Edward Del Grande v. Her Majesty the Queen, [1993] 1 CTC 2096

Bowman, T.C.C.J.:—These appeals from reassessments for the appellant's 1985 and 1986 taxation years have to do with the inclusion by the Minister in the appellant's income for 1985 of the amounts of $135,866 and $35,872 as a“ benefit or advantage” within the meaning of paragraph 15(1)(c) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act") alleged to have been conferred upon the appellant by two corporations, Rust Check Canada Inc. (” Rust Check") and Lear Chemical Research Corporation (' Lear").

The reassessment for 1986 was made as a consequence of the 1985 assessment, and involved an adjustment to the appellant's forward averaging elective income deduction.

Subsection 15(1) read in 1985 as follows:

15(1) Where in a taxation year

(a) a payment has been made by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction,

(b) funds or property of a corporation have been appropriated in any manner whatever to, or for the benefit of, a shareholder, or

(c) a benefit or advantage has been conferred on a shareholder by a corpora» tion, otherwise than

(d) on the reduction of capital, the redemption, cancellation or acquisition by the corporation of shares of its capital stock or the winding-up, discontinuance or reorganization of its business, or otherwise by way of a transaction to which section 88 applies,

(e) by the payment of a dividend or a stock dividend,

(f) by conferring on all holders of common shares of the capital stock of the corporation a right to buy additional common shares thereof, or

(g) by an action described in paragraph 84(1)(c.1) or (c.2),

the amount or value thereof shall, except to the extent that it is deemed to be a dividend by section 84, be included in computing the income of the shareholder for the year.

The benefit or advantage which the Minister considered to have been conferred upon the appellant qua shareholder in 1985 consisted of the difference between the price paid by him under an option to purchase shares granted in 1982 and the fair market value of the shares acquired when the option was exercised in 1985. The appellant did not dispute the Minister's determination of the fair market value of the shares in 1985.

The evidence was straightforward and uncomplicated. It was adduced through agreed documents and two witnesses, the appellant, who was the President of Rust Check and Vice President of Lear and Mr. Lindsay McCleery, Chairman of the Board of Rust Check and President of Lear. Both witnesses were credible and gave their evidence in a forthright manner. The evidence may be summarized as follows:

In 1970, Mr. McCleery retired from his previous employment and devoted the next three years to research into the development of a more effective method of rustproofing automobiles. He met the appellant in 1970 and they, as well as their respective families, became close friends — a relationship that has continued to the present. He started a small rustproofing business in the town of Hepworth near Owen Sound. During and subsequent to this time he sought and obtained from the appellant advice on business and financial matters relating to the development of the rustproofing business. It appeared from the testimony of both witnesses that Mr. McCleery had the inventive ability and vision to develop the rustproofing product and the appellant, with extensive business experience in other fields, had the commercial acumen and experience to assist in the development of the business aspects of the rustproofing business, including its marketing and franchising.

In 1980, two numbered companies were formed, 447442 Ontario Ltd. and 447443 Ontario Ltd. 447443 carried on business under the name Rust Control Centres. That business involved essentially the franchising of rights relating to rustproofing of automobiles. 447442 manufactured the rustproofing product and operated under the name of Lear Chemical Research. The shares of both corporations were owned in equal proportions by Mr. McCleery, his wife Esther, his daughter Lise and the appellant. Although Mr. McCleery wanted the corporate names to include the words “Rust Check" and "Lear", the legal advice that they obtained at that time was to the effect that such names could not be obtained.

On December 15, 1981, on the basis of legal advice received from another firm of solicitors, two more corporations, Rust Check Corporation of Canada Ltd. (now Rust Check Canada Inc.) and Lear Chemical Research Corporation were incorporated. The first directors of the two corporations were the appellant and Mr. McCleery. By resolutions dated December 15, 1981, the two directors allotted and issued to each of themselves ten common shares from each company.

