Rothstein,
J.:—This
is
an
appeal
from
a
decision
of
the
Tax
Court
of
Canada
dated
March
30,
1990.
As
a
result
of
an
amalgamation
in
1983,
stock
options
that
had
been
granted
to
employees
of
a
pre-amalgamated
company,
Canadian
Reserve
Oil
and
Gas
Ltd.
(Canadian
Reserve
I)
were
terminated.
Following
the
amalgamation,
the
plaintiff,
Joseph
R.
Dundas,
executed
a
release
agreement
which
provided
that
he
accepted
the
sum
of
$596,590
in
full
settlement
of
any
claim
he
may
have
had
in
respect
of
the
unilateral
termination
of
his
stock
options
in
Canadian
Reserve
I.
In
his
1983
tax
return
he
disclosed
receipt
of
"damages
in
the
amount
of
$596,590,
which
constitutes
a
non-taxable
capital
receipt
resulting
from
the
breach
of
stock
options
granted
by
Canadian
Reserve
Oil
and
Gas
Ltd.”.
In
1986,
Her
Majesty
The
Queen
(the
Minister
of
National
Revenue)
reassessed
the
tax
payable
by
Mr.
Dundas
for
the
1983
taxation
year
by
including
the
sum
of
$596,590
in
his
income
for
that
year.
Mr.
Dundas
objected
to
the
reassessment.
The
decision
of
the
Tax
Court
of
Canada
upheld
the
reassessment.
Relevant
law
Subsection
7(3)
of
the
Income
Tax
Act,
R.S.C.
1970,
c.
l-5,
as
amended,
provides:
7.(3)
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)
no
benefit
shall
be
deemed
to
have
been
received
or
enjoyed
by
the
employee
under
or
by
virtue
of
the
agreement
for
the
purpose
of
this
Part
except
as
provided
by
this
section,
and.
.
.
.
Counsel
for
the
plaintiff
argues
that
the
effect
of
subsection
7(3)
is
that
where
options
to
purchase
shares
are
given
to
employees
by
a
company,
the
only
provision
of
the
Income
Tax
Act
applicable
to
benefits
received
by
the
employee
under
or
by
virtue
of
the
stock
option
agreement
is
section
7
of
the
Act.
Paragraph
7(1)(b)
of
the
Income
Tax
Act,
R.S.C.
1970,
c.
I-5,
as
amended,
states:
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,
(b)
if
the
employee
has
transferred
or
otherwise
disposed
of
rights
under
the
agreement
in
respect
of
some
or
all
of
the
shares
to
a
person
with
whom
he
was
dealing
at
arm's
length,
a
benefit
equal
to
the
value
of
the
consideration
for
the
disposition
shall
be
deemed
to
have
been
received
by
the
employee
by
virtue
of
his
employment
in
the
taxation
year
in
which
he
made
the
disposition.
Counsel
for
the
plaintiff
asserts
that
paragraph
7(1
)(b)
of
the
Income
Tax
Act
is
not
applicable
in
this
case
because
there
was
no
transfer
or
disposition
of
rights
under
an
agreement
for
stock
options.
He
submits
that
when
the
amalgamation
agreement
took
effect,
any
rights
to
options
under
the
option
agreements
terminated.
Thus,
there
could
be
no
transfer
or
disposition
of
rights
under
such
agreements
and
therefore
paragraph
7(1)(b)
of
the
Income
Tax
Act
is
not
applicable.
Further,
by
virtue
of
subsection
7(3)
of
the
Act,
there
is
no
other
provision
that
could
be
applicable
and
therefore
no
tax
is
payable
on
the
sum
of
$596,590
received
by
Mr.
Dundas.
In
support
of
this
position,
counsel
for
the
plaintiff
relies
upon
Reynolds
v.
The
Queen,
[1975]
C.T.C.
85,
75
D.T.C.
5042,
a
decision
of
the
Federal
Court-
Trial
Division,
which
was
affirmed
by
the
Federal
Court
of
Appeal,
[1975]
C.T.C.
560,
75
D.T.C.
5393
and
subsequently
affirmed
by
the
Supreme
Court
of
Canada,
[1976]
C.T.C.
792,
77
D.T.C.
5044.
In
Reynolds,
employees
of
Bethex
Explorations
Ltd.
had
contracts
giving
them
the
option
to
purchase
shares
of
Bethex
at
certain
prices
and
subject
to
certain
conditions.
On
December
17,
1968,
Bethlehem
Copper
Corp.
offered
to
buy
all
the
assets
of
Bethex.
On
January
23,
1969,
Bethex
accepted
the
Bethlehem
offer
and
also
passed
a
resolution
to
wind
up
Bethex.
On
February
7,
1969,
agreements
were
executed
between
Bethex
and
the
employees
who
had
option
contracts
whereby
the
employees
were
to
receive
shares
of
Bethlehem
in
consideration
for
settlement
of
all
liabilities
under
their
option
contracts.
Gibson,
J.
found
that
the
settlement
transactions
did
not
fall
under
section
7
(section
85A
at
that
time)
of
the
Income
Tax
Act.
