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Citation: 2005TCC324
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Date: 20050513
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Dockets: 2002-3824(IT)G
2003-3232(IT)G
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BETWEEN:
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DUSTIN MORIN,
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Appellant,
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And
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Campbell J.
[1] These
appeals are in respect to the Appellant's 2000 and 2001 taxation years. The
Appellant sought to deduct $133,333.00 in 2000 and $50,662.95 in 2001 in
respect of amounts expended for the right to acquire shares within the meaning
of subparagraph 7(1)(a)(iii) of the Income Tax Act (the "Act").
The Minister of National Revenue (the "Minister") denied the
deductions on the basis that they were not paid to acquire shares but instead
were payments for employment consulting and counselling services.
[2] In
1993 the Appellant attended school in Toronto. During this
time, he met Robert Tordiffe, the father of one of his school friends. After
discussions with Mr. Tordiffe concerning the high tech industry, he decided he
wanted to pursue a career in this area specifically with a company that would offer
employee stock options. The Appellant asked Mr. Tordiffe to assist him in
finding such a position and eventually an agreement was entered into between
the Appellant and Tordiffe's company, Bobsan Investments Inc.
("Bobsan") on March 12, 1999 (the "Agreement"). According
to the Agreement, Bobsan had "the necessary associations and experience to
provide valuable employment advise (sic)". This advice was to lead the
Appellant to obtaining employment that would "maximize the financial
benefits to him".
[3] Pursuant
to the Agreement, the Appellant was to pay Bobsan, for assistance given by
Bobsan, "a portion of any stock option or similar compensation or benefit
package that Morin obtains from any employment that Morin accepts from the
recommendations provided by Bobsan" (paragraph 7 of the Agreement). The
portion of this benefit that the Appellant would pay Bobsan from any employment
accepted as a result of the recommendations was to be an amount equal to
"...one hundred percent (100%) of the first one hundred thousand dollars
($100,000.00) and thirty-three and one third percent (33.33%) of the second one
hundred thousand dollars ($100,000.00)" (paragraph 8 of the Agreement). As
a result of this Agreement, the Appellant met with several potential employers from
a list provided by Bobsan. After meeting with one of Tordiffe's contacts in
Vancouver, the Appellant accepted a position in the finance and engineering
department of a company called Westport Research Inc. ("Westport"). His remuneration package included an
employee stock option benefit plan where the Appellant had the right to acquire
shares of Westport. Eventually the Appellant exercised
these stock options through a broker and pursuant to his agreement with Bobsan,
he instructed the broker to pay Bobsan its share.
[4] In
the Appellant's tax return for 2000 he reported income of $192,113.55 in
employment income and deducted payments of $133,333.00 as "consulting
services provided by Bobsan". The Appellant on cross-examination stated
that this description of the payments was incorrect and in his tax return of
2001, he reported $117,374.52 as employment income and deducted $50,662.95 for
the "acquisition cost for Westport Research Inc. share options".
Bobsan included these amounts paid to it by the Appellant in its income tax
returns as consulting fees.
[5] There
is no issue as to whether these options were qualifying employee stock options.
The issues here are as follows:
(1) Did the Appellant
pay the amounts to Bobsan in order to acquire stock options?
(2) If not, did the
arrangement between Bobsan and the Appellant constitute a partnership and as a
consequence should the amounts retained by the Appellant be his share of the
partnership income?
[6] The
relevant legislation is contained in paragraph 7(1)(a) of the Act.
It states:
7. (1) Subject to subsections (1.1)
where a particular qualifying person has agreed to sell or issue securities of
the particular qualifying person, or of a qualifying person with which it does
not deal at arm's length, to an employee of the particular qualifying person or
of a qualifying person with which it does not deal at arm's length,
(a) if the
employee has acquired securities under the agreement, a benefit equal to the
amount, if any, by which
(i) the value of the securities at
the time the employee acquired them
exceeds the total of
(ii) the amount paid or
to be paid to the particular qualifying person by the employee for the
securities, and
(iii) the amount, if
any, paid by the employee to acquire the right to acquire the securities
is deemed to have been received, in
the taxation year in which the employee acquired the securities, by the
employee because of the employee's employment;
[7] The
Appellant's position is that the purpose of the contractual arrangement was
that Bobsan would provide advice to the Appellant on how to successfully secure
a stock option benefit package. He submits that the amount paid to Bobsan in each
year is within the literal meaning of "any amount paid" by the
employee for the right to acquire the shares. The Appellant concentrated his
argument on applying a plain reading of the relevant provisions. He focused on
the distinction between subparagraphs 7(1)(a)(ii) and 7(1)(a)(iii)
to argue that if the legislation had intended the Respondent's
interpretation, that is, that subparagraph 7(1)(a)(iii) refers only
to an amount paid to the corporation that provides the options, it would have
limited the deduction as it did in subparagraph 7(1)(a)(ii). In the alternative,
the Appellant argued that he and Bobsan formed a partnership, the purpose of
which was to profit from an available profit sharing program through the high
tech industry.