The appellant testified that the 50/50 split of the shares of the two corporations was Mr. McCleery's idea — an idea that the appellant had always resisted as he considered it inappropriate for him to have a 50 per cent interest in the corporations. The appellant and Mr. McCleery therefore reached what both witnesses described as a compromise. On January 4, 1982, an additional ten shares in each corporation were allotted and issued to each of Esther and Lise McCleery thereby reducing the appellant's interest in each corporation. to 25 per cent.

The dispute between the appellant and Mr. McCleery, whether the former should have a 25 per cent or a 50 per cent interest in the company, was resolved by the granting to the appellant, on January 4, 1982, of an option to purchase up to 20 shares of each corporation at $1 per share. The options were for a term of five years, were not assignable and could be exercised only so long as the appellant was an officer or director of the corporations. They terminated on the appellant's death.

On December 23, 1981, the appellant signed with the Bank of Nova Scotia a guarantee of the liabilities of Rust Control Centres, the name under which 447443 Ontario Ltd. operated. No limit was stated in the guarantee but the appellant stated that he believed that the line of credit was $25,000.

By agreement dated January 1, 1982, 447443 and 447442 transferred their business and assets to Rust Check and Lear respectively. The net assets transferred to Rust Check had a value of $11,120 and the purchase price was paid by a non-interest bearing demand promissory note. The liabilities of 447442, which were assumed by Lear, exceeded the value of the assets transferred to Lear.

Accordingly, the value of the shares of Rust Check and Lear on January 4, 1982, was nominal or nil and it follows that the value of the options at that time was nominal or nil as well.

In 1983, 447442 and 447443 amalgamated with Lear and Rust Check respectively.

In 1985, Rust Check was experiencing cash flow problems. The appellant was prepared to sign a further guarantee with the Bank of Nova Scotia in order to enable Rust Check to obtain an increased line of credit. The local branch of the bank advised the appellant that if he owned more shares of the corporations he could improve the chances of obtaining an increased line of credit on the basis of his guarantee. He informed the bank of his option to acquire an additional 20 shares of each of Rust Check and Lear. On the bank's suggestion he exercised the option and on July 3, 1985, he personally gave to the Bank of Nova Scotia an unlimited guarantee of the liabilities of Rust Check.

It is the position of the Minister of National Revenue that in issuing to the appellant 20 shares of each corporation in response to the exercise of the options and in accordance with their provisions, those corporations conferred on him a benefit or advantage as follows:

The respondent pleaded further as a so-called "assumption" that

. . . the options were granted and the said benefit or advantage was conferred on the appellant by virtue of his being a shareholder, and not by virtue of his employment.

The central question is therefore whether, on these facts, the two corporations in issuing to the appellant shares having a total market value of $171,778 for a consideration of $40, the option price, conferred upon him a benefit or advantage qua shareholder within the meaning of paragraph 15(1)(c) of the Act.

In M.N.R. v. Pillsbury Holdings Ltd., [1965] 1 Ex C.R. 676, [1964] C.T.C. 294, 64 D.T.C. 5184, Cattanach, J. of the Exchequer Court held that a waiver of interest owing to two subsidiary corporations by their corporate shareholder was not a benefit or advantage conferred upon the latter qua shareholder within the meaning of paragraph 8(1)(c) of the Act (now paragraph 15(1)(c)).

The reasoning of the Court is instructive. At pages 682-83 (C.T.C. 299, D.T.C. 5186), Cattanach, J. stated:

Subsection (1) of section 8 is aimed at payments, distributions, benefits and advantages flowing from a corporation to a shareholder other than those referred to in the immediately preceding paragraph. While the subsection does not say so explicitly, it is fair to infer that Parliament intended, by section 8, to sweep in payments, distributions, benefits and advantages that flow from a corporation to a shareholder by some route other than the dividend route and that might be expected to reach the shareholder by the more orthodox dividend route if the corporation and the shareholder were dealing at arm's length.

