Arthur Clemiss v. Minister of National Revenue, [1987] 2 CTC 2275, 87 DTC 569

Bonner, T.CJ.: — The appellant appeals from assessments of income tax for the 1977, 1979 and 1980 taxation years. At all relevant times the appellant was president and one of the directors of B.X. Development Limited (hereinafter "B.X."). B.X. was a public company whose shares were traded on the Vancouver stock exchange. B.X. formed a subsidiary company for the purpose of acquiring a plant for the manufacture of lime. The plant was acquired and subsequently the appellant, the chairman of the company and three other persons were charged with conspiracy to defraud B.X. and its shareholders and with theft of the property of B.X. The charges arose from events connected with the lime plant transaction. Following a lengthy trial the accused were acquitted.

In his 1977 income tax return the appellant claimed a deduction in computing income in the amount of $61,013 in respect of legal fees spent by him for his defence. The theory on which the claim for deduction was founded in the notice of appeal was that the legal fees were expenses incidental to the appellant's business activities as a trader in securities, including the shares of B.X. The respondent disallowed the deduction. He found or assumed that the expense in question was not incurred for the purpose of gaining or producing income from a business or property, but was a personal or living expense of the appellant. Thus arises the first issue.

During the years 1977 to 1980 the appellant incurred legal costs totalling $151,889.50* [1] in defending himself against the criminal charges. In 1980 B.X. paid the appellant $146,533.37 to indemnify him against legal costs.! [2] The respondent, in assessing tax for that year, included the amount received as a

. . . benefits] . . . received . . . by [the appellant] in the year in respect of, in the course of, or by virtue of an office or employment," namely, his office or employment with B.X., within the meaning of paragraph 6(1)(a) of the Income Tax Act. Paragraph 6(1)(a) reads as follows:

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 (except the benefit he derives from his employer's contributions to or under a registered pension fund or plan, group sickness or accident insurance plan, private health services plan, supplementary unemployment benefit plan, deferred profit sharing plan or group term life insurance policy) received or enjoyed by him in the year in respect of, in the course of, or by virtue of an office or employment.

It was the appellant's position that the indemnification did not fall within paragraph 6(1)(a) because it was a simple reimbursement for expenses incurred by reason of his office. Thus arises the second issue.

The third and final issue! [3] arises from the assessment for the appellant's 1979 taxation year. It is whether shares of B.X. acquired by the appellant under a stock option agreement dated March 1, 1977, were acquired by him on August 30, 1979, as found by the respondent, or were acquired by him, as the appellant contends, on February 25, 1978, when the appellant exercised his option and delivered a cheque to B.X. in payment of the purchase price. The date of acquisition must be determined for purpsoses of paragraph 7(1)(a) of the Income Tax Act which at the relevant time read 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 evidence on the first issue does not support a finding that the criminal charges were, as alleged, incidental to a business of trading in securities. There was no evidence that the appellant himself carried on such business. The appellant did testify that a corporation called Licon, 100 per cent of the shares of which were controlled by him, traded in securities and that he made all decisions on behalf of that company. A corporation and its shareholders are, of course, separate persons and the business of the corporation is not the business of the shareholder. The assessment for 1977 has not been shown to be wrong and the appeal in respect of that assessment will therefore be dismissed.

I turn now to the second issue. The circumstances giving rise to the criminal charges were not touched on in any detail in the course of the testimony given by the appellant. They were, however, outlined in documents introduced without objection to prove the truth of their contents. The reasons for judgment of His Honour Judge H. J. McGivern of the Provincial Court of British Columbina, read in part as follows:

In a simplified form the case for the Crown may be summarized as follows: Pezim, [Chairman of the Board of B.X.] in the sring of 1974 saw the opportunity to acquire a lime plant known as the Paul Lime Plant in Arizona. Pezim started to discuss the matter with one Sherwood Owens who in turn knew the trustee in bankruptcy of a company known as Homestake. The Paul Lime Plant was eventually acquired by Owens from the trustee and sold to a subsidiary company of B.X. Developments Ltd. The acquisition price consisted of cash, the assumption of certain debts and shares of the parent company, B.X. Developments Ltd. The Crown submits that the share portion of the consideration was a "sham" from the beginning or became a "sham" when Pezim and his co-accused arranged to receive approximately 350,000 shares of B.X. Developments Ltd. from Owens. The Crown submits that an agreement existed among the accused to carry out the transaction to the detriment of B.X. Developments and/or its shareholders.

The Crown further submits that a second conspiracy existed which dealt with a fraud on B.X. Developments Ltd. of $50,000. This allegation which is Count 4 in the Information, concerns two payments of $25,000 to Shillingford Investments Ltd. which were "covered-up" and treated as acquisition costs of the Paul Lime Plant. The Crown's theory is that the accused Clemiss, Pezim and Rotterman agreed to acquire these funds in an illegal fashion for their own use and benefit and that they were assisted by the accused Leverant.

