Bertram v. The Queen, 93 DTC 1251, [1993] 2 CTC 2982 (TCC)

Beaubier, T.C.C.J.:— These matters were heard together on common evidence by consent of the parties on October 4 and 5, 1993 at Vancouver, British Columbia. They are appeals pursuant to the general procedure of this Court.

Both appellants testified and they called Douglas McRae as a witness. The respondent called James Mackie as a witness.

At issue is whether each appellant realized a stock option benefit in 1985 pursuant to subsection 7(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") in the amount of $64,080. Assumption 5(b) of each reply states that the stock option was granted to each appellant as "an employee" on February 13, 1984. This assumption was not challenged by the appellants.

The two appellants were founders of Edgewater Resources Ltd. ("Edgewater"), a corporation which was listed on the Vancouver Stock Exchange. Edgewater was an unsuccessful mining company. The appellants were directors of it, had shares in it and each also had 375,000 escrow shares and an option to purchase 44,500 shares in Edgewater for 16¢ per share. On September 5, 1985 a group led by Douglas McRae took over Edgewater pursuant to negotiations between Messrs. Bertram and McRae. The appellants state that they each entered into a deal with Mr. McRae's group to:

1. Sell 375,000 escrow shares for 1¢ each, a total of $3,750.

2. (a) Allow Mr. Simpson to retain 5,000"seed" shares;

(b) Allow Mr. Bertram to retain 10,000“ seed” shares.

3. Transfer to Mr. McRae, for no other consideration, his option to purchase 44,500 shares from Edgewater for 16¢ per share.

The deals were not in writing. The evidence before the Court is that, both before and after the deals with the appellants, Mr. McRae has been a very successful businessman in Vancouver Stock Exchange circles.

The exercise of the two options is the subject matter of the assessments. The benefit to each appellant was calculated as follows by the Minister of National Revenue:

Revenue Canada determined the value of an Edgewater share to be $1.60 at the time of the transactions.

On September 5, 1985 Mr. Bertram and Mr. Hunter, a member of the McRae group, signed a news release (Exhibit A-1(6)) that announced the transfer of control of Edgewater to the McRae group and described the allocation of the escrow shares and the change of directors. It did not refer to the option shares.

Paragraph 9 of each appellant's option agreement stated:

9. This option is neither assignable nor transferrable.

Paragraph 9 virtually quotes part of the policy statement of the Vancouver Stock Exchange. The option deal was described by James Mackie, an employee of the Vancouver Stock Exchange, to be contrary to Edgewater's listing agreement undertakings. Mr. McRae described the way the option deal was carried out as “normal”.

Each appellant carried out the deal. Mr. Simpson resigned as a director of Edgewater on September 5, 1985. Mr. Bertram remained as a director but ceased having any policy functions and did not receive any remuneration.

The appellants exercised the options on September 5, 1985. Mr. McRae wrote one cheque to Edgewater dated September 5 for the option price of both options (Exhibit A-1(4)). On September 9, Edgewater’s directors passed a resolution to issue the shares to the appellants (Exhibit A-1(7)). The following is the agreed evidence as to when the shares were in each appellant's name:

The share register is not in evidence. However, Mr. Bertram testified that he received the share certificates in October 1985 and endorsed them and delivered them to Mr. McRae's lawyer, Mr. Brian Irwin, in Vancouver. Mr. Simpson said he signed his option shares off when Mr. Bertram came to him for that purpose. Mr. McRae testified they were delivered to his lawyer. The Insider Reports filed by the appellants, and their testimony, indicate that they exercised the options on September 5 at 16¢ and disposed of the shares on the same day at 16¢. There is some discrepancy respecting numbers in the Reports, but these were explained by both appellants as errors due to their own misunderstandings; there was no cross-examination on the discrepancies.

The appellants sworn testimony, verified by Mr. McRae, is that they did not pay anything to exercise the options and they did not receive anything for the shares they got upon exercising the options and transferring the share certificates to Mr. McRae.

At the time in question paragraph 7(1)(a) read:

7(1) Subject to subsection (1.1), where a corporation has agreed to sell or issue shares of the capital stock of the corporation or of a corporation with which it does not deal at arm's length to an employee of the corporation or of a corporation with which it does not deal at arm's length,

(a) if the employee has acquired shares under the agreement, a benefit equal to the amount by which the value of the shares at the time he acquired them exceeds the amount paid or to be paid to the corporation therefor by him shall be deemed to have been received by the employee by virtue of his employment in the taxation year in which he acquired the shares;

The evidence is that each appellant exercised his option with Mr. McRae's cheque and received the share certificates in his own name. The respondent's replies state that the issue is whether each appellant realized the stock benefit on his own account under subsection 7(1) of the Income Tax Act. Mr. Simpson stated that, in exercising the option as he did, he regarded himself as the agent for Mr. McRae. His counsel stated that both appellants were in a fiduciary relationship with Mr. McRae respecting the options and the option shares.

Mr. McRae and a member of his group, Mr. Hunter, constituted two of the three Edgewater directors along With Mr. Bertram (see Exhibit A-1(7)); therefore they controlled the issuance of option shares. Mr. McRae wrote and signed an undated letter "to whom it may concern” stating that he purchased Edgewater's shares "by using the option of existing Shareholders” on September 5, 1985 for 16$ per share (Exhibit A-1(5)). A most interesting document relating to the option shares is Mr. McRae's October, 1985 Insider’s Report to the Vancouver Stock Exchange (Exhibit A-1 (12)). It shows that he acquired 87,500 shares of Edgewater for 16¢ per share on October 18; he agreed in examination in chief that this could be 89,500 shares and that it represents the option shares. The portion of the Report headed “Additional Information” reads as follows:

ADDITIONAL INFORMATION: If answer to any below is” Yes", please give particulars in “Additional Remarks”

(a) Were any shares acquired from the corporation ? Yes [ ] No [] Sold to it?

Yes [] No [x]

(b) Acquired through exercise of an option? Yes [] No []

(c) Acquired or disposed of otherwise than in the open market? Yes [x] No [ ]

(d) Were there any transactions other than purchases or sales? Yes [ ] No [x]

The Court has no doubt that the omitted checks in (a) and (b) were deliberate. The report was signed by Mr. McRae and filed in November, 1985.

In summary, Mr. McRae purchased the option shares in the appellants’ names and pursuant to their deal, the appellants immediately endorsed the option shares and delivered them to Mr. McRae. The deal with Mr. McRae was made before the options were exercised, with the result that the appellants never acquired the shares and did not receive any benefit from them. The shares and benefit were Mr. McRae's. The appellants were trustees for his benefit.

The appeals are allowed. The appellants are awarded their costs.

Appeals allowed.