At
pages
87-88
(D.T.C.
5044)
he
stated:
What
transpired
in
these
cases
is
not
covered
in
section
85.
In
these
cases
there
was
a
cancellation
of
the
rights
of
the
appellants
under
their
respective
option
agreements
to
acquire
shares
in
Bethex
by
reason
of
winding
up
resolution
of
Bethex
on
January
23,
1969.
Such
constituted
a
discharge
of
the
option
contracts.
What
each
of
the
appellants
had
left
after
this
breach
of
the
option
contracts
by
Bethex
was
a
new
cause
of
action
for
such
breaches.
The
appellants
were
each
entitled
to
the
common
law
remedy
of
damages
for
such
breach.
None
of
them
pursued
such
remedy.
Instead
their
new
causes
of
action
for
the
breaches
of
the
option
contracts
were
discharged
between
the
appellants
and
Bethex
by
the
agreements
on
February
7,
1969
whereby
the
appellants
were
to
receive
and
accept
the
said
shares
in
Bethlehem.
These
agreements
were
executed.
Each
appellant
subsequently
received
the
said
shares
of
Bethlehem.
The
receipt
by
each
of
the
appellants
of
these
shares
in
Bethlehem
was
not
income
within
the
meaning
of
the
Income
Tax
Act.
Sequence
of
events
A
form
of
amalgamation
agreement
was
sent
to
Mr.
Dundas
in
his
capacity
as
president
of
Canadian
Reserve
I,
on
May
27,
1983,
from
Getty
Oil
Company,
the
majority
owner
of
Canadian
Reserve
I.
On
June
22,
1983,
Canadian
Reserve
I
issued
a
notice
of
extraordinary
general
meeting
of
shareholders
to
consider
the
amalgamation
agreement.
The
meeting
was
convened
at
10:00
a.m.
on
July
29,
1983.
At
11:00
a.m.,
the
amalgamation
agreement
was
approved.
Later
that
same
day
Mr.
Dundas
received
a
notice
of
termination
of
outstanding
options.
Late
that
afternoon,
he
executed
a
release
agreement.
Analysis
If
the
release
agreement
is
found
to
represent
settlement
of
a
claim
for
damages
for
breach
of
the
option
agreements,
the
determination
in
Reynolds
is
applicable
and
is
binding
on
this
Court.
Paragraph
7(1)(b)
of
the
Income
Tax
Act
would
not
be
applicable
to
the
amount
received
by
Mr.
Dundas.
If,
on
the
other
hand,
Mr.
Dundas
is
found
to
have
disposed
of
his
rights
under
his
option
agreements,
Reynolds
is
distinguishable
on
the
facts
and
the
amount
received
by
Mr.
Dundas
would
be
taxable
pursuant
to
paragraph
7(1
)(b)
of
the
Income
Tax
Act.
Counsel
for
both
parties
cited
Greiner
v.
The
Queen,
[1984]
C.T.C.
92,
84
D.T.C.
6073,
a
decision
of
the
Federal
Court
of
Appeal
in
which
Stone,
J.A.
expressly
identifies
the
distinction.
At
page
97
(D.T.C.
6078)
he
states:
In
that
case
it
was
clear
that
at
the
time
the
settlement
was
reached,
the
taxpayer's
stock
option
rights
as
such
had
already
passed
out
of
existence
and,
accordingly,
that
no
rights
remained
to
be
transferred
or
otherwise
disposed
of
under"
the
agreement.
In
the
present
case,
the
rights
created
by
the
stock
option
agreements
remained
very
much
alive
and
were
in
fact
the
subject
of
each
surrender
agreement.
Although
in
form
the
strict
chronological
sequence
in
which
the
events
transpired
was
such
that
Mr.
Dundas
executed
the
release
agreement
subse-
quent
to
the
amalgamation
agreement,
thus
resembling
the
sequence
of
events
in
Reynolds,
supra,
I
have
concluded
that
what
actually
occurred
was
a
disposition
of
rights
in
a
manner
contemplated
by
paragraph
7(1)(b)
of
the
Income
Tax
Act.
(a)
The
Amalgamation
I
will
first
briefly
describe
the
amalgamation
that
took
place.
Reserve
Oil
and
Gas
Company,
a
California
corporation,
owned
approximately
86
per
cent
of
the
shares
of
Canadian
Reserve
I.
In
January
1980,
there
was
a
merger
of
Reserve
Oil
and
Gas
Company
and
Getty
Oil
Company.
The
result
of
that
merger
was
a
company
called
Getty
Oil
Company
Ltd.
(Getty).
Following
this
merger
Getty
owned
approximately
86
per
cent
of
Canadian
Reserve
I.
The
amalgamation
that
gave
rise
to
the
issue
in
this
case
was
one
between
Canadian
Reserve
I
and
Getty
Oil
(Canadian
operations)
Ltd.
(Getty
Canada).
Getty
Canada
was
a
wholly
owned
subsidiary
of
Getty.
The
amalgamation
of
Canadian
Reserve
I
and
Getty
Canada
resulted
in
Canadian
Reserve
Oil
and
Gas
Ltd.