Payment of the indemnity was approved by the shareholders of B.X. at an extraordinary general meeting held May 5, 1980. The notice to the shareholders of the meeting dated March 24, 1980, reads in part as follows:

An Extraordinary General Meeting of members (shareholders) of B.X. DEVELOPMENT LIMITED (the "Company") is to be held on 5th May 1980 at which the members will be asked to consider certain claims for indemnification received from three of the present Directors of the Company, a chartered accountant and a lawyer who represented the Company in the acquisition of the Paul Lime Plant, Douglas, Arizona, U.S.A.

All of these individuals were charged with criminal conspiracy arising out of transactions directly or indirectly related to the purchase of the Paul Lime Plant with the result that they were subjected to very lengthy and costly legal proceedings from the date they were charged in January 1977 to the date of their acquittal on 9th November 1979.

Two of the Directors concerned, namely Murray Pezim, Chairman of the Board of your Company, and Arthur Clemiss, President of the Company, will also need to seek approval of the Supreme Court of British Columbia, Canada as is required in the case of directors, by the provisions of Section 151 of the Companies Act of British Columbia, that Province being the jurisdiction of incorporation of the Company. Court approval is not, however, required in the case of Isadore Rotterman, the third Director concerned, as he was not a Director at the material times concerned, and Court approval is not required to approve indemnification to Robert L. Liverant, the chartered accountant, nor Lawrence Page, the lawyer.

The Articles of your Company do not require members approval before payment of claims for indemnification; however the amounts involved are substantial and your Directors consider it only appropriate that members be given an opportunity to express an opinion.

The notice to the shareholders expanded further on the circumstances giving rise to the claims for indemnification as follows:

SPECIAL BUSINESS

1. Claims for Indemnification

During the period 1st July 1974 and 9th May 1975 representatives of the Company negotiated for the purchase from Sherwood B. Owens of Tucson, Arizona, U.S.A., of certain assets comprising Paul Lime Plant, Douglas, Arizona, U.S.A, at a price of $2,500,000.00 (U.S. funds). $300,000 of the purchase price of these assets was by the terms of the Agreement with Mr. Owens to be satisfied by the delivery to Mr. Owens of 500,000 treasury shares of the Company at a deemed price of $0.60 (U.S. funds) per share. The representatives of the Company who were actively involved in the negotiations for the purchase of the assets of Paul Lime Plant included three of the present Directors of the Company, namely Murray Pezim, Chairman of the Board of the Issuer, Arthur Clemiss, President of the Company, and Isadore Rotterman, Vice-President of the Company. Mr. Rotterman was not a Director of the Company during the period these negotiations were carried on. Other persons who were active participants in the negotiations were Lawrence Page, Barrister and Solicitor, and Robert Liverant, Chartered Accountant, both of whom practice their respective professions in the City of Vancouver, British Columbia, Canada.

In January 1977 Murray Pezim, Arthur Clemiss, Isadore Rotterman, Lawrence Page and Robert L. Liverant, C.A., were charged with conspiracy as a result of matters directly and indirectly related to the acquisition of the Paul Lime Plant. The conspiracy charges were made up of 4 counts in all; Mr. Page was named in counts 1 to 3 inclusive only and Mr. Liverant was named in count 4 only. The other accused were named in all 4 counts. The first 3 counts were concerned with 350,000 shares of the 500,000 shares of the Company which constituted part of the purchase consideration for Paul Lime Plant, and count 4 was concerned with the sum of $50,000.00 which had been paid to Shillingford Investments Ltd., a company of which Mr. Rotterman was at the time a representative.

By an Agreement dated 9th June 1976 expressed to be between Sherwood B. Owens (''Owens"), of the first part, Caco Industrial Consultants, Inc. ("Caco"), of the second part, Wopaco Agencies Ltd. ("Wopaco"), of the third part, and Zareba Investments Ltd. ("Zareba"), Licon Management & Investments Ltd. ("Licon") and Isadore Rotterman ("Rotterman"), of the fourth part (the "Consultants Agreement"), Licon, Zareba and Rotterman (the "Consultants") agreed with Mr. Owens that they would actively promote the business and affairs of the Company and its subsidiary Can-Am Corporation with the expectation on the part of Mr. Owens that the market value of the Company's shares would be enhanced to the benefit of Mr. Owens and Mr. Owens on his part agreed with the Consultants that for such services the Consultants would receive from the 500,000 shares of the Company allocated to Mr. Owens as part of the purchase price of Paul Lime Plant a total of 285,000 shares which, by subsequent arrangement, was increased to 350,000 shares. 345,000 of these shares were to be delivered to and in fact have now been delivered to the Consultants as to 155,000 shares thereof to Zareba, as to 95,000 shares thereof to Licon and as to 95,000 shares thereof to Rotterman.