At pages 683-87 (C.T.C. 299-303, D.T.C. 5187-89) he added:

Paragraph (c) of subsection (1) of section 8 may be expected, therefore, to apply to cases where benefits or advantages have been conferred on a shareholder in such circumstances that the effect is, in substance, equivalent to the payment of a dividend to the shareholder.

By way of contrast, in my view, there can be no conferring of a benefit or advantage within the meaning of paragraph (c) where a corporation enters into a bona fide transaction with a shareholder.

In applying paragraph (c) full weight must be given to all the words of the paragraph. There must be a“ benefit or advantage” and that benefit or advantage must be “conferred” by a corporation on a “shareholder”. The word "confer" means "grant" or "bestow". Even where a corporation has resolved formally to give a special privilege or status to shareholders, it is a question of fact whether the corporation's purpose was to confer a benefit or advantage on the shareholders or some purpose having to do with the corporation's business such as inducing the shareholders to patronize the corporation.

In effect, the Minister takes the position that waiver of interest payable by a borrower who happens to be a shareholder of the lender is the conferring of a benefit or advantage within paragraph (c) regardless of the circumstances surrounding the waiver. In my view, the mere fact of waiver, even if legally effective to cancel the debt, is not sufficient of itself to bring the transaction within paragraph (c). To come within that paragraph, it must be an arrangement or device whereby a corporation confers a benefit or advantage on a shareholder qua shareholder.

In the Pillsbury case the benefit was both obvious and immediate. The shareholder was relieved of an obligation to pay interest with, evidently, no concomitant benefit to the subsidiary corporations. Moreover, as the court observed, it seems improbable that the interest would have been forgiven outright had practically all of the shares not been owned by the taxpayer. Also, as counsel for the respondent noted, the result in Pillsbury may have been influenced by the failure of the Minister to plead that the benefit or advantage was conferred on the taxpayer qua shareholder — an omission that was not repeated in this case.

Nonetheless, the Pillsbury case is clear authority for the proposition that for a benefit or advantage to be assessed in a shareholder's hands under paragraph 15(1)(c) it must be conferred upon that taxpayer qua shareholder, that is to say, by reason of his being a shareholder. The principle was applied by Couture C.J.T.C. in Pellizzari v. M.N.R., [1987] 1 C.T.C. 2106, 87 D.T.C. 56.

The matter requires a two part analysis:

(a) as a matter of fact, was a benefit conferred upon the appellant at all by the corporations' honouring their legal obligations to issue shares to him under the option agreement? and

(b) if so, was that benefit conferred upon him qua shareholder?

The first part of the analysis requires a consideration of the decision of the Federal Court of Appeal in Kennedy v. M.N.R., [1973] F.C. 839, [1973] C.T.C. 437, 73 D.T.C. 5359. In that case a corporation that leased property from its shareholder effected improvements to the property. The issue was the timing and the quantum of the benefit, if any, conferred upon the shareholder. Jackett, C.J. stated at pages 842-43 (C.T.C. 440, D.T.C. 5361):

Here, the question is when a“ benefit” has been "conferred" within the meaning of those words in subsection 8(1). In my view, when a debt is created from a company to a shareholder for no consideration or inadequate consideration, a benefit is conferred. (The amount of the benefit may be a question for valuation depending on the nature of the company.) On the other hand, when a debt is paid, assuming it was well secured, no benefit is conferred because the creditor has merely received that to which he is entitled. I am, therefore, of the opinion that the $53,000 promissory note must be taken into account for the purposes of section 8(1) in the year in which it created an indebtedness from the company to the appellant, namely, 1965.

In the course of his reasons he observed at pages 844-45 (C.T.C. 441, D.T.C. 5362):

Where a tenant improves the leased premises, the extent to which, if at all, the improvement confers a benefit on the landlord will depend on the extent to which the improvement increases the value of his reversionary interest and that, in turn, will depend on the term and conditions of the lease and on the nature of the improvement.