(Canadian
Reserve
II).
In
order
that
Canadian
Reserve
Il
be
a
wholly
owned
subsidiary
of
Getty,
the
approximately
14
per
cent
of
shares
of
Canadian
Reserve
I
that
were
publicly
held
and
the
options
for
the
stock
of
Canadian
Reserve
I
granted
to
its
employees
had
to
be
dealt
with.
In
respect
of
outstanding
shares
of
Canadian
Reserve
I,
minority
shareholders
were
to
be
bought
out
at
a
price
of
$26
per
share.
With
respect
to
outstanding
options
of
Canadian
Reserve
I,
option
holders
were
to
receive,
for
each
option,
$26
less
the
exercise
price
of
the
option.
Getty
stated
that
it
would
not
proceed
with
the
amalgamation
unless
the
amalgamation
was
approved
by
at
least
the
majority
of
the
aggregate
of
the
votes
cast
in
respect
of
all
Canadian
Reserve
I
shares
not
controlled
by
Getty,
i.e.,
a
majority
of
the
14
per
cent.
This
apparently
was
a
requirement
of
certain
securities
commissions
(see
paragraph
13
of
the
agreed
statement
of
facts).
(b)
The
documents
The
documents
and
their
times
and
dates
are
as
follows:
1.
May
27,
1983
draft
of
amalgamation
agreement
first
provided
to
Mr.
Dundas.
2.
June
22,1983
(a)
notice
of
extraordinary
general
meeting
of
the
shareholders
to
be
held
on
July
29,
1983;
(b)
Information
Circular;
(c)
amalgamation
agreement;
(d)
fairness
opinion
—
Dominion
Securities
Ames;
3.
July
29,
1983
(a)
12:01
a.m.
—
date
and
time
at
which
amalgamation
became
effective;
(b)
10:00
a.m.
—
date
and
time
of
extraordinary
general
meeting
of
shareholders;
(c)
11:00
a.m.
—
time
at
which
shareholders
approved
amalgamation
agreement;
(d)
after
11:00
a.m.
—
notice
of
termination
of
outstanding
options
provided
to
Mr.
Dundas;
(e)
late
afternoon
—
release
agreement
executed
by
Mr.
Dundas;
(c)
The
Information
Circular
and
the
amalgamation
agreement
Mr.
Dundas
was
a
director,
president
and
chief
operating
officer
of
Canadian
Reserve
I.
As
a
member
of
the
board
of
directors
of
Canadian
Reserve
I,
he
approved
the
contents
of
the
Information
Circular
dated
June
22,
1983,
which
was
distributed
to
shareholders.
On
page
7
of
the
Information
Circular
under
the
heading
"Interest
of
the
Management
of
Canadian
Reserve
in
the
Business
to
be
Transacted
at
the
Meeting”,
there
appears
the
following:
If
the
amalgamation
is
completed,
the
directors
and
senior
officers
of
Canadian
Reserve
will
receive
the
same
per
share
price
as
all
other
shareholders
for
their
Canadian
Reserve
Shares.
Senior
officers
of
Canadian
Reserve
who
hold
options
to
purchase
Canadian
Reserve
Shares
will
receive
payments
for
the
cancellation
of
such
options
in
accordance
with
the
formula
set
out
in
the
amalgamation
agreement
and
applicable
to
all
outstanding
options
to
purchase
Canadian
Reserve
Shares.
Such
payments
for
cancellation
of
such
options
shall
be
equal
to
the
amount
by
which
$26
(the
per
share
amount
to
be
paid
to
holders
of
Canadian
Reserve
Shares
other
than
Getty
Canada)
exceeds
the
exercise
price
of
the
option
multiplied
by
the
number
of
Canadian
Reserve
Shares
subject
to
such
option.
Each
of
the
directors
and
senior
officers
of
Canadian
Reserve
holding
or
exercising
control
or
direction
over
any
Canadian
Reserve
shares
or
options
to
purchase
Canadian
Reserve
shares
has
informed
Canadian
Reserve
that
each
such
individual
intends
to
vote
his
Canadian
Reserve
shares
in
favour
of
approval
of
the
Amalgamation
and
does
not
intend
to
exercise
any
of
such
options
prior
to
the
amalgamation.
These
provisions
disclose
a
proposal
by
Canadian
Reserve
I,
whereby,
if
the
amalgamation
was
completed,
senior
officers
of
Canadian
Reserve
I
who
held
options
would
receive
payments
for
cancellation
of
their
options
in
accordance
with
a
formula
set
out
in
the
amalgamation
agreement,
i.e.,
$26
less
the
exercise
price
of
the
options.
Mr.
Dundas
approved
this
provision.
It
is
indicated
that
each
of
the
directors
and
senior
officers,
one
of
whom
was
Mr.
Dundas,
would
be
voting
in
favour
of
the
approval
of
the
amalgamation
and
would
not
be
exercising
his
options
prior
to
the
amalgamation.
