Kenneth G. Lintott, Murray W. Pyke, Nigel R. Cozens, Myrna L. Bazant v. Minister of National Revenue, [1987] 2 CTC 2266, 87 DTC 563

Brulé, T.C.J.:—These appeals, which were heard on common evidence, concern the reassessments of the appellants for benefits arising from their participation in an Employee Share Purchase Plan. The appeals relate to the following taxation years:

Kenneth G. Lintott 1977 and 1979

Murray W. Pyke	1977 to 1981
Nigel R. Cozens	1979
Myrna L. Bazant	1977 and 1979

The appellant Nigel R. Cozens was not present at the hearing. A request on his behalf for an adjournment was denied but an order was granted to the Minister to have Mr. Cozens' case brought forward for trial in the event that the other appellants are successful. Otherwise, his appeal is dismissed.

Mr. Pyke's appeals for the 1978, 1980 and 1981 taxation years concern the effect of the general averaging provisions dependent on the result of his appeals for the 1977 and 1979 taxation years.

Facts

Each of the appellants material to this hearing was at all times an employee of Comaplex Resources International Ltd. ("the Company"). In 1975 the Company instituted the Key Employee Share Purchase Plan ("the Plan") to provide key employees an opportunity to obtain a proprietary interest in the Company.

A Stock Purchase Plan Committee was established and empowered to grant, from time to time, the right to participate in the Plan to such employees as it deemed in the best interests of the Company. Participation in the Plan was wholly voluntary. Upon electing to participate, the employee would enter into an "Employee Share Purchase Contract". The Company would then loan funds to the Trustee of the Plan to purchase on behalf of these employees six per cent of the cumulative, redeemable, exchangeable preferred shares of the Company. Simultaneously the employee would execute a promissory note in favour of the Trustee for the full purchase price of the shares which would then be endorsed by the Trustee in favour of the Company. Upon the employee making payment in full the Trustee would then transfer the shares to the employee.

When initiated in 1975 the Plan consisted of three series of preferred shares, series “A”, "B" and "C", which were exchangeable for common shares at different exchange rates upon specified future dates.

On June 23, 1977 a special resolution was passed at the Annual General Shareholders Meeting of the Company altering the designation of 45,000 of each of the existing series "A", "B" and "C" preferred shares to series “D”, "E" and “F” respectively with varying conversion rights attached thereto. This special resolution was subject to the proviso that the conversion rates would be alterable by the board of directors to comply with the requirements, if any, of the Vancouver Stock Exchange or the Registrar of Companies for British Columbia.

At this same meeting a resolution was passed extending the Key Employee Share Purchase Plan by allowing certain persons to purchase series "D", "E" and “F” shares. At a directors meeting on the same date the following proposed allotment of shares was unanimously approved, subject to the acceptance of the same by the Vancouver Stock Exchange:

The Company's Filing Statement dated September 23, 1977, reflecting the amendment to the terms of the Plan, was accepted for filing by the Vancouver Stock Exchange on or about October 6, 1977. On September 30, 1977, the Company amended the Statement of the Plan, adding the series "D", "E" and "F" shares. In particular, note should be taken of the amendment to clause 13 of the Statement. It provides as follows:

Any Participant employed by the Company after September 30th, 1977 may thereafter purchase any of the Series "D", "E" or "F" shares allocated to him.

[Emphasis added.]

According to a series of letters introduced into evidence by the appellants, the formal documentation with respect to the key employees' acquisition of the series "D", "E" and "F" shares was not completed until some time after November 3, 1977 and prior to November 15, 1977. All of the share purchase agreements and share certificates were dated as of December 30, 1977. I accept the appellants’ evidence that these documents were completed prior to the dates noted thereon.

Pursuant to the provisions of the British Columbia Companies Act, S.B.C. 1973, c. 18, a copy of the special resolution passed by the shareholders on June 23, 1977 altering the Company's Memorandum was filed with the Registrar on December 23, 1977. Section 238 of the Companies Act provides as follows:

238. (1) A company may only alter its memorandum by filing with the Registrar a certified copy of a resolution required by this Act altering the memorandum, in the cases and in the manner and to the extent for which express provision is made in this Act, but only if the memorandum as altered would, at the time of the filing, comply with this Act.

(2) A resolution to alter the memorandum of a company takes effect on,

(a) where every other requirement of this Act relating to the proposed alteration is complied with, the date that a certified copy has been accepted for filing by the Registrar; or

(b) the date specified in the resolution,

whichever is the later.

[Emphasis added.]

In accordance with section 238 this resolution did not, therefore, take effect until December 23, 1977 when it was accepted for filing by the Registrar.

In 1979 the directors approved a further allotment of shares to the Plan. The minutes of the meeting, held on December 5, 1979, indicate the number of shares to be allocated to each of the appellants. Mr. Lintott's and Mr. Pyke's share purchase agreements correspond with the minutes of the meeting but, Ms. Bazant's agreement is in excess of those approved at the meeting. No reason for this discrepancy was forthcoming at the hearing but, in any event, it does not affect the outcome of these appeals and I place no importance on this fact. Mr. Cozens did not participate in the 1979 share purchase agreements.

The 1979 share purchase agreements were all dated December 31,1979 but the appellants testified that it was intended that these agreements were to be effective from the date of the directors’ meeting on December 5, 1979.