From this, counsel for the appellant reasons, if any benefit was conferred it was in 1982 when the options were given. The amount of the benefit would presumably be the difference between the value of the options and the price paid for them. No benefit or advantage is conferred in the subsequent year of exercise by the corporations doing no more than giving to the shareholder that to which he is legally entitled.

In The Queen v. Leslie, [1975] C.T.C. 155, 75 D.T.C. 5086, Addy, J. referred to the Kennedy decision and stated at page 159, (D.T.C. 5089):

Generally speaking, when a legally enforceable obligation to pay has been entered into, in one taxation year, and this obligation creates a taxable benefit in the hands of the obligee or of the payee and the legal obligation is met and paid in a subsequent taxation year, it is when the legally enforceable benefit is created and not when the taxpayer actually receives payment that the amount should be taken into account.

He concluded however that the debt was valueless when created and that its creation was not a bona fide business transaction. That is unquestionably not the situation here. There was no suggestion, nor could there be, that there was any artificiality, sham or lack of bona fides in either the granting of the options or their exercise. (See also The Queen v. Schubert, [1980] C.T.C. 497, 80 D.T.C. 6366.)

Paragraph 15(1)(c) requires that a benefit or advantage be conferred on a taxpayer qua shareholder. No benefit or advantage is conferred when a corporation does no more than honour a commitment previously given in a bona fide transaction. In the honouring of that commitment the option holder's status as a shareholder plays no part. The holder gives up a valuable right, the option, and receives for it the shares. The corporation issues the shares and is relieved of the obligation to honour the option agreement. The value of the option is measured by the value of the shares which the option holder is entitled to receive less the price he must pay. Following the exercise of the option he is in no better economic position than he was before.

Paragraph 15(1)(c) contemplates the conferral of a genuine economic benefit upon the shareholder. The word "confer" implies the bestowal of bounty or largesse, to the economic benefit of the conferee and a corresponding economic detriment of the corporation. Such was not the case here. The corporations did no more than was legally required of them. To say that in honouring the options the corporations conferred a taxable economic benefit on the appellant, particularly where in fact his sole reason for exercising the options when he did was to facilitate an extension of the corporate line of credit through his giving of a guarantee, is in accordance neither with economic reality nor fundamental fairness. The taxation of benefits conferred on shareholders under paragraph 15(1)(c) depends upon practical and realistic considerations. Paragraph 15(1)(c) does not contemplate the inclusion in a taxpayer's income of hypothetical or notional "benefits" arising from a change in a legal relationship resulting from the exercise of a legal right.

The second part of the analysis is whether whatever Mr. Del Grande received — even if it could be designated a benefit — he received by virtue of his being a shareholder.

It is true that he was a shareholder. He was also, from January 4, 1982 on, the holder of legally enforceable options to acquire shares at a fixed price. He was also an officer and director of the corporations. His rights under the option agreements did not depend upon his being a shareholder nor did the corporations' obligation to honour his exercise of the options depend upon his position as shareholder.

The option agreements refer to his contribution to the business and affairs of the companies. The options are exercisable only while he is an officer or director of the companies. In other words the granting and exercise of the options might have been connected to his position as an officer and director but they are in no way connected with his being a shareholder.

My conclusion on this aspect of the case is that the Minister erred in concluding that a benefit was conferred on the appellant at all by the corporations' honouring their obligation under the option agreements and that in any event, even if it could be considered that a benefit or advantage was conferred, it was not conferred on him qua shareholder.