The
inference
I
draw
from
this
provision
of
the
Information
Circular
and
the
representations
of
the
directors
and
senior
officers
is
that
they
agreed
that
the
amalgamation
should
be
completed
in
accordance
with
the
amalgamation
agreement
including
the
provisions
for
payment
for
cancellation
of
options.
While
undoubtedly
Mr.
Dundas
had
a
fiduciary
obligation
to
Canadian
Reserve
I,
I
cannot
distinguish
these
representations
as
being
made
solely
in
a
fiduciary
capacity
as
a
director
or
senior
officer
and
not
in
his
personal
capacity
as
a
Shareholder
and
option
holder.
He
and
the
other
directors
and
senior
officers
who
held
shares
and
options
represented
that
they
would
vote
in
favour
of
the
amalgamation
and
not
exercise
their
options
prior
to
the
amalgamation.
I
do
not
see
how,
after
the
amalgamation
agreement
was
approved,
they
could,
in
their
personal
capacities,
disavow
the
representations
they
had
made
to
Canadian
Reserve
I
and
to
the
other
shareholders
and
option
holders
of
Canadian
Reserve
I.
It
seems
to
me
that
the
Information
Circular
evidences
Mr.
Dundas’
agreement
to
dispose
of
his
rights
under
the
option
agreements
in
accordance
with
the
terms
offered
in
the
amalgamation
agreement
and
Information
Circular,
conditional
upon
the
amalgamation
taking
place.
Therefore,
upon
the
amalgamation
becoming
effective,
the
disposition
of
his
option
rights
took
effect
and
he
was
entitled
to
receive
$26
less
the
exercise
price
for
each
of
his
options.
He
was,
in
effect,
locked
into
a
position
that
hinged
solely
on
the
approval
of
the
amalgamation
agreement.
Upon
approval
of
the
amalgamation
agreement,
a
disposition
of
his
stock
options
became
effective.
Therefore,
no
cause
of
action
arose
with
respect
to
any
rights
he
had
under
his
option
agreements
since
he
disposed
of
them
in
accordance
with
the
terms
of
the
amalgamation
agreement.
The
Information
Circular
also
includes
a
fairness
opinion
from
Dominion
Securities
Ames
Ltd.
stating
that
$26
per
share
was,
from
a
financial
point
of
view,
fair
to
the
shareholders.
After
reviewing
the
Dominion
Securities
Ames
Ltd.
fairness
opinion,
the
board
of
directors
of
Canadian
Reserve
I,
by
a
unanimous
vote
of
the
disinterested
directors,
determined
that
the
terms
of
the
offer
for
shares
by
Getty
Canada
were
fair
to
the
shareholders
of
Canadian
Reserve
I
and
that
the
amalgamation,
in
accordance
with
the
terms
of
the
amalgamation
agreement,
be
approved.
The
agreed
statement
of
facts
states
that
Mr.
Dundas
participated
in
this
vote
of
the
disinterested
directors.
I
draw
the
inference
from
Mr.
Dundas'
vote
that
he
agreed
with
the
terms
of
the
amalgamation
agreement
and
was
of
the
opinion
that
the
cash
price
of
$26
being
offered
for
the
shares
of
Canadian
Reserve
I
was
fair
to
the
shareholders.
Paragraph
26
of
the
agreed
statement
of
facts
states:
26.
Mr.
Dundas
was
of
the
view
that
the
subject
options
were
worth
more
than
$26
per
share
being
offered
because
of
the
future
growth
potential
of
Canadian
Reserve
which
Mr.
Dundas
would
be
entitled
to
participate
in
pursuant
to
the
terms
of
the
subject
option
agreements.
In
this
regard,
section
4
of
the
subject
option
agreements
provides,
in
part,
that
the
subject
options
could
be
exercised
over
a
term
of
ten
years
from
the
date
of
the
subject
option
agreements.
With
respect
to
this
evidence
(Dundas
v.
M.N.R.,
[1990]
1
C.T.C.
2492,
90
D.T.C.
1529),
the
learned
Tax
Court
judge
stated
at
page
2498
(D.T.C.
1534):
I
have
had
difficulty
following
the
reasons
for
Mr.
Dundas’
view
as
to
the
reasons
for
a
significant
difference
in
values
between
the
shares
and
stock
options,
in
particular
since
the
options
were
exercisable
over
a
ten
year
period.
Mr.
Dundas
relied
on
future
growth
of
Canadian
Reserve
to
form
the
opinion
that
while
$26
per
share
was
a
current
value,
it
was
not
related
to
future
value
of
a
very
successful
company
insofar
as
stock
options
are
concerned.
I
question
whether
a
shareholder
would
have
accepted
$26
per
share
if
he
believed
the
company’s
prospects
were
as
bright
as
stated
by
Mr.
Dundas.
When
a
person
purchases
a
share
in
any
corporation
one
of
his
primary
considerations
in
acquiring
the
shares
is
his
hope
and
expectation
that
the
shares
will
increase
in
value;
he
expects
the
corporation
to
do
well
in
the
future.
I
agree
with
the
observation
of
the
learned
Tax
Court
judge.
I
view
paragraph
26
as
a
subjective
self-serving
statement
by
Mr.