[8] The
Respondent submits that the amounts paid by the Appellant were payments for
employment recruitment and counselling services and cannot be considered an
amount paid by the employee to obtain the right to acquire the shares. The
Respondent also argued that subparagraph 7(1)(a)(iii) requires that the
benefit be calculated by subtracting any amount that the employee (the
Appellant) paid to the corporation (Westport) for the option to purchase
those shares from the value or market price of those shares (emphasis are mine).
[9] The
Respondent relied on a number of extrinsic authorities in support of his interpretation
of subparagraph 7(1)(a)(iii) as there is no case law dealing directly
with this particular provision. He referred me to the CCH interpretation of
section 7 as well as an article written by Christin R. Van Cauvenberghe entitled
"Taxation of Employee Stock Options – A Review and Update", 2001
Prairie Provinces Tax Conference, (Toronto: Canadian Tax Foundation, 2001).
Both of these sources to a large extent simply restate the legislation in that
it allows a deduction of the amount the employee paid to acquire the stock
option. These materials are of little assistance to the issue before me and to
some extent beg the question as to "what is an amount paid to acquire
something".
[10] The Respondent also referred me to a number of cases and in particular
the case of M.N.R. v. Wardean Drilling Ltd., 69 DTC 5194. In
doing so, the Respondent was attempting to address this issue by looking at the
definition of "when something is acquired". In the case of Wardean
Drilling, at page 5197 Cattanach J. stated:
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.
While this case certainly addresses the issue of "when"
something is acquired and what final steps may be essential before something
can be said to have been acquired, it is silent on what each of these steps
entails or what steps are necessary to acquire title to the property which in
this case is title to the employee stock options. The definition of
"acquire" as contained in Black's Law Dictionary, Eight Edition, and
to which Respondent counsel referred me may be of assistance here. It states:
to gain possession or control of;
to get or obtain.
The Canadian Oxford English Dictionary defines "acquire" as
follows:
gain by and for oneself; obtain;
come to possess.
[11] When I look to the plain meaning of the word "acquire", it
is difficult to see how the word as it is used in the section can be limited to
an amount paid by employee to the corporation only. While the amount paid by an
employee for a stock option may in most cases be paid to the qualifying person (the
corporation here) and therefore be the usual amount caught by subparagraph
7(1)(a)(iii), the plain reading of the wording does not specifically
exclude other amounts.
[12] The Supreme Court of Canada has on a number of occasions discussed the
appropriate interpretation of income tax statutes. In 65302 British Columbia Limited v. The Queen, 99 DTC 5799, Bastarache J. stated at
paragraph 51:
[51] However, this Court has
also often been cautious in utilizing tools of statutory interpretation in
order to stray from clear and unambiguous statutory language. In Canada v.
Antosko, [1994] 2 S.C.R. 312, at p. 326-27, this Court held:
While it is true that the courts
must view discrete sections of the Income Tax Act in light of the other
provisions of the Act and of the purpose of the legislation, and that they must
analyze a given transaction in the context of economic and commercial reality,
such techniques cannot alter the result where the words of the statute are
clear and plain and where the legal and practical effect of the transaction is
undisputed.
In discussing this case, P.W. Hogg
and J.E. Magee, while correctly acknowledging that the context and purpose of a
statutory provision must always be considered, comment that "[i]t would
introduce intolerable uncertainty into the Income Tax Act if clear
language in a detailed provision of the Act were to be qualified by unexpressed
exceptions derived from a court's view of the object and purpose of the
provision": Principles of Canadian Income Tax Law 2nd ed., 1997 at
pp. 475-76. This is not an endorsement of a literalist approach to statutory
interpretation, but a recognition that in applying the principles of
interpretation to the Act, attention must be paid to the fact that the Act is
one of the most detailed, complex, and comprehensive statutes in our
legislative inventory and courts should be reluctant to embrace unexpressed
notions of policy or principle in the guise of statutory interpretation.