Counsel for the appellant argued that if a benefit was conferred on Mr. Del Grande (a point which she did not concede) it was attributable to his friendship with Mr. McCleery and not to his position as shareholder. I have no doubt that the close friendship between these two men and their respective families was inextricably bound up in the development of the corporations and their business and that that friendship may have been an important factor in the appellant's becoming involved initially in the corporations' affairs. Indeed, it seems reasonable to conclude as well that the appellants friendship with Mr. McCleery was influential in his decision to give to the bank an unlimited guarantee of Rust Check's indebtedness and, to assist in having the line of credit approved on the basis of his guarantee, to exercise his options and acquire a further 25 per cent of the shares of the corporations. The benefit, if any, from all of this seems to have flowed to the corporations, not from them.

I prefer, however, not to base my conclusion on this aspect of the case upon something as amorphous as the friendship that existed between these two men. It is not necessary that I do so. The legal result would have been the same had they not been friends. It is clear that no benefit was conferred on Mr. Del Grande qua shareholder by his exercise of his options or by the corporations honouring them.

The alternative contention of the respondent was that in any event the appellant received the options qua employee and that the provisions of subsection 7(1) apply. The respondent further pleaded that the appellant did not deal with the corporations at arm's length and that accordingly the appellant would be deemed to have received a benefit in the amount of $171,738 in his 1985 taxation year by virtue of subsection 7(1) of the Act. It is implicit in this pleading that the Minister's position is that although the corporations are Canadian controlled private corporations, the deferral under subsection 7(1.1) of the recognition of the benefit that would otherwise arise under subsection 7(1) is not available to the appellant on the basis that he was not at arm's length with the corporations.

Subsection 7(5) provides as follows:

This section does not apply if the benefit conferred by the agreement was not received in respect of, in the course of, or by virtue of the employment.

The difficulty that I have with the respondent's alternative position is that it seems doubtful that the appellant was conferred" any benefit by the agreement (i.e., the option agreement) qua employee. If I were forced to make a choice between his being granted the options qua employee and his being granted the options qua shareholder, I would have had to conclude that on a balance of probabilities the reason for his receipt of the options was more attributable to his status of employee. It certainly had nothing to do with his being a shareholder. As stated above in the analysis of the issue under section 15, the option agreements refer to his contribution to the business and affairs of the companies. The options are exercisable only while he is an officer or director of the companies. In other words the granting and exercise of the options may have been connected with his position as an officer and director but they are in no way connected with his being a shareholder. Moreover, in the case of any doubt between paragraph 15(1)(c) or section 7 the specific code laid out in section 7 should prevail. [1]

Abbott v. Philbin (Inspector of Taxes), [1960] 2 All E.R. 763, [1961] A.C. 352, 39 T.C. 82, was a decision of the House of Lords which considered the effect of the grant to its employees by a corporation of non-assignable options to purchase its shares in one year and the exercise of those options in a subsequent year when the shares had increased in value.

The employees were assessed in the year the options were exercised on the difference between the option price and the value of the shares at that time. The provision under which the assessment was made was rule 1 of the Rules applicable to Schedule E contained in Schedule 9 to the English Income Tax Act, 1952, which read in part as follows:

Tax under Sch. E shall be annually charged on every person having or exercising an office or employment mentioned in Sch. E . . . in respect of all salaries, fees, wages, perquisites or profits whatsoever therefrom for the year of assessment. . .

The majority of the House of Lords held that the proper year of assessment under the English Act was the year in which the option was granted, on the basis that the option was the "perquisite" within the meaning of Schedule E. Lord Radcliffe stated at pages 774-75 (E.R.):

The advantage which arose by the exercise of the option, say £166, was not a perquisite or profit from the office during the year of assessment; it was an advantage which accrued to the appellant as the holder of a legal right which he had obtained in an earlier year and which he exercised as option holder against the company. The quantum of the benefit, which is the alleged taxable receipt, is not, in such circumstances, the profit of the service; it is the profit of his exploitation of a valuable right. Of course, in this case, the year of acquiring the option was only the year immediately preceding the year in which, pro tanto, it was exercised. But, supposing that he holds the option for, say, nine years before exercise? The current market value of the company’s shares may have changed out of all recognition in that time, through retention of profits, expansion of business, changes in the nature of the business, even changes in the market conditions or

with if subsection 7(1) were ignored in preference for paragraph 15(1)(c). I find support for this view in words of Cameron, J. in Trans-Canada Investment Corp. v. M.N.R., [1953] Ex. C.R. 292, [1953] C.T.C. 353, 53 D.T.C. 1227; aff’d [1956] S.C.R. 49, [1955] C.T.C. 275, 55 D.T.C. 1191, at page 299 (C.T.C. 360, D.T.C. 1231) as follows:

