliates or its parent company for reasons other than permanent disability, retirement or death of the Employee.
2. The right of purchase herein may be exercised by the Company at any time up to 5:00 o'clock P.M. (Calgary time) on the sixtieth (60th) day following the date the right to purchase first occurred, by notice in writing directed to the Employee at the last known address of the Employee as disclosed by the records of the Company.
Notice may be given to the Employee by mailing the same registered mail, postage prepaid, to the Employee's address as above stated or by delivering same to the Employee personally. The said notice if delivered shall be deemed to have been given on the date on which it was delivered, and if mailed shall be deemed to have been given on the third (3rd) business day following the date on which it is mailed.
The notice shall be accompanied by the Company's cheque payable to the Employee in an amount equal to FIFTEEN ($15) DOLLARS multiplied by the number of shares purchased, provided always that the Company may deduct from such amount any moneys which the Employee may then owe the Company.
3. The Employee does hereby constitute and appoint the Company its lawful attorney to do all such acts and things and to execute all such documents on the Employee's behalf as may be necessary to effectively transfer and deliver the shares purchased to the Company or to such person, firm or corporation as the Company may designate.
4. Time shall be of the essence of this Agreement.
5. This agreement shall enure to the benefit of the Company and its successors and assigns and shall be binding upon the employee, his heirs, executors and administrators.
IN WITNESS WHEREOF the parties hereto have executed this Agreement effective as of the day, month and year first above written.
Mr. Jaggard left the company on March 31, 1982, at which time only a relatively small portion, namely 400 shares (out of 7500 shares after the 3 for 1 split) had been paid and a share certificate in that amount issued to him. Mr. Jaggard testified that on termination, no discussions took place with respect to the shares, or to any indebtedness to the company. He was under the impression in any event that Viscount would buy back those shares which remained unpaid. He never felt obligated to the company on a loan or otherwise. He was of course aware of the tax implications of the plan, i.e. the capital gains aspect of it, but otherwise regarded many of the provisions in the agreements as corporate jargon impossible to understand. He nevertheless admitted that when the matter of forgiveness came up, the company's stability was precarious and he was concerned that a receiver for the company might be appointed. He felt it was in his interest to adhere to the forgiveness formula presented to him by the company and get rid of whatever problem there was once and for all.
The situation with respect to the third plaintiff, Marion Wargacki, is somewhat similar. As previously disclosed, he entered into a purchase and sale agreement and a buy-sell agreement (1-40, 1-41) on September 6, 1978 for 2,000 warrants at $2 each for a total price of $4,000. As also noted earlier, payment for those warrants were scheduled on the optional basis of 25 per cent per year with any balance due and payable on or before June 30, 1982. As of that date, and upon payment of any debt outstanding, he became entitled to the delivery of the warrants. The provisions of the above agreement were substantially the same as in the case of the plaintiff Jaggard, including the right to have released to him from time to time such number of warrants for which payment had been made.
According to his evidence, Mr. Wargacki thought he was buying into a winwin situation. He was shocked to learn later that he still owed the company $2,000 when the warrants were no longer worth anything. He was under the belief that he would only be responsible for the price of the warrants actually paid for, but not for the balance.
Mr. Norman Richard Gish, who joined Turbo in 1980 as vice-president and early in 1983 was appointed its president and chief executive officer, provided useful information on the corporate view of its stock option plan and of the events which surrounded and followed the drastic fall in Turbo share prices in the latter part of the year 1981.
He explained that the stock option plan (1981) giving the right to an employee to a one-time purchase or all option shares paid by a loan repayable over five years was to provide consideration so that the employee would have the shares. The objective was to set up an incentive plan competitive with other plans in the oil industry. The plan itself had been prepared by outside counsel at the request of Turbo. He reviewed the optional buy-back agreement with Viscount and stated that this was to prohibit an employee from having unpaid shares issued or available to him upon cessation of employment. His understanding was that under that agreement, Viscount would repurchase outstanding shares in such circumstances.
He further admitted that in the face of falling stock prices, something had to be done and thus the forgiveness formula was developed. The amount of noninterest bearing loans outstanding was approximately $3.5 million and these loans had been set up in the books of the company as " loans receivable”. By June 10, 1982, with the oil industry in recession, with the company's liability amounting to $900 million and with a loss for that year of $128 million of which $100 million was on account of interest payments alone, there was growing concern that the company would default on its secured loans and a receiver appointed. A receiver would not be so paternalistic towards Turbo employees and would probably have to enforce collection.
Mr. Gish admitted that in the kind of agreement which the plaintiff Mr. Jaggard had signed, there was an opportunity subject to company approval to prepay the loan outstanding and thus cut losses. He felt, however, that in the frail state of the company's affairs, this might have constituted a fraudulent preference. To the question of whether a fraudulent preference could be triggered only if there were a liability, Mr. Gish said that rightly or wrongly, there was a large receivable on the books of the company, but concurrently, the company had never had the intention of putting any of its employees at risk.
