The individual taxpayer (“Des Groseillers”), who was the chair and CEO of an electronics products company (“ATBM”) and who had been granted stock options on the publicly-listed shares of the holding company (“BMTC”) holding shares of ATBM, gifted his rights under options with an in-the-money value of $1M and $2M in his 2010 and 2011 taxation years, respectively to arm's length registered charities. The stock option plan specified that such a donee of the options was not entitled to physically exercise the options, and instead was only permitted to realize on them pursuant to a clause in the plan permitting the option holder to require the corporation to pay the in-the-money value of the options to their holder.
The ARQ assessed Des Groseillers on the basis that the donation of the options constituted a disposition of such options described in the Taxation Act. s. 50 (equivalent to ITA s. 7(1)(b)) and that TA s. 422 (equivalent to ITA s. 69(1)(b)) deemed the “value of the consideration for the disposition” received by him to be equal to the options’ fair market value of $3M, thereby resulting in the receipt of employment income in that amount by him pursuant to s. 50.
In finding that s. 50 (or the other Quebec rules applicable to stock options under Section VI of the TA) did not apply to the assignment to the charities, Bourgeois, JCQ stated (at paras. 65, 68-69, TaxInterpretations translation):
[T]hat which Des Groseillers donated in this case was his right to receive remuneration. He assigned a portion of the remuneration to which he was entitled and instructed ATMB (or BMTC) to pay those sums directly to the charities, nothing more, nothing less. …
[T]he intention of the parties was never to assign the options on shares, nor to subscribe for or redeem shares, but rather to transfer the sums to the foundations, and the legal act before us is that by which Des Groseillers had directed BMTC to pay those sums directly to the recipients, i.e., the foundations. …
[T]he Court has reached the conclusion that the litigated transactions are not contemplated by Section VI, which comprises articles 47.18 to 58.0.7, quite simply because those provisions apply only where a qualifying person (BMTC) has agreed to issue or sell one of its securities.
He further found, in the alternative, that even if the s. 7(1)(b) equivalent applied, it only applied on the basis of the nil consideration actually received by Des Groseillers rather than being expanded by the s. 69(1)(b)(ii) equivalent to deem the consideration to be $3M. In this regard, he agreed (at para. 72) with Des Groseillers’ submission that the stock option rules constituted “a complete code which by itself contains an exhaustive treatment of the rules for computing income on the issuance of securities of an employer.” After quoting the equivalent of ITA s. 7(3)(a), he stated (at para. 73):
Thus … TA article 422 cannot be engaged in order to fill in the rules for computing income provided in Section VI.