Issue

The Minister's position is that none of the appellants received an enforceable interest in the shares in question until December 30, 1977 and December 31, 1979, the dates recorded on the share purchase agreements. Accordingly, he determined the fair market value of the shares issued as of those dates and reassessed the appellants including in their incomes the difference between the fair market values on the above dates and the amounts paid by the appellants, relying on subsections 7(1) and 7(2) of the Income Tax Act. Subsection 7(1) provides, in part, as follows:

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,

(a) if the employee has acquired shares under the agreement, a benefit equal to the amount by which the value of the shares at the time he acquired them exceeds the amount paid or to be paid to the corporation therefor by him shall be deemed to have been received by the employee by virtue of his employment in the taxation year in which he acquired the shares;

The appellants submit that the shares in question were acquired, for the purposes of the Act, when the directors approved the issue of shares. Specifically, they are asserting that they acquired these shares on June 23, 1977 and December 5, 1979.

The issues to be determined therefore are the dates upon which the appellants acquired the shares under the Plan. The value of these shares increased following each of the directors' meetings and if they were in fact acquired by the appellants at a later time, they unquestionably received a benefit under section 7 of the Act.

Analysis

In support of their position the appellants cited the following cases:

Donald G. Grant v. The Queen, [1974] C.T.C. 332; 74 D.T.C. 6252 (F.C.T.D.)

Ronald J. Wiebe et al. v. The Queen, [1987] 1 C.T.C. 145; 87 D.T.C. 5068 (F.C.A.)

Emmanuel Rosenblat v. The Queen, [1975] C.T.C. 472; 75 D.T.C. 5274 (F.C.T.D.)

Upon reviewing these cases, however, I find that they are of no assistance to the appellants given the facts of their appeals. I intend to refer to only two of these.

The Grant case (supra), which was cited by both the respondent and the appellant, involved an employee who had entered into an agreement on July 24, 1968 to purchase company shares under a deferred payment plan which extended over a three-year period. Although the shares were not to be issued until paid for in full, the Court concluded that all the evidence indicated that the parties had entered into a binding contract as of the date of the agreement and it was their intention that the appellant acquire legal title to the shares as of that date. I can find no such intention in the present case to indicate that the appellants intended to acquire a legal interest in their shares as of the date of the respective directors' meetings. On the contrary, the documents entered into evidence indicate a clear intention on the part of the parties to defer legal ownership until year-end in each case.

The case of William Russell Steen v. The Queen, [1986] 2 C.T.C. 394; 86 D.T.C. 6498, involved an employee who was granted an option to purchase authorized but unissued shares. The option was exercised by the plaintiff, but payment was delayed for one year at which point in time the shares were issued. The Minister assessed the appellant for the value of the shares as of the date the option was exercised. Although the Court's statements with respect to the acquisition of shares related to the exercise of an option, I believe they are equally applicable in the present case and make specific reference to the statements of Rouleau, J. at page 399-400 (D.T.C. 6502) in which he discussed Mr. Justice Bastin's findings in the Grant case (supra):

Thus the key factor that Mr. Justice Bastin considered in ascertaining the date of acquisition was not the date on which the shares were fully paid nor the date on which the share certificates were issued but the date on which the taxpayer established a binding proprietary right in the legal ownership of the shares.

And later on the same page:

In conclusion, after an examinationof the scheme of paragraph 7(1)(a) of the Act and of the relevant jurisprudence, I am satisfied that a taxpayer is deemed to have received a benefit, if any, at the moment he obtains legal ownership or the incidence of legal ownership in and to the shares subscribed.

The question which must therefore be determined in the present case is when did the appellants obtain legal ownership of the shares.

The Rosenblat case (supra) was cited by the appellants as authority for the proposition that the minutes of a directors' meeting could substantiate the existence of a valid contract for the issuance of shares to employees. In that case the directors confirmed an agreement to issue the shares on June 10, 1967, but did not authorize the actual issuing of shares until December 28, 1967. The Court held that there was a valid contract in existence as of the meeting on June 10, 1967 and that the appellant acquired the right to the shares as of that date. There are, however, important distinctions between that case and the case before this Court.

In the present case the authorized capital of the Company on June 23, 1977 did not include the series "D", "E" and "F" preferred shares which are the subject matter of this appeal. In accordance with the British Columbia Companies Act, as noted previously, the alteration of the share capital was only effective upon being accepted for filing with the Registrar. The evidence is clear that this did not occur until December 23, 1977. There is no provision in the Act which provides for any retroactive effect and I must therefore conclude that these preferred shares did not legally exist until December 23, 1977. The case of Oakfield Developments (Toronto) Limited v. M.N.R., [1969] C.T.C. 219; 69 D.T.C. 5175, provides clear authority for the conclusion that these shares could not be validly issued until the statutory requirements were fulfilled. The earliest possible date for the appellants to acquire legal title to these shares pursuant to subsection 7(1) of the Income Tax Act was therefore December 23, 1977.

With respect to the evidence of the appellants that it was intended that these agreements be effective from the date of the directors' meetings, I am not convinced that the intention was that the legal rights attached to the shares should pass to them at those times. On the contrary, the documentation seems to conclusively indicate that legal ownership was to be deferred until the fiscal year-end. There is no evidence that between the meetings and the dates the shares were issued the appellants had any shareholder rights with respect to these shares.

Their evidence is also contrary to an amendment to the Plan dated September 30, 1977 which specifies that only those individuals employed after September 30, 1977 may purchase any of the "D", "E" or “F” preferred shares.

On the basis of all the evidence before this Court, it must be concluded that the appellants did not acquire legal title to the shares until the dates specified in the agreements. Acquisition for the purposes of the Income Tax Act was therefore on December 30, 1977 and December 31,1979 in each of those years.

The Minister’s reassessments are therefore confirmed. These appeals are dismissed.

Appeals dismissed.