As far as the 1978 or 1980 agreements were concerned, Mr. Gish viewed them as conditional sales subject to the continuing employment of the employee concerned.
Mr. Gish readily conceded that the purpose of the 1981 plan was to get around the option benefits covered by section 7 of the Income Tax Act and to so structure the plan that any resulting profit in the hands of an employee would be taxed as a capital gain. To accomplish that purpose, title to the shares would have to vest in the employee, subject to a pledge as a guarantee for the loan. Share certificates were in fact issued to the employee but were not delivered to him. As to entitlement to dividends, the witness was not too sure on that and commented that any dividend paid might have been a mistake.
Expert evidence with respect to the transactions in which the several plaintiffs became involved was also submitted. Mr. William A. McCann, on behalf of the plaintiffs, took the position that the benefit conferred on an employee by way of loan forgiveness must be evaluated on the basis of the fair market value to the employee. It was clear, he said, on reading 1983 board of directors' minutes that if an obligation to pay existed, collection action would either place an employee in jeopardy or would be uncollectible. This meant in effect that a valuation of the amount of forgiveness be set on a case by case basis.
The witness had of course made certain assumptions, i.e. that there had been no loans, or if there had been a loan, it was unenforceable, or if there was an enforceable loan, it would not have been collectible. On that basis, said the witness, the value of the benefit to the employee by way of forgiveness should be discounted by up to 90 per cent of its face value.
Mr. Richard Wise, on behalf of the Crown, submitted his expert opinion on the basis of different assumptions. The witness assumed that a transaction had taken place, that a debt had been incurred and that the benefit received was the amount of the debt forgiven. Whatever value might be ascribed by the employee by reason of collectibility or otherwise had not been considered nor had he considered the issue of the enforceability of the loan.
The case for the plaintiffs
The basic position of the plaintiffs, according to their counsel, was that the application of paragraph 6(1)(a) of the Income Tax Act with respect to any benefit conferred on an employee becoming taxable in his or her hands invited an inquiry into what was the nature of the benefit.
When the benefit was in the nature of a forgiven debt, the test to be applied was whether or not the debt was an absolute and legally enforceable one. If the debt were of that kind, the next question was to determine whether the debt was forgiven. If it were forgiven, was it a benefit in respect of employment? Finally, if it were a benefit, there was left remaining the determination of the value of it.
With respect to the plaintiffs, Mr. Lovig and Mr. jaggard, counsel stated that the alleged debt was only due at the expiry date of the option period, when at that time both of them had ceased to be employed.
The Crown's case, he said, was based on an assumption that the loans in issue were in fact loans of money and that a debt was immediately created. Such was not the case. There might have been a loan of shares, but not the kind of loan on which the Crown's assessment was based. As for the plaintiff Wargacki, the release given to him by the company refers to a loan when in fact no one had even suggested that he had taken out any loan with the company. Counsel for the plaintiffs referred to the agreements to which the plaintiffs had subscribed. An analysis of these agreements, he said, clearly indicated that they required interpretation. The conflicts and inconsistencies found in them made it imperative that an enquiry be made into all the surrounding circumstances of the case, including of course parol evidence as to the intention of the parties, the purpose of the stock option plans and of the benefits which the employer was evidently desirous of conferring on its employees.
Counsel asked that the Court direct its attention particularly to paragraph 5 and paragraph 7(b) of the loan agreement. Here was a document, he said, where upon leaving employment, the so-called loan became immediately due and payable. Concurrently, however, upon leaving employment, an employee had no right to any shares remaining unpaid at that time. It would be inconceivable for the parties to have intended that an employee would be stuck with a total debt but not receive in return all the shares to which he was purportedly entitled.
Counsel also urged that care be taken in dealing with the Crown's position. Counsel's view was that if the agreements said that there was a purchase of shares, if they said that there was a loan and if the employer assumed that the loan was enforceable and then purported to forgive that loan, it constituted a taxable benefit to the employee. Such an approach, said plaintiffs' counsel, was purely formalistic and did not reflect the true relationship between the parties.
Counsel for the plaintiffs suggested that there was an implied term in the loan agreement. Counsel referred to a proceeding taken by way of an originating notice of motion before the Court of Queen's Bench in Alberta instituted in February 1987 (see plaintiffs’ trial documents, vol. 2) for an order declaring that the plan and its consequent agreements did contain an implied term that liberated an employee from any further liability to Turbo if from year to year during the option period, the market value of the shares available to an employee were not equal to 90 per cent of the original purchase price of the shares.
The Court of Queen's Bench had available to it all the agreements now before this Court as well as lengthy affidavits from any number of people who had participated in the Plan. In the result the Honourable Mr. Justice J.J. Kryczka, on February 24, 1987, had issued an order accordingly and given the applicants the relief for which they had applied.