Dundas.
If
Mr.
Dundas
was
of
the
view
that
the
shares
were
worth
more
than
$26
because
of
the
future
potential
of
the
company,
I
do
not
see
how
he
could
represent
to
the
shareholders,
as
he
did
by
voting
to
that
effect,
that
$26
per
share
was
fair.
I
do
not
think
Mr.
Dundas
intended
to
deceive
the
shareholders.
I
prefer
to
accept
the
more
objective
evidence
of
the
contents
of
the
Information
Circular
and
Mr.
Dundas'
approval
of
it.
In
doing
so,
I
conclude
that
Mr.
Dundas
was
agreeing
to
dispose
of
his
rights
under
his
option
agreements
in
consideration
for
the
amounts
specified
in
the
amalgamation
agreement
and
Information
Circular.
Mr.
Dundas
says
that
he
first
became
aware
of
the
amalgamation
agreement
on
May
27,
1983.
The
Information
Circular
is
dated
June
22,
1983.
It
would
appear
that
Mr.
Dundas
formulated
his
opinion
that
the
offer
to
shareholders
was
fair,
that
the
terms
of
the
amalgamation
agreement
should
be
approved
and
that
notice
should
be
sent
to
option
holders
setting
forth
the
procedures
whereby
they
would
receive
payment
in
respect
of
their
options
on
or
about
June
22,
1983.
The
Information
Circular
and
the
amalgamation
agreement
were
annexed
to
the
notice
of
extraordinary
general
meeting
of
shareholders.
The
proxy
solicitation
forms
sent
to
shareholders
of
Canadian
Reserve
l
state
that
they
are
solicited
by
management.
While
the
proxy
form
provides
that
the
proxy
is
to
be
voted
in
accordance
with
instructions
of
the
shareholder,
it
also
states
that
in
the
absence
of
instructions
to
the
contrary,
the
proxy
shall
be
voted
“for”
the
adoption
of
the
amalgamation
agreement.
Mr.
Dundas
and
two
other
directors
were
named
as
proxies
for
shareholders.
I
view
this
as
a
further
indication
that
the
management
of
Canadian
Reserve
I,
including
Mr.
Dundas,
approved
the
amalgamation
agreement
and
the
arrangements
for
payment
to
the
option
holders.
The
amalgamation
agreement
is
dated
June
22,
1983,
and
is
signed
on
behalf
of
the
Canadian
Reserve
by
Mr.
Dundas.
Article
X
—
stock
options,
deals
with
arrangements
for
payment
to
option
holders
for
cancellation
of
their
options:
10.01
On
the
effective
date
of
the
amalgamation
each
outstanding
option
to
purchase
any
shares
in
the
capital
of
Canadian
Reserve
shall
terminate
and
cease
to
exist,
and
shall
not
attach
to
or
be
exercisable
in
respect
of
any
shares
in
the
capital
of
the
amalgamated
corporation,
and
there
shall
be
paid
to,
or
for
the
account,
of
each
holder
of
each
such
outstanding
option
(which
shall
not
include
any
option
or
part
thereof
which
has
expired
or
terminated
in
accordance
with
its
terms)
an
amount
in
cash
equal
to
(a)
the
product
of
$26
times
the
number
of
shares
in
the
capital
of
Canadian
Reserve
the
holder
of
such
option
would
have
received
if
such
option
had
been
fully
exercised
(whether
or
not
then
exercisable)
immediately
prior
to
the
effective
date
of
the
amalgamation;
less
(b)
the
aggregate
exercise
price
the
holder
of
such
option
would
have
been
required
to
pay
to
Canadian
Reserve
if
such
option
had
been
so
exercised
(whether
or
not
then
exercisable)
immediately
prior
to
the
effective
date
of
the
amalgamation.
10.02
Canadian
Reserve
will
give
notice
to
all
holders
of
options
to
purchase
shares
in
the
capital
of
Canadian
Reserve
that,
if
the
amalgamation
is
consummated,
their
rights
as
such
holders
will
terminate
on
the
effective
date
of
the
amalgamation
and
will
thereafter
be
limited
to
the
rights
provided
in
this
article,
and
in
addition,
Canadian
Reserve
shall
distribute
to
such
holders
the
Information
circular
and
other
material
required
to
be
distributed
to
the
shareholders
of
Canadian
Reserve
and
referred
to
in
section
9.05
hereof.
10.03
Canadian
Reserve
shall
use
its
best
efforts
(1)
to
enter
into
agreements
with
each
holder
of
options
to
purchase
shares
in
the
capital
of
Canadian
Reserve
whereby
such
holder
shall
consent
to
termination
of
the
option
held
and
accept
the
amount
payable
therefor
pursuant
to
this
Article,
in
full
satisfaction
of
their
rights
under
such
options,
or
(2)
failing
that,
in
consideration
for
payment
of
such
amount
to
obtain
releases
from
such
option
holders,
releasing
and
discharging
Canadian
Reserve,
Getty
Canada
and
the
amalgamated
corporation
from
any
and
all
claims
in
respect
of
or
relating
to
the
termination
of
such
options
pursuant
to
this
Article.