Shillingford Investments Ltd. ("Shillingford") received the sum of $50,000 following completion of the acquisition as a stipulated consideration for Shillingford delivering a commitment to provide $1,000,000.00 standby moneys pending closing of the purchase of Paul Lime Plant.

It was alleged in the conspiracy charges that payment of the sum of $50,000.00 to Shillingford was improper and that the Consultants Agreement of 9th June 1976 only recorded after the event an arrangement which had been entered into by the Consultants on or about the time of completing the purchase of Paul Lime Plant.

Article 117 of the articles of B.X. required the company to indemnify a person who was a party to any proceeding, whether civil or criminal, by reason of the fact that he was a director, officer, employee or agent of the company against all costs including legal fees if he acted honestly and in good faith with a view to the best interests of the company and, with respect to any criminal proceeding, if he had reasonable ground for believing that his conduct was lawful. Article 117 further provided that no indemnification of a director was to be made except to the extent approved by the court pursuant to the Company Act.

The relevant provision of the Company Act of British Columbia, R.S.B.C. 1979, c. 59, was section 152. Subsections (1) and (2) thereof read as follows:

152. Indemnification

(1) A company may, with the approval of the court, indemnify a director or former director of the company or a director or former director of a corporation of which it is or was a shareholder, and his heirs and personal representatives, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, actually and reasonably incurred by him, including an amount paid to settle an action or satisfy a judgment in a civil, criminal or administrative action or proceeding to which he is made a party by reason of being or having been a director, including an action brought by the company or corporation, if

(a) he acted honestly and in good faith with a view to the best interests of the corporation of which he is or was a director; and

(b) in the case of criminal or administrative action or proceeding, he had reasonable grounds for believing that his conduct was lawful.

(2) The court may, on the application of a company, director or former director, make an order approving an indemnity under this section, and the court may make any further order it considers appropriate.

Approval pursuant to section 152 was given by order of the Supreme Court of British Columbia dated June 13, 1980.

Counsel for the respondent argued that the payment indemnified the appellant against a personal expense because it was the appellant who was charged and who found it necessary to defend himself. It followed, so the argument went, that the payment fell within the all-embracing words of paragraph 6(1)(a) of the Income Tax Act.

Counsel for the respondent relied on the decision of the Supreme Court of Canada in The Queen v. Elizabeth Joan Savage, [1983] C.T.C. 393; 83 D.T.C. 5409, and, as well, on the decision of this Court in Theresa Pellizzari v. M.N.R., [1987] 1 C.T.C. 2106; 87 D.T.C. 56.

Counsel for the appellant argued that the legal expense incurred was a deductible expense to B.X. and that the indemnity did not fall within subsection 5(1) and paragraph 6(1)(a) of the Act. He relied in particular on the decision of the Federal Court-Trial Division in Richard D. McNeill v. The Queen, [1986] 2 C.T.C. 352; 86 D.T.C. 6477, with particular emphasis on the discussion at page 363 (D.T.C. 6485) of the ambit of paragraph 6(1)(a).

In my view, considerations relevant to the deductibility of legal expenses when it is necessary to compute income or profit from a business or property are not relevant to the question whether a payment to an officer of a corporation falls within the language employed in paragraph 6(1)(a) of the Act. Profit is a concept foreign to the statutory scheme applicable to the taxation of income from employment.

The decision of the Supreme Court in Savage is the leading authority on the scope of paragraph 6(1)(a). In that case the Court considered the taxability of a payment of $300 received by an employee of a life insurance company from her employer as an award for the successful completion of three courses on the subject of life insurance. At page 399 (D.T.C. 5414) Dickson, J. (as he then was), speaking for four members of the Court, said the following:

Our Act contains the stipulation, not found in the English statutes referred to, “benefits of any kind whatever. . . in respect of, in the course of, or by virtue of an office or employment". The meaning of "benefit of whatever kind” is clearly quite broad; in the present case the cash payment of $300 easily falls within the category of “benefit”. Further, our Act speaks of a benefit “in respect of” an office or employment. In Nowegijick v. The Queen, [1983] C.T.C. 20; 83 D.T.C. 5041 this Court said, at 25 [5045], that:

The words “in respect of" are, in my opinion, words of the widest possible scope. They import such meanings as “in relation to”, “with reference to" or “in connection with”. The phrase “in respect of” is probably the widest of any expression intended to convey some connection between two related subject matters.

See also Paterson v. Chadwick, [1974] 2 All E.R. 772 (Q.B.D.) at 775.