Counsel for the plaintiffs conceded that such an order was not necessarily binding on this Court and it was a fact that the Crown had not been made a party to the proceedings. Nevertheless, said counsel, the order did indicate that the agreements could only be construed on the basis of the intention of the parties and such an intention required an implied term as set out in the order.
The other matter raised by plaintiffs' counsel was the collectibility aspect of the so-called benefit. According to the expert witness Mr. McCann, the financial position of the plaintiffs, made evident by an amount of indebtedness at roughly the same level as their annual income from employment, was a very precarious one. The plaintiffs could very well have made a voluntary assignment. They might have left the jurisdiction or otherwise have become judgment proof. It was incumbent therefore that both collectibility, as well as enforceability, be factored into the determination of the value of the benefit to the employees.
The case for the Crown
The main plea by Crown counsel was that on the subject of the agreements, it did not matter whether or not they contained inconsistencies or difficulties of interpretation. The test before the Court was whether or not the parties acted on them in a manner which indicated a common intention to buy shares, to pay for them by way of a company loan and eventually to realize a capital gain on the resale. The whole scheme, said counsel, was a tax-driven one based on a firm expectation of price increases with an eventual benefit of a capital gain as against ordinary income. If the parties never even contemplated a sharp downward turn in the market, it did not follow that there were no valid agreements or that a debt, subsequently forgiven, was not created. Furthermore, the surrounding circumstances themselves indicated that all parties were at idem on the view of the situation taken by the company and which had prompted the company to adopt a forgiveness policy. Granted that what happened had not been foreseen and, admittedly, the results ran counter to the incentive purpose of the plans, nevertheless these results prompted the company to forgive the loans, and the amount of the forgiveness was no less a benefit to an employee.
In essence, said Crown counsel, the plaintiffs suffered a loss on the stock market. It was a huge loss, it was a disastrous loss, but it was not the kind of loss that Revenue Canada should be expected to finance. Furthermore, although the agreements provided the company with a plethora of rights, i.e. the acceleration of the due date of the loan, the pledging of the shares, the disentitlement to unpaid shares on leaving employment, the company in fact never enforced these rights. The company by necessary implication, permitted the prepayment of the shares by releasing them to the employees who in turn sold them and reduced the debt accordingly.
To sum up, the Crown's position was that a stock option plan was put together with the intention of making future profits in company shares a matter of capital gains. The plan was tailored to get a capital gain and at the same time get an adjusted cost base fixed in time. There was an alternative offered to the employees to follow the simple option route in which case, if the shares had dropped in value, the option need not have be taken up. In the case of a one-time purchase, however, as was stated in Mr. Gish's memoranda (1-1) the employee took the risk should the market value of the shares fall below the option price. This possibility had been clearly spelled out to the employees and they had taken that risk. There was therefore no reason why Revenue Canada should not now be entitled to reassess as it did.
Analysis of the evidence
Evidently the case before the Court is a difficult one. Paragraph 6(1)(a) of the Income Tax Act, as well as jurisprudence in support, says clearly that a benefit, by way of an employer-forgiven loan, is income in the hands of the employee and taxable as such. Crown counsel reduces it to simple terms: if at a given time, an employee has a liability of $50,000 and that liability is forgiven, the employee's net worth increases by that much and that increase is a taxable benefit.
It is also evident that the plan was intended not only to provide an incentive to employees but that any profits resulting from an increase in market value of the company shares be treated as capital gains. This represented a tax advantage to the employees. It was agreed that upon a straight option plan, the employee assumed no risk but any spread between option price and fair market value of the shares became immediately taxable in the hands of the employee. Such an employee could become seriously exposed, however, if he kept his optioned shares, paid taxes on the spread and later on faced a rapidly declining market. On disposing of these shares, he not only would have suffered a capital loss but would already have incurred a tax liability on the spread.
Much of what the Crown argues as to the parties' intention carries some weight. No matter the risks which the plan imposed on the employees, the agreements were structured on the presumption that share values would rise. Yet the risk was there, a risk which as the facts disclosed, resulted in an unconscionable loss to the employees. One might remark that what an employee was being offered were shares in the company at a 100 per cent margin, and from the evidence, the value of these unpaid shares was pretty close to the employee's annual earned income. One might retrospectively wonder whether such a scheme was of an incentive kind bringing benefits to employees. One can only conclude that the euphoria in oil and gas share prices at that time obliterated all possibilities of a downturn.
Be that as it may, the agreements signed by the plaintiffs have to be considered. It is on the basis of these agreements that individual loans were purportedly made to employees and that shares were issued in their name. These shares, however, were not delivered but were kept as security for the debt. The total amount of these debts were put in the books of the company as receivables. When the whole scheme collapsed and it prompted senior management to do something about it, the company appears to have adopted a procedure which had a semblance of conformity with these same agreements. That procedure was structured, rightly or wrongly, on the basis that a lawfully enforceable debt was due, that the delivery of unpaid shares be accelerated, that their value be realized and that the resulting outstanding balance of the loan, even though not yet due, be forgiven.