But in my view, there is another interpretation that may be put upon it, an interpretation which I think is more consonant with the intention of Parliament as I deem it to be from the language itself. . .

Again, in Shannon Realties v. St. Michel, [1924] A.C. 185 at page 192, it was stated that if the words used are ambiguous, the Court should choose an interpretation which will be consistent with the smooth working of the system which the statute purports to be regulating.

A further proposition which would be applicable here — but which might be difficult to reconcile in every case with the first proposition stated above — is that if there is doubt as to which of two provisions under which a taxpayer is to be taxed the provision that should be chosen under subsection 4(4) of the Act is the one that is most beneficial to the subject. This appears to be a logical corollary to the broad principle enunciated by Estey, J. in Johns-Manville Canada Ltd., [1985] S.C.R. 46, [1985] 2 C.T.C. 111, 85 D.T.C. 5373 at 123 C.T.C. (D.T.C. 5382):

On the other hand, if the interpretation of a taxation statute is unclear, and one reasonable interpretation leads to a deduction to the credit of a taxpayer and the other leaves the taxpayer with no relief from clearly bona fide expenditures in the course of his business activities, the general rules of interpretation of taxing statutes would direct the tribunal to the former interpretation.

To the same effect see Fries v. The Queen, [1990] 2 S.C.R. 1322, [1990] 2 C.T.C. 439, 90 D.T.C. 6662.

the current rate of interest or yield. I think that it would be quite wrong to tax whatever advantages the option holder may obtain through the judicious exercise of his option rights in this way as if they were profits or perquisites from his office arising in the year when he calls the shares.

The Federal Court of Appeal in Robertson v. The Queen, [1990] 1 C.T.C. 114, 90 D.T.C. 6070, declined to follow Abbott v. Philbin, supra. In that case the taxpayer was employed as a ranch manager by an individual, Mr. Pierce, who was also the president and a shareholder of Ranger Oil (Canada) Ltd.. The taxpayer was not an employee of the corporation. As an inducement to the taxpayer to continue to work for him as a ranch manager, Mr. Pierce granted to him an option to purchase from him up to 2,500 shares of Ranger Oil at $15 per share, a price which approximated their fair market value at the time the option was given. Five years later while still an employee of Pierce, the taxpayer exercised his option to purchase 6,000 shares at a price of $3.75 per share (the shares having previously split on a 4:1 basis). In the result he acquired for $22,500 shares having a fair market value of $258,000.

The Minister of National Revenue assessed the taxpayer in the year the option was exercised on the difference between the option price that he paid and the fair market value of the shares.

Section 7 of the Act had no application since the taxpayer was not an employee of Ranger Oil. The Minister therefore invoked subsection 5(1) and paragraph 6(1)(a) which read in part as follows:

5(1) Subject to this Part, a taxpayer's income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by him in the year.

6(1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:

(a) the value of board, lodging and other benefits of any kind whatever received or enjoyed by him in the year in respect of, in the course of, or by virtue of an office or employment, except . . .

The taxpayer relied upon Abbott v. Philbin and argued that when an employee is given an option to purchase issued shares from the employer (not the corporation) in circumstances in which section 7 does not apply a benefit is “received or enjoyed” within the meaning of paragraph 6(1)(a) when the employee first becomes entitled to purchase the shares and not in the year when he actually purchases them.