[13] The case law supports the principle of interpretation that when the
language is plain and clear, the plain meaning should be followed. Aside from
the plain meaning approach, when I look at the relevant subsection within the
total context of this provision, I cannot help but notice that there is a definite
distinction between the wording in subparagraph 7(1)(a)(iii) and the
preceding subparagraph 7(1)(a)(ii). Subparagraph 7(1)(a)(ii)
stipulates what allowable expenses are when buying the actual security and the
wording allows only a deduction for an amount which the employee pays to the
qualifying person (the corporation here) for the securities. Subparagraph 7(1)(a)(iii)
however discusses the treatment of expenses in acquiring the stock option but
is silent as to whom the amount must be paid. As noted in Drieger on the
Construction of Statutes, Ruth Sullivan, 3rd ed., Butterworths, 1994
at page 163, "the legislature is presumed to avoid stylistic
variation". The corollary of that presumption is that when the legislature
uses different wording, that variation of wording will have a different
meaning. In respect to this subparagraph, it follows that the legislature's
decision to separate subparagraphs 7(1)(a)(ii) and 7(1)(a)(iii)
was to provide different types of deductions to employees. To hold that subparagraph
7(1)(a)(iii) is limited to only amounts paid to the employer or
"qualifying" person would clearly undermine Parliament's intention.
Both the plain meaning approach and the total context approach indicate that subparagraph
7(1)(a)(iii) should be broadly interpreted to include any expense that
the Appellant paid for the purpose of and as it related to obtaining the stock
option.
[14] The Appellant specifically wanted employment where he could benefit
from stock options. He entered into a contract with Bobsan on the basis that
Bobsan could assist him in securing employment with stock options or a
"similar compensation or benefit package" (paragraph 7 of the
Agreement). In doing so, the Appellant agreed not to "attempt to contact,
deal with, or solicit, either directly or indirectly, any party, financial
institution, or client introduced by ... (Bobsan) ... in any manner whatsoever
without prior express written consent of the introducing party" (paragraph
2 of the Agreement). Pursuant to this Agreement, Bobsan introduced the
Appellant to Westport which subsequently offered the Appellant
employment which included a stock option package. As a consequence the
Appellant was obligated under the Agreement to pay Bobsan a percentage of the
stock option which he received.
[15] While this type of Agreement may be an unorthodox method for obtaining
such benefits, it does not alter the fact that the Agreement, and consequently
the amounts paid to Bobsan, were directly related to the Appellant "acquiring"
those options. Once the Appellant was introduced to Westport he could only accept employment with Westport if he paid Bobsan the amounts in issue. If he accepted the employment and
did not pay Bobsan, he was in breach of the contract and liable to be sued.
[16] I do not accept the Respondent's argument that the payments to Bobsan
are really consideration for advice given and are not consideration for the
acquisition of the right to acquire shares. The agreement to pay these amounts
to Bobsan led the Appellant to obtaining these stock options. There is a direct
correlation here. If I refer back to the dictionary definitions of
"acquire", they include "to get" or "obtain" or
"come to possess". This provision is not restricted to a situation
where an amount is paid in exchange for legal title to the stock options. When
I look at the clear and unambiguous statutory language of subparagraph 7(1)(a)(iii)
as well as the language of this provision within the total context of the
section, I conclude that subparagraph 7(1)(a)(iii) is not confined only
to amounts paid in exchange for "legal ownership of options".
[17] Subparagraph 7(1)(a)(iii) applies to the amounts paid by the
Appellant to Bobsan, pursuant to the Agreement, to acquire the stock options.
The amounts may be deducted because they were required to be made to Bobsan in
order for the Appellant to obtain the stock options in the first place.
[18] Although I do not have to deal with the Appellant's alternative
argument, I believe it is without merit in any event.
[19] The appeals are allowed, with costs, for the 2000 and 2001 taxation
years and the assessments are referred back to the
Minister of National Revenue for reconsideration and reassessment.
Signed at Ottawa,
Canada, this 13th day of May 2005.
Campbell J.
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