In that respect, there is also some weight to be given to the Crown's position that if the parties acted throughout on the basis of there being an enforceable debt which required forgiveness, the Court should not waste too much time in a legalistic approach to contract interpretation to determine whether or not such a debt was indeed enforceable.
In my respectful opinion, the relationship between the plaintiffs and the company do not support the Crown's position. Furthermore, the Crown did state that the agreements speak for themselves. This, in my view, invites an enquiry into the provisions of the agreement and I should at this time elaborate on them.
I should first of all deal with the agreements relating to the plaintiff Lovig. He joined the 1981 plan effective February 3, 1981. For this he executed several documents, the most important of which is the loan agreement. According to the agreement the plaintiff became indebted to the company for an amount of $47,700 representing the option price of $23.85 a share on 2,000 shares. The loan was repayable at the annual rate of five per cent of the loan amount with the balance payable on the due date. In case of default, the company could declare the whole amount immediately payable. Prepayment could be made, but only on consent of the company.
Similarly, paragraph 5 of the loan agreement provided that on cessation of employment, the entire balance of the loan became due and payable. Paragraph 7(b), however, said that, on cessation of employment which occurred on October 31, 1982 and subject to payment therefor, Mr. Lovig was only entitled to 20 per cent of the shares for each year in the plan, less any shares previously released. The provision specifically referred to pledged shares, thereby covering the case of Mr. Lovig.
Finally there was provision for an option to be granted by Mr. Lovig to Viscount Financial Services Ltd. to purchase any shares which on cessation of employment, Mr. Lovig was entitled to have released to him.
As security for the above loan, Mr. Lovig pledged all the optioned shares, gave an irrevocable assignment and authorization to the company to apply 50 per cent of any bonus payable to the reduction of the loan, executed a promissory note and signed in blank an irrevocable stock power of attorney.
In the case of the plaintiff Jaggard, his participation was in the 1972 plan (as amended) but nevertheless its essential provisions were the same. The partici- pation date was January 8, 1980. His loan amount was for $37,500 representing 2,500 shares at $15 per share. This loan was repayable at the annual rate of 25 per cent for four years with any balance due and payable on January 8, 1983. The agreements provided for a similar right but not an obligation, to repurchase unpaid shares upon cessation of employment. Mr. Jaggard was entitled to have released to him any paid-up shares. There was no loan agreement as in the case of the plaintiff Lovig and no specific provision disentitling him to shares on leaving his employment. Nevertheless, in a memorandum circulated by the company dated January 2, 1979 (1-28), and which outlined the general scheme of the share purchase agreement, it was stated that”. . .Turbo has the right to re-purchase . . .the shares the employee is not entitled to pay for. . .” (the italicizing is in the text) and noting also that the buy-back is effective in the event of cessation of employment.
I also note that in paragraph 6 of the 1972 plan (1-58) it was provided that " if the optionee shall no longer be in the employ of the company, the option terminates as to any shares not taken up at the time he ceases to be so employed”. The 1980 plan also had a similar provision in paragraph 6.5 where an option could only be exercised in respect to such shares which would have been exercisable on the date of termination of employment.
It seems to me, therefore, that it was a policy in the company's stock option plans that unreleased shares would no longer be available to an employee on cessation of employment. Such a policy, if it was to be an incentive, or as some witnesses put it, "a golden handcuff”, was not only consistent with the scheme but its absence would have been necessarily inconsistent with it.
I should therefore find that in both the case of Mr. Lovig and the case of Mr. Jaggard, the issue is the same: can the plaintiffs be held accountable for the full purchase price of all the unreleased shares when they were disentitled from receiving them on leaving the company. Expressed in more general terms, was there an actual, unconditional sale of all the optioned shares to the employees under the plan or pursuant to the agreements which they signed. There is no dispute that the basic principle of contract interpretation or construction is that when the parties have seen fit to reduce their intentions into writing, it must be because they wanted their meaning to be unequivocally established. Thus, the written word should make plain beyond doubt or question what were the requirements of the contract that was entered into by the parties. However, as was pointed out by Dickson, J.A. (as he then was) in Coodin v. Binsky,  34 D.L.R. (3d) 257 at page 262:
Obviously the parties intended something by the wording adopted in the latter part of the quoted clause and if a literal interpretation leads to an absurdity, as it does, we must, I think, depart from the ordinary rule that words in a written contract are to be given their plain and literal meaning and seek a construction which will give the words a reasonable meaning within the context of the whole document.
Now, in addition to the words used, and the facts shown to explain those words, the courts may consider the commercial or business purpose of the contract. As Lord Diplock stated in Antaios Cia. Naviera S.A. v. Salen Re- derierna A.B.,  A.C. 191:
While deprecating the extension of the use of the expression " purposive construction" from the interpretation of statutes to the interpretation of private contracts, I agree with the passage I have cited from the arbitrators’ award and I take this opportunity of re-stating that if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.