The Federal Court of Appeal rejected the argument. It noted the difference in the wording of the English statute and concluded, unlike the House of Lords, that the granting of an option involves two benefits — one when the option is granted and one when it is exercised.

The reasoning which underlies the conclusion of the Federal Court of Appeal is set out in two passages at pages 119-20 (D.T.C. 6073-74):

The question debated is whether the benefit of an option to purchase shares at a fixed price (assuming that it is a taxable benefit) should be measured and seen to have accrued at the time of its conferral, or at the time of its exercise. In the Abbott v. Philbin case, the judgment of the majority, as I understand it, hinges on two propositions, a basic one and an alternative one. If, say the three learned law lords, a benefit can be said to have been granted at one time, more precisely when the option was given, it is not possible to speak of another benefit being granted later at another time. In any event, adds Lord Reid, even if we can speak of a benefit realized by the exercise of the option, it would not be possible to relate it directly to the employee's office.

My reaction to the main proposition is this. Obviously, double-tier taxation should not be imposed on gains from a single transaction, nor should the same benefit be taxed on two occasions. We certainly cannot have two benefits of a same type, both taxable under paragraph 6(1)(a) of the Act. But, that being said, let me ask why the arrangement should necessarily be seen as conveying only a single benefit. It can hardly oe contested, it seems to me, that a first benefit arises upon the employer binding himself, over a period of time, to sell shares at a fixed price, regardless of the appreciation in the market value of such shares, and a second benefit arises if and when the employee makes use of the rights flowing from the first one and exercises the option. The fact is however that while the second benefit can be measured by the discrepancy between the cost of exercising the option and the market value of the shares at the time of the acquisition, the first benefit, although a real one, eludes independent quantification.

Thus, in my view, there are two economic benefits, both arising from employment, but only the second is quantifiable as only that one is realized by a flow of money or money's worth from the employer to the employee. Nothing flows from the employer on the granting of the option: while the employer retains the shares, votes them, collects dividends for his own account and may dispose of them, the employee only acquires a possibility to eventually obtain a proprietary interest in those shares and realize a profit therefrom. In my view, individual taxation on employment- source income is based on the flow of money or money's worth from the employer to the employee. Only the second benefit, the quantifiable one, falls within the scope of paragraph 6(1)(a) of the Act.

I do not think that the same reasoning can apply to the situation where a taxpayer, who is both a shareholder and an employee of a corporation is granted an option by the corporation to purchase treasury shares of that corporation and he or she exercises the option in a subsequent year. Either section 7 or section 15 applies or neither applies. If the application of section 7 to options given to employees of a corporation is excluded by subsection 7(5) on the basis that "the benefit conferred by the agreement was not received in respect of, in the course of or by virtue of the employment" it follows as a necessary consequence that paragraph 6(1)(a) can have no application because paragraph 6(1)(a) is also premised on the benefit being received or enjoyed in the year "in respect of, in the course of, or by virtue of an office or employment." Conversely, if the “benefit” from the option is received or enjoyed in respect of, in the course of or by virtue of the office or employment section 7 would apply and section 6 would be excluded. The essential difference between paragraph 6(1)(a) and paragraph 15(1)(c) is that the former requires that the taxpayer receive or enjoy a benefit in the year in respect of, in the course of, or by virtue of his office or employment whereas paragraph 15(1)(c) requires that the corporation confer a benefit. Section 7, if applicable, provides that the benefit is deemed to have been received in the year this option is exercised. The Federal Court of Appeal was concerned with neither section 15 nor section 7, and concluded that the benefit that was susceptible of quantification under section 6 was enjoyed in the year when the taxpayer took advantage of his right to acquire the shares. [2]

Subsection 7(1) generally taxes an employee of a corporation who receives stock options from the corporation on the exercise of the options and not on their receipt. The existence of section 7 and the regime that it governs is premised on the assumption that the benefit, if any, is conferred when the option is granted. This is implicit in subsection 7(5). The purpose of section 7 is to effect a statutory alteration to that result. It is a specific application of the rules in sections 5 and 6.