10.04
The
holders
of
options
to
purchase
shares
in
the
capital
of
Canadian
Reserve
shall
have
the
right
to
receive
from
the
special
account
to
be
established
by
the
amalgamated
corporation,
pursuant
to
paragraph
11.01(c)
hereof,
the
amount
payable
to
each
such
holder
pursuant
to
this
Article,
upon
delivery
to
the
Guaranty
Trust
Company
of
Canada,
401
-
9th
Avenue
S.W.,
Calgary,
Alberta,
of
a
demand
for
such
payment
signed
by
the
said
holder
or
his
attorney
duly
authorized
in
that
behalf,
accompanied
by
a
statement
of
the
exercise
price
or
prices
of
such
options
and
the
number
of
shares
subject
to
the
option
in
respect
of
each
such
exercise
price
or
prices.
Payment
in
respect
of
such
option
may
be
refused
by
the
said
trust
company
until
it
is
satisfied
that
the
person
making
such
demand
for
payment
is
entitled
thereto
in
accordance
with
this
amalgamation
agreement.
The
said
trust
company
shall
not
incur
any
liability
in
refusing
in
good
faith
to
make
any
payment
in
respect
of
any
options
which,
in
its
judgment,
is
improper
or
unauthorized.
Cheques
for
payment
in
respect
of
such
options
will,
unless
instructions
to
the
contrary
are
given
in
the
said
demand
for
payment,
be
mailed
to
the
option
holders
entitled
thereto
at
their
respective
addresses
as
they
appear
on
the
records
of
the
amalgamated
corporation
or
to
the
address
designated
for
payment
in
the
said
demand
for
such
payment
following
delivery
of
a
demand
for
payment
as
above
described.
Paragraph
24
of
the
agreed
statement
of
facts
indicates
that
clause
10.03
initially
did
not
contain
the
words
now
appearing
after
the
number
"(2)".
Paragraph
25
of
the
agreed
statement
of
facts
states:
25.
Mr.
Dundas
advised
Getty
that
he
would
not
consent
to
the
termination
of
the
subject
options,
and
that
he
would
not
encourage
the
other
option
holders
to
consent
to
the
termination
of
their
options.
Getty
then
unilaterally
amended
Article
10.03
to
read
(as
above
set
forth).
Presumably,
the
amendment
was
satisfactory
to
Mr.
Dundas.
Apparently,
he
thought
that
the
effect
of
clause
(1)
of
article
10.03
was
a
disposition
of
rights
under
his
option
agreements
and
was
dissatisfied
with
it.
However,
for
the
reasons
outlined
above,
Mr.
Dundas'
actions
in
this
case
place
him
in
the
position
of
having
consented
to
the
termination
of
his
options
and
accepting
the
amounts
payable
under
article
10.01,
conditional
upon
the
amalgamation
agreement
becoming
effective.
In
his
case,
a
release
would
be
unnecessary
given
his
prior
agreement
to
dispose
of
his
option
rights.
Clause
10.03(2)
would
not
apply
to
Mr.
Dundas.
(d)
The
notice
of
termination
of
outstanding
options
and
release
agreement
The
notice
of
termination
of
outstanding
options
and
release
agreement
are
dated
July
29,
1983,
the
same
date
as
the
extraordinary
general
meeting
of
shareholders
of
Canadian
Reserve
I.
Mr.
Dundas
received
his
copy
sometime
between
11:00
a.m.
and
the
late
afternoon
of
July
29,
1983.
He
executed
the
release
agreement
later
that
same
day.
The
release
agreement
contains
some
provisions
that
one
would
normally
see
in
release
documents.
For
example:
1.
The
employee
hereby
accepts
the
payment,
or
the
said
total
release
payment
in
full
settlement,
satisfaction
and
discharge
of
any
and
all
claims
and
rights
and
entitlements
to
damages
in
respect
of
or
arising
out
of
or
relating
to
the
unilateral
termination
of
the
stock
options
or
arising
out
of
or
relating
to
any
agreement,
arrangement,
relationship,
contract
or
dealing
whatsoever
arising
out
of
or
relating
to
the
stock
options
which
have
been,
or
might
have
been
asserted
against
the
company,
Getty
Canada
or
the
amalgamated
corporation
of
their
respective
employees,
agents,
representatives,
shareholders
or
any
of
them
in
respect
of
or
arising
Out
of
or
relating
to
the
stock
options.
Such
provisions
give
the
impression
that
an
option
holder
who
signed
a
release
agreement
was
settling
his
claim
against
Canadian
Reserve
I
for
terminating
his
option
rights
and
was
giving
up
his
rights
to
pursue
a
breach
of
contract
claim.
This
would
presumably
fit
the
fact
situation
of
Reynolds,
supra.
However,
I
place
little
weight
on
the
release
agreement
for
this
purpose
for
the
following
reasons:
1.
It
does
not
appear
that
Mr.
Dundas
had
to
sign
the
release
agreement
to
get
the
payment
provided
for
under
the
amalgamation
agreement.