In the cases of both Mr. Lovig and Mr. Jaggard, I note several repugnancies not only within the individual agreements but also when reading the agreements together.
Under the loan agreement, as explained in Mr. Gish's letter of April 28, 1981, the 2,000 shares purchased with the $47,700 loan from Turbo, was to be held as security for the said loan, with a release of up to 20 per cent of the shares to the plaintiff annually. Provision was also made for Viscount Financial Services to have an option to buy-back the appropriate number of shares at the original option price should the employee leave the company. This buy-back provision, at the sole discretion of Viscount, was in respect of those shares, less the shares previously released, to which the employee was entitled on leaving his employment pursuant to the loan agreement.
There are two clauses in the loan agreement that provide for the reimbursement of the total balance; paragraph 3 in the case where there was a default in the five per cent payment of the loan and paragraph 5 in the case of cessation of employment.
With respect to the cessation of employment contingency, the loan agreement provided that upon cessation the employee was entitled to a number of shares equal to but no greater than 20 per cent of the pledged shares for each option year less any shares already released to him. Later, the agreement stipulated that in regards to the remainder of those shares Viscount had the option to buy-back those shares. If it did so the company had the power to receive from Viscount such of the moneys payable on the option as was required to retire the indebtedness outstanding and such amount so received was applicable to the balance outstanding on the loan.
The problem which surfaces here, in the context of determining whether or not there existed a legally enforceable debt, is that it is unclear what would have happened with that portion of the shares not released to the employee upon cessation and not purchased by Viscount under its buy-back option.
Certainly, with respect to both the plaintiff Lovig and the plaintiff Jaggard, there is great difficulty in reconciling an obligation to pay in full a debt to acquire shares when on cessation of employment, they were not entitled to any more than a cumulative 20 per cent of those shares. Generally speaking, these employees owned all the shares and were entitled to them or they did not. Donner et retenir ne vaut.
There are other difficulties, however, in trying to reconcile various discordant provisions of the agreements which apply to Mr. Lovig and Mr. Jaggard but which might equally apply to other employees who joined the plan in 1980 or 1981.
It is clearly admitted in the evidence that the plan was structured with one purpose in mind. That purpose was to create a stock option plan in a manner that on the face of it, an employee would enter into an outright purchase of company shares, become their rightful owner and the price thereof would be paid incrementally or by a non-interest bearing note. The intended result was that the employee, having become owner of the shares at that time, could later dispose of the shares on a capital gain basis.
To fulfil that purpose, what did the company do? It purported to sell an amount of shares to an employee. It purported to provide credit or to advance to the employee an equivalent amount to pay for those shares by way of a company loan with a five-year term. As a May 14, 1981 memorandum (plaintiffs' documents, Vol. 1, Tab 3) discloses, that loan was a condition of the agreement. The employee could not" use his own funds or borrow from other sources and thereby take immediate possession of all the shares”.
If the true intent of the deal was what it purported to be, the company would have forthwith issued the shares, hypothecated them to secure the loan and have assured itself that the proceeds of any subsequent sale of any portion of these shares would first be applied to loan reduction. This would have been, in my view, a situation parallel to the relationship between a broker and his customer when a margin account is opened. The broker holds the shares. He may exercise the right to sell them where the market drops and the customer does not maintain his margin, but otherwise the customer has full power and control over the shares, including the power of sale.
In the case before me, however, the company had other exigencies to meet. Although the agreements purportedly vested ownership in the shares in the name of the employee, the latter was denied control over them. Mr. Lovig's loan agreement specifically stated in paragraph 7(a) that the employee was not entitled to have released to him nor was the company required to release to him any shares except in accordance with the formula set out in that paragraph, i.e., the cumulative 20 per cent—40 per cent—60 per cent—80 per cent on an annual basis over four years. Similarly, in Mr. Jaggard's agreements, he was only entitled to have released to him his paid-up shares.
There were of course other provisions in the loan agreement which might lead to the conclusion that things were not as they appeared to be. These provisions were obviously to protect the company from any exposure and concurrently to assure that the employee, like a Houdini, could not escape from the golden handcuff. The company imposed a pledge of the shares, a partial assignment of any bonuses payable and a five per cent annual payment on account of the loan. Furthermore, the company imposed an acceleration clause on the five-year loan not only in the event of default, but upon death of the employee or on his ceasing to be employed. And further, paragraph 7(b) of the agreement, dealing with cessation of employment, expressly limited the right of that employee to have released to him no more than 20 per cent of the pledged shares for each full year of employment as a plan member. Finally, the company imposed on the employee the grant of an option to either Viscount or Turbo Properties to buy from the employee on cessation of employment those unreleased shares held in his name but to which, according to the agreement, he was not entitled.
