Des Groseillers – Court of Quebec decision indicates no s. 7(1)(b) application to option cash-out amount assignments, and no s. 69(1)(b) application to s. 7(1)(b) dispositions
An individual (Des Groseillers) who donated some of his employee stock options on the shares of his public-company employer (“BMTC”) to arm's length registered charities was assessed by the ARQ on the basis that the Quebec equivalent of 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 deemed employment income in that amount by him pursuant to the Quebec equivalent of s. 7(1)(b). (S. 69(1)(b)(ii) is not limited to non-arm's length gifts.)
Bourgeois, JCQ reversed the assessment. To him, a crucial factor was that the stock option plan specified that a permitted 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. Accordingly, Des Groseillers had effectively only donated a right to receive cash, rather than an agreement to issue shares as contemplated by the s. 7(1)(b) equivalent, so that s. 7(1)(b) equivalent did not apply. In other words, “the intention of the parties was never to assign the options on shares … but rather to transfer the sums to the foundations.”
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) equivalent to deem the consideration to be $3M. In this regard, he agreed 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:
Thus … [the s. 69(1)(b) equivalent] cannot be engaged in order to fill in the rules for computing income provided in [the stock option rules].
Since the ARQ assessments and pleadings had not relied, in the alternative, on the equivalents of ITA ss. 6(1)(a) and 15(1)), and the ARQ’s assessments based on a mooted expansive effect of the s. 69(1)(b) equivalent had been demolished, Des Groseillers’ appeal was allowed.