An exception to the rule in subsection 7(1) is found in subsection 7(1.1) which defers recognition of the deemed benefit in the case of shares of a Canadian controlled private corporation to the time when the shares are sold by the employee. That deferral is not permitted where immediately after the granting of the option the employee was not at arm's length with the corporation.

Although I have concluded that neither section 7 nor section 15 apply to the appellant, if it were germane to my decision to determine, assuming that subsection 7(1) otherwise applied, whether the appellant was at arm's length with the corporations immediately after the granting of the options, I would have no hesitation in holding that the appellant, immediately after January 4, 1982, was at arm's length with Rust Check and Lear. He held only 25 per cent of the shares. He was one of four directors. While he was a trusted, respected and influential member of the board, I cannot find on the facts that he controlled these corporations or exercised so great a degree of influence that it could be said he was not at arm's length with the corporations.

A number of cases were cited in connection with the arm's length issue, including Peter Cundill & Associates Ltd. v. The Queen, [1991] 2 C.T.C. 221, 91 D.T.C. 5543, and Beaumont v. The Queen, [1986] 1 C.T.C. 507, 86 D.T.C. 6264, where the leading cases were reviewed. Ultimately the question resolves itself into one of fact, whether the relationship between Mr. Del Grande and the two corporations was such that it could be said that he was the directing mind of the corporations or whether he and the McCleery family acted so closely in concert that he exercised a degree of control over the corporations vastly disproportionate to his minority position so as to be able to induce the corporations to confer benefits upon him that they would not otherwise have done. The evidence falls far short of establishing such a relationship. Mr. McCleery appeared to me to be a strong minded man who, while he respected the appellant, was very much in charge of the business and was not likely to be influenced by the appellant if he did not choose to be.‘

Since I have had to deal with alternative and inconsistent bases upon which it was sought to uphold the assessments, I should summarize briefly my conclusions:

(a) The basic fact upon which the reassessment rested was, to use the words of Rand, J. in Johnston v. M.N.R., [1948] S.C.R. 186, [1948] C.T.C. 195, 3 D.T.C. 1182, demolished. No benefit was conferred upon the appellant in 1985 by the corporations as the result of his exercising his options and the consequent honouring thereof by the corporations.

(b) Had I found that there was a benefit conferred it was not conferred on him in his capacity of shareholder as Pillsbury Holdings, supra, and subsequent cases have held is required under paragraph 15(1)(c). The change in his legal position from option holder to shareholder resulted from a bona fide business relationship that was not dependent upon his being a shareholder.

(c) The alternative and inconsistent "assumption" that a benefit was deemed to have been received by the appellant under subsection 7(1) of the Act has not been established. [3] The "benefit", if there were one, was not received by virtue of his employment.

(d) If it were necessary to choose between subsection 7(1) and paragraph 15(1)(c), that is to say if, as a matter of law I am precluded from deciding that neither applies, I think that subsection 7(1) should apply, both on the basis that such a conclusion is more consistent with the evidence and on the basis that as a matter of law, where the court has a choice between the general provisions of subsection 15(1) and the specific regime of section 7 relating to options granted by corporations to their employees, the specific provisions of section 7 should be preferred.

(e) If subsection 7(1) applied, the appellant was dealing at arm's length with the corporations immediately after the options were granted and accordingly subsection 7(1.1) would require the deferral of the recognition of any deemed benefit under subsection 7(1) until the shares were disposed of.

The appeals are therefore allowed with costs and the reassessments for 1985 and 1986 are referred back to the Minister for reconsideration and reassessment on the basis that the amounts of $135,866 and $35,872 should be deleted from the appellant's income for 1985 and the appellant's forward averaging elective income deduction for 1986 should be adjusted to conform to the reassessment for 1985.

Appeal allowed.