The initial conclusion which can be drawn from all these provisions is that in attempting to set up a stock option scheme and provide for capital gains benefits, the company was certainly not prepared to give away the store or to depart from its incentive policy. It was not going to be exposed to the possibility of having issued and delivered shares on the one hand and holding on to an uncollectible debt on the other. Nor was it disposed to deliver shares in a rapidly rising market to employees who would quit the company the next day. It is not surprising therefore that in an attempt to achieve both purposes, the agreements which were entrusted to the drafting skills of some tax lawyer or other, would purposefully be drafted in such a way that the technical requirements to make any resulting profit a capital gain would be met and that, if the agreements were subjected to scrutiny, they might more successfully pass the test.
As with any other documents produced in this Court from time to time and which are drafted with an eye to some kind of tax benefit, artificialities are often times introduced to give these documents a sheen of respectability or legitimacy. Often times, however, a more thorough analysis of their several provisions discloses the flaws, the blemishes and the distortions in them. In such circumstances, a court can only do its best to get at the pith and substance of the transaction in order to determine the true legal rights and obligations of the parties.
There is no doubt on a reading of several provisions in the agreements, that there appeared to be an unconditional purchase and sale of an amount of optioned shares payable by way of a loan over five years. There were also provisions that in the event of default or cessation of employment, the entire balance of the loan would immediately become due. There were also provisions for the issue of a promissory note and the pledging of optioned shares as security. If all these provisions were taken alone, a conclusion might be drawn that indeed an employee acquired ownership, title and interest in these shares, became liable on the note and should the shares lose their value, he would still be accountable for any balance of debt.
These provisions assured, however, that the shares had indeed been purchased, that an outright sale had taken place, that the employee was entitled to them and in accordance with the well-established incidents of ownership, could dispose of them at will.
Yet, notwithstanding the ambit of the agreements in that respect, it is abundantly clear, in my opinion, that the employee could not obtain control over the shares except by paying for them at an incremental rate. Paragraph 7(a) of the loan agreement is explicit on this. It is so explicit that the company itself acknowledged at a board meeting on November 11, 1982 (Tab 69) that the "shares and warrants. . .were not under the employees' control and therefore the employees were not in a position to react to the declining market".
It appears to me that such a restriction on the normal attributes of ownership creates the kind of blatant defect as to whether, in spite of the smoke and mirrors, the employees had obtained a clear and indefeasible title to the shares. After all, it would only be in those circumstances that any enforceable debt to the company occurred or any forgiveness of it could be considered a benefit to the employee.
In M.N.R. v. Wardean Drilling Ltd.,  C.T.C. 265, 69 D.T.C. 5194, when the issue was whether the taxpayer had "acquired" depreciable property in 1963 or in 1964, Cattanach, J. said this at page 271 (D.T.C. 5197):
In my opinion the proper test as to when property is acquired must relate to the title to the property in question or to the normal incidents of title, either actual or constructive, such as possession, use and risk.
Further, on the same page, Cattanach, J. stated:
In order to fall within any of the specified classes in Schedule B, there must be a right in the property itself rather than rights in a contract relating to property which is the subject matter of the contract.
In the case of Danalan Investments Ltd.,  C.T.C. 251, 73 D.T.C. 5209, Collier, J. was invited to determine the owners of shares which were registered in certain individuals. His lordship was able to find that these individuals were not the true owners of them and he stated, at page 254 (D.T.C. 5211):
He (a registered owner) may not have appreciated the exact legal meaning but there is no doubt in my mind that he knew that he had no control over these shares. The request for the use of his name came through his father from his uncle and in my view, it is fair and logical inference to draw that his uncle was the true owner of the shares.
A similar issue came up in The Queen v. Louis Bisson,  C.T.C. 332, 78 D.T.C. 6224, where on a review of a series of complex transactions involving ownership on the basis of stock certificates, Walsh, J. could conclude, at page 340 (D.T.C. 6229):
There is nothing to indicate that Georges Bisson or Jacques Gaston Bisson ever were entitled to the 665 shares for which they each had a certificate either by initial allotment or by transfer . . .they must each be considered as only having owned one share of the capital stock of the company.
An effort must therefore be made to separate the wheat from the chaff, or to segregate the incentive aspects of the agreements from their tax-driven devices. I can only conclude that there was a missing link in the transfer of actual ownership in the shares and in the employee obtaining control or use over them. That missing link was the inability of the employee to obtain release of all the shares except in accordance with the schedules set out in the several agreements. In the first and subsequent years of the option period, however, the employee had that missing link available to him at least in respect of some of the optioned shares. He had obviously agreed to purchase all the shares but if true ownership was not conferred on him by reason of the scheduled release provisions, he was entitled to a release of a portion of them from year to year. If, for any reason, he did not avail himself of this provision in order to perfect his defective title over those shares, he cannot be heard to say that all his obligations to pay the releasable shares terminated. The employee must bear some responsibilities under his agreements. If he should establish that if, by reason of the release provisions, he did not acquire effective ownership of all the shares to which he subscribed, he cannot simultaneously establish that he should bear no liability with respect to the releasable portion of them. This would be tantamount to concluding that all the agreements are null and of no effect, a conclusion which certainly I am not prepared to draw.