I agree with what was said by Evans, J.A. in R. v. Poynton, [1972] 3 O.R. 727 at 738, speaking of benefits received or enjoyed in respect of, in the course of, or by virtue of an office or employment:

I do not believe the language to be restricted to benefits that are related to the office or employment in the sense that they represent a form of remuneration for services rendered. If it is a material acquisition which confers an economic benefit on the taxpayer and does not constitute an exemption, e.g., loan or gift, then it is within the all-embracing definition of s. 3.

It is difficult to conclude that the payments by Excelsior to Mrs. Savage were not in relation to or in connection with her employment. As Mr. Justice Grant said, the employee took the course to improve his or her knowledge and efficiency in the company business and for better opportunity of promotion.

As Crown counsel submits, the sum of $300 received by Mrs. Savage from her employer was a benefit and was received or enjoyed by her in respect of, in the course of or by virtue of her employment within the meaning of paragraph 6(1)(a) of the Income Tax Act; it was paid by her employer in accordance with company policy upon the successful completion of courses "designed to provide a broad understanding of modern life insurance and life insurance company operations" and "to encourage self-upgrading of staff members"; the interest of the employer "was that the courses would make her a more valuable employee"; Mrs. Savage took the courses to "improve [her] knowledge and efficiency in the company business and for better opportunity for promotion". Distinguishing this case from Phaneuf, there was no element of gift, personal bounty or of considerations extraneous to Mrs. Savage's employment.

I would hold that the payments received by Mrs. Savage were in respect of employment. That, of itself, makes them income from a source under section 3 of the Act.

In the McNeill case the Court applied the twofold test. At page 360 (D.T.C. 6483) Rouleau, J. said:

My interpretation of paragraph 6(1)(a) leads me to the conclusion that a determination must be made as to whether the payment received by the taxpayer did in fact constitute a benefit and whether it was received “in respect of, in the course of, or by virtue of an office or employment”.

On the facts there under consideration the Court found that the payment made to the taxpayer was not a personal or an economic benefit arising from employment which rendered the taxpayer's salary of greater value to him.

The decision of this Court in Pellizzari is authority for the proposition that payment by a corporation to a corporate director of legal costs incurred in defending herself on criminal charges is a benefit within the meaning of paragraph 6(1)(a).

In Rendell v. Went* [4] the Court of Appeal and House of Lords found that a benefit was conferred in circumstances which bear a marked resemblance to the present case. While driving a car belonging to the company in the course of conducting company business the taxpayer was involved in an accident as a result of which he was charged with dangerous driving. The company retained counsel and paid the legal costs of the defence. The legal costs paid by the company were included in the computation of the director's income. The statutory provision on which the Crown relied authorized the inclusion in a director's income of the amount of expense incurred by a company . . . in connexion with the provision, for any of its directors of . . . benefits . . . of whatsoever nature . . . ” That provision is to be found in the context of a statute which, of course, is not the same as the Canadian Act. However, it is noteworthy that the members of the House of Lords and Court of Appeal did not entertain any doubt that the provision of the defence was a benefit to the taxpayer. Thus, for example, Viscount Radcliffe said at page 467 (T.C. 656):

This is a case in which the money bought nothing except the taxpayer's defence. No part of it was spent on something that did not benefit him.

In the Court of Appeal Donovan, L. J. said at page 327 (T.C. 651):

That expense was incurred in connexion with the provision of a benefit to the taxpayer, viz., the benefit of being defended by solicitors and counsel on his trial.

and Russell, L.J. said at page 328 (T.C. 652):

I cannot see how the provision of solicitors and counsel for the defence of the taxpayer was anything other than the provision of à benefit for the taxpayer.

I find that the payment was a “benefit” within the meaning of paragraph 6(1)(a).

I turn next to the question whether the payment of the indemnity was made "in respect of" the appellant's position as president and director of B.X. The appellant's claim for the idemnity rested on the corporation's article 117 to which reference has been made earlier and, it would seem, on the fact that he was a party to the proceeding by reason of his position as director. I cannot imagine that the payment would have been made had the appellant not held office as president and director. It therefore cannot be said that the benefit does not fall within the scope of the words “in respect of” as laid down in Savage. The case is not similar to one in which a payment is made by a corporation to a director or officer to indemnify him against a cost incurred in the course of performing his duties. The evidence suggests that the criminal charges resulted not from the appellant's activities in connection with the acquisition of the lime plant but, rather, from activities alleged to have been intended to divert into the pocket of the appellant or of his company, Licon, part of the property which flowed from B.X. to others in connection with the acquisition of the lime plant. I therefore cannot find that the respondent was wrong in including the $146,533.37 in income.

I turn now to the final issue. By agreement in writing dated March 1, 