The
notice
of
termination
of
outstanding
options
states:
Notice
is
hereby
further
given
that
the
full
aggregate
cancellation
price
of
all
of
the
stock
options
has
been
deposited
in
a
special
account
at
the
Guaranty
Trust
Company
of
Canada,
401-9th
Avenue
S.W.,
Calgary,
Alberta
T2P
3C5
to
be
paid
without
interest
to
or
to
the
order
of
the
respective
holders
of
the
stock
options
upon
such
respective
holders
making
demand
for
payment
of
the
cancellation
price
of
such
stock
options
in
accordance
with
the
procedures
herein
below
described.
Each
holder
of
stock
optiosn
desiring
to
receive
payment
of
the
cancellation
price
thereof
must
send
or
deliver
the
accompanying
demand
for
payment,
completely
filled
in
and
signed,
in
accordance
with
the
payment
instructions
contained
therein
to
Guaranty
Trust
Company
of
Canada
at
401-9th
Avenue
S.W.,
Calgary
Alberta
T2P
3C5.
Cheque(s)
for
the
cancellation
price
of
the
stock
options
will,
unless
instructions
to
the
contrary
are
given
in
writing
by
the
holders
in
the
accompanying
demand
for
payment,
be
mailed
to
the
holders
entitled
to
payment
of
such
cancellation
price
at
their
respective
addresses
as
they
appear
on
the
employee
records
of
the
amalgamated
corporation
following
demand
for
payment
as
above
described.
Nothing
here
suggests
that
option
holders
had
to
execute
release
agreements
in
order
to
receive
payment
if
they
were
satisfied
with
$26
per
share,
less
the
exercise
price
of
their
options.
2.
The
release
agreement
says
that
the
employee"
has
ascertained
that
the
total
release
payment
represents
a
fair
and
reasonable
valuation
of
his
rights
resulting
from
the
unilateral
termination
of
the
stock
options".
Although
the
release
agreement
seems
to
relate
the
valuation
to
the
loss
of
rights
resulting
from
the
unilateral
termination
of
the
stock
options,
the
amount
(based
on
$26
per
share)
is
exactly
the
same
as
the
amount
paid
to
minority
shareholders
of
Canadian
Reserve
I.
It
was
the
amount
that
both
Dominion
Security
Ames
and
the
board
of
directors
considered
to
be
fair
as
set
forth
in
the
Information
Circular.
It
was
the
amount
available
to
option
holders
who
consented
to
the
termination
of
their
option
rights.
Although
the
words
may
be
intended
to
suggest
that
the
consideration
is
related
to
the
unilateral
termination
of
stock
options
and
the
settlement
of
a
dispute,
there
was
no
dispute
to
settle.
3.
The
release
agreement
was
received
by
Mr.
Dundas'
lawyer
on
July
15,
1983,
some
two
weeks
prior
to
the
amalgamation
becoming
effective.
The
wording
of
the
release
agreement
suggests
that
it
is
being
given
in
anticipation
of
the
shareholders'
meeting
at
which
the
amalgamation
agreement
would
be
approved.
For
example,
the
document
contains
the
following:
Whereas
the
employee
is
the
holder
of
the
options
to
purchase
shares
in
the
capital
stock
of
the
company
set
out
and
descirbed
in
Schedule
"A"
hereto
.
.
.
These
words
must
be
referring
to
a
time
prior
to
the
effective
date
of
the
amalgamation
agreement
because
once
the
amalgamation
agreement
became
effective,
the
employee
would
no
longer
be
the
holder
of
options.
The
release
agreement
thus
evidences
an
agreement
to
dispose
of
rights
under
the
option
agreements
at
a
time
prior
to
the
amalgamation
agreement
taking
effect.
The
release
agreement
continues:
And
whereas
pursuant
to
the
amalgamation
agreement
made
as
of
the
22nd
day
of
June,
1983,
providing
for
the
amalgamation
of
the
Company
and
Getty
Oil
(Canadian
Operations),
Ltd.
("Getty
Canada")
the
Stock
Options
shall,
on
the
effective
date
of
the
said
amalgamation,
terminate
and
cease
to
exist.
.
.
.
This
provision
is
drafted
in
the
future
tense,
i.e.,"shall.
.
.
terminate
.
.
."
and
speaks
at
a
time
prior
to
the
effective
date
of
the
amalgamation.
Again
these
works
evidence
an
agreement
to
dispose
of
option
rights.
Further,
the
release
agreement
was
between
Canadian
Reserve
I
and
Mr.
Dundas.
This
is
obvious
from
the
reference
to
“the
employee
is
the
holder
of
the
options
to
purchase
shares
in
the
capital
stock
of
the
company".
"Company"
is
defined
as
Canadian
Reserve
Oil
and
Gas
Ltd.
While
both
the
pre-amalgamated
and
post-amalgamated
companies
had
the
same
name,
Mr.
Dundas
never
held
options
in
the
post-amalgamated
company.
It
seems
to
me
that
if
the
release
agreement
was
to
evidence
a
release
of
rights
arising
after
the
amalgamation
took
effect,
the
agreement
would
have
been
between
Mr.