In the case of Steen v. The Queen,  2 C.T.C. 394, 86 D.T.C. 6498, Rouleau, J. had occasion to examine the relationship between the acquisition of shares and the establishment of legal title to them. He quoted with approval the formula stated by Mr. Justice Baskin in Grant v. The Queen,  C.T.C. 332, 74 D.T.C. 6252, that "the key factor ... in ascertaining the date of acquisition was not the date on which the shares were fully paid nor the date on which the share certificates were issued but the date on which the taxpayer established a binding propriety right in the shares". [Emphasis added.]
I must therefore find that the liability of an employee under the plans extended only to those shares otherwise releasable to him. The number and value of such shares would consequently be determined by reference to the date of cessation of employment or the winding-up of the plan on November 11, 1982, whichever date came first. That date in November, 1982, is the date on which the board of directors officially cancelled the existing plans and adopted the forgiveness formula. The resolution in question is in 1-69.
This finding applies of course to both the plaintiffs Lovig and Jaggard. It might also apply to other employees as well although I readily recognize that their cases are not before the Court. As regards the plaintiff Wargacki, however, I must regretfully find that he did enjoy a taxable benefit when the company forgave a $2,000 outstanding amount on the warrants he had purchased. It will be recalled that Mr. Wargacki entered into his agreement for the purchase of 2,000 warrants for a total price of $4,000 on September 6 1978. He became entitled to full possession and control of them at the optional rate of 25 per cent a year for each of the years in the four-year term. In fact, Mr. Wargacki did pay for the release of half of these warrants prior to the end of the term. As of June 30, 1982, however, the other half of the warrants were releasable to him. By that time, the warrants had no value at all and the company simply released him from the balance on the debt. I must therefore conclude that in his case, the company conferred a benefit in an amount of $2,000 properly taxable as income under paragraph 6(1)(a). As mentioned before, this is a regretful conclusion but I do not see in what manner or form he can escape this liability.
I should also traverse some of the arguments raised by Crown counsel with respect to the actual position taken by plaintiffs when the company adopted a policy of forgiveness and structured its formula accordingly. If that formula referred to an outstanding loan, if it said that the unreleased shares were to be released and the proceeds used to reduce that loan, Crown counsel says that the employees are bound by it and the actual amount forgiven is a taxable benefit.
Respectfully, I beg to disagree. Such an approach would simply add more myth and more artificiality to the transactions. It is quite true that the plans, as Crown counsel put it, were tax-driven. It is also true that the relevant documents were intended to create an aura of rights and obligations to make it appear that an absolute transfer of all optioned shares had taken place. This was the position which apparently justified the company in setting up all the loans account as receivables in its book.
Yet the rights and obligations in these documents do not stand the test of scrutiny. I can only marvel at the degree of conformity and consistency which the company paid to its precarious structure. The company simply assumed that the loans were due in full. It simply took it for granted that they were enforceable. Indeed, the evidence discloses that when the forgiveness plan was submitted to the employees for their acceptance, it was stated that a receiver might be taking over the company and that such a person might be hard-nosed about it. The employees had little choice.
For the reasons stated herein, however, that was on the part of the company an erroneous assumption. If it should now be shown that on a proper construction of the agreements, the loans were not enforceable to the limits of their purported values, I do not see where the plaintiffs who, on the evidence, were certainly not willing to look a gift horse in the mouth, should be denied their right before this Court to challenge such a unilateral and erroneous position taken by the company. In any event, it should not be surprising that in the face of such a convoluted and irascible situation in which the plaintiffs found themselves, greater resistance on their part to their purported legal liability was not forthcoming.
The Crown further says that in the end, the plaintiffs got possession of all the shares and some of them claimed a capital loss. This suggests, says the Crown, that they owned all the shares and could freely dispose of them. I have found, however, that they were not free to dispose of all the shares. In any event, the action taken by the company was simply damage control measures structured on an erroneous assumption. It does not change the rights and obligations of the parties under the agreements.
If the test of ownership is effective control, a print-out of the share movements on the Toronto Stock Exchange (1-55) indicates pretty clearly what can happen when a shareholder is locked in. On April 30, 1981, the share value was $33. At the end of June, 1981, after a 3 for 1 split, the stock was at 10 /s. By the end of September, 1981, it had slipped to $6. By the end of the year, 1981, it had dropped again to $4.60 and by March, 1982, it was in the $1.70 range. It seems to me that in such circumstances, it should have been open to any employee, had he been able to dispose of his shares, to have sold them when the value had dropped to its original option price or at any time thereafter simply to minimize his losses.
In fact, however, not only did the shares remain in the hands of the company as security for the debt but moreover the employee was only entitled to exercise any ownership rights on the shares pursuant to the 20 per cent and 25 per cent formula set out in the agreements. Therefore, to repeat, the agreements must be construed so as to limit the employee's liability for the so- called loan to that amount of shares in which he had complete right of ownership. This would correspond to the relevant portion of shares releasable on each anniversary date.
Order of the Court of Queen's Bench
The proceedings taken before the Court of Queen's Bench deserve a few comments. That Court found in the agreements relating to Norman R. Gish,
David L. James and lan R. Mills that it was an implied term by way of a condition precedent that these agreements would have no force or effect if the company's common shares decreased in value to less than 90 per cent of the value of the optioned shares.
This order of the court to which the parties agree I am not bound demands great respect and there is no doubt that on the basis of the affidavit evidence submitted by the applicants, an implied term as defined could well be found.
The problem I have with it, however, is two-fold. One is that the application in substance if not in form was ex parte and the Crown, which has now argued the case before me, was not a party to the proceedings.
The second ground, and in my view the most important one, is that if that implied condition had in fact been inserted in the agreements, it would have defeated the whole capital gain purpose which was contemplated. It would have turned an ostensibly perfect purchase and sale of shares into mere options exercisable in future years at the will of the employee. If exercised in a rising market, it would have triggered off an immediate tax liability on the spread. It was admitted that the structure was devised on the unquestioned presumption that share value would rise. It seems to me, in the face of unforeseen events, that employees must bear some portion of the loss.
Furthermore, the purpose of the scheme in that respect is made clear when, in the agreements, it was provided that the employee “hereby purchases from the Company the Shares, title to the Shares to pass as of the date of this Agreement".
If, therefore, on an analysis of these agreements (and I am not sure they would have passed the capital gains test) I should have found that some liability or obligation attached to the employees, it was in an effort to reconcile the obvious tax purpose on one side, with the equally obvious ownership limitations on the other. In this light, it would be contradictory to adopt at the same time the doctrine of implied term. It would be a finding that the employees did not enter into any obligation at all, a finding against which I have already ruled.
Each of the appeals of the plaintiff Lovig and of the plaintiff Jaggard is allowed. Each is also allowed costs but limited to one counsel fee. The Minister of National Revenue is directed to re-assess the plaintiffs on the basis set out in these reasons after allowing for amounts credited to the loan by payment or from the proceeds of disposition of all the shares.
The plaintiff Wargacki's appeal is dismissed, without costs.
I would invite counsel for the parties, who have been most constructive and helpful throughout the trial, to submit an appropriate draft judgment for my endorsement or otherwise speak to me.
In the meantime, of course, I remain seized of each of these cases.
Appeals of Jaggard and Lovig allowed in part. Appeal of Wargacki dismissed.
Supplementary Reasons for Judgment (April 10, 1992)
Joyal, J.:—On February 7, 1992, following a four-day trial on December 16 to 19,1991, in Calgary, Alberta, I issued reasons for judgment with respect to the above tax appeals.
The issues before the Court concerned the tax liability of the plaintiffs on the amount of certain loans made by the employer to purchase company stock and which loans, in the year 1983, had been forgiven. Although the trial concerned the above plaintiffs, it was in the nature of a test case which might not only fix their individual tax liability, but would apply also to some other 36- odd employess who had also been reassessed with respect to the employer's loan forgiveness scheme.
In my reasons for judgment, I invited counsel to prepare and, if possible, agree to the terms of a formal judgment which I would subsequently endorse. The terms of that formal judgment came to a head in the course of a teleconference with counsel on April 6, 1992. It was in the course of this hearing that it was disclosed that the findings of fact and law and resulting formula fixing the plaintiffs' tax liability was in essence the settlement offer made to the defendant on behalf of all the plaintiffs on June 17, 1986, which offer the defendant had refused.
The plaintiffs' reassessments date back to 1988 covering the taxation year 1983. Since that time, in the normal order of things, interest on the tax liability, as now fixed by this Court, has accumulated over a period of some nine years. Furthermore, as my reasons for judgment disclose, the tax liability of the individual plaintiffs arose out of exceptional and unforeseen circumstances resulting in an onerous tax burden on each of them.
I cannot, however, do much about that. I am concerned, however, that on June 17, 1986, the plaintiffs offer of settlement, which counsel agree is identical to my findings, was refused. In the meantime, however, an inconsiderate amount of interest on the tax payable has accumulated.
In these circumstances, I should strongly recommend that the defendant remit the interest on the tax payable from June 17,1986 until the date of my formal judgment, which judgment is issued concurrently with these supplementary reasons.
This recommendation, in my respectful view, is a most proper one to make. It is meant to alleviate the added burden of interest charges over the past six years; a burden which, as events turned out, could have been avoided. The recommendation is also in keeping with more recent policy positions adopted by our tax authorities to bring a greater measure of "fairness" in the administration of the Income Tax Act.