Dundas
and
Canadian
Reserve
II.
The
fact
that
the
release
agreement
was
drafted
at
least
two
weeks
prior
to
the
amalgamation
agreement
being
approved,
that
it
was
drafted
in
the
future
tense
and
that
it
was
between
Canadian
Reserve
I
and
Mr.
Dundas,
all
imply
that
an
agreement
had
been
worked
out
whereby
Mr.
Dundas
agreed
to
dispose
of
his
rights
under
his
option
agreements
and
to
accept
payment
of
$26
for
each
option
less
the
exercise
price
of
each
option
upon
the
amalgamation
agreement
being
approved.
I
earlier
found
that
Mr.
Dundas,
by
his
representations
in
the
Information
Circular
and
his
agreement
not
to
exercise
his
options
and
to
vote
in
favour
of
the
amalgamation
agreement,
had
agreed
to
dispose
of
his
options
in
accordance
with
the
amalgamation
agreement
upon
the
amalgamation
becoming
effective.
The
release
agreement
may
have
been
signed
a
few
hours
after
the
amalgamation
agreement
had
been
approved,
but
the
circumstances
indicate
to
me
that
this
was
superfluous
and
that
the
disposition
of
rights
under
Mr.
Dundas'
stock
option
rights
did
not
depend
upon
his
signing
of
the
release
agreement.
I
make
specific
reference
to
one
other
portion
of
the
release
agreement:
.
.
.the
stock
options
shall,
on
the
effective
date
of
the
said
amalgamation,
terminate
and
cease
to
exist,
and
shall
not
attach
to
or
be
exercisable
in
respect
of
any
shares
in
the
capital
of
the
amalgamated
corporation
("the
amalgamated
corporation”)
resulting
from
the
said
amalgamation,
which
action
is
acknowledged
to
constitute
a
breach
of
the
stock
options
by
the
company
(the"unilateral
termination”);
I
quote
these
words
because,
in
my
opinion,
they
indicate
the
real
purpose
of
the
release
agreement.
Words,
expressly
acknowledging
a
breach
of
an
agreement,
are
unnecessary
in
a
release.
Where
causes
of
action
are
settled,
one
might
expect
to
find
words
suggesting
that
the
entering
into
of
the
settlement
does
not
constitute
an
admission
of
liability.
No
rationale
is
given
to
explain
the
inclusion
of
words
expressly
acknowledging
liability.
I
infer
that
they
were
included
solely
in
an
attempt
to
make
the
facts
of
this
case
resemble
those
in
Reynolds,
supra.
However,
in
Reynolds,
there
was
no
indication
that
the
employees
had
agreed
to
dispose
of
their
option
rights
prior
to
the
cancellation
of
such
rights.
Here,
I
have
found
that
Mr.
Dundas
agreed
to
dispose
of
his
rights
under
his
option
agreements
upon
amalgamation
becoming
effective.
He
retained
no
rights
that
could
form
the
basis
of
a
cause
of
action
and
therefore
the
release
agreement
was
unnecessary.
Whether
or
not
the
amalgamation
resulted
in
a
breach
of
stock
option
agreements
was
irrelevant
since
Mr.
Dundas
had
disposed
of
his
rights
upon
the
amalgamation
becoming
effective.
In
the
circumstances
of
this
case,
I
place
much
more
weight
on
the
objective
evidence
of
Mr.
Dundas
approving
the
amalgamation
agreement,
determining
that
the
compensation
formula
for
option
holders
was
fair
and
representing
to
shareholders
that
he
was
going
to
vote
in
favour
of
the
amalgamation
agreement,
than
to
an
apparently
unnecessary
release
agreement.
Conclusion
In
my
opinion,
Mr.
Dundas
had
decided
on
or
about
June
22,
1983,
that
if
the
amalgamation
agreement
was
approved
by
the
shareholders,
he
would
be
satisfied
to
receive
the
total
release
payment
provided
for
in
the
amalgamation
agreement
which
he
had
approved
in
his
capacity
as
a
director
of
Canadian
Reserve
I.
Mr.
Dundas
was
committed
to
support
the
amalgamation
and
had
decided
to
accept
the
amount
provided
for
in
the
amalgamation
agreement
upon
the
amalgamation
being
approved.
All
the
terms
of
his
agreement
to
dispose
of
his
rights
under
his
option
agreements
were
reached
as
of
the
amalgamation
becoming
effective.
As
between
Mr.
Dundas
and
Canadian
Reserve
I,
there
was
nothing
left
to
negotiate
after
the
amalgamation
vote.
Once
the
amalgamation
took
effect,
Mr.
Dundas
had
no
rights
remaining
upon
which
to
base
a
claim
for
breach
of
contract.
In
my
opinion,
what
occurred
was
a
disposition
of
rights
under
Mr.
Dundas'
stock
option
agreements
as
contemplated
by
paragraph
7(1)(b)
of
the
Income
Tax
Act.
Accordingly,
I
dismiss
the
appeal
with
costs.
Appeal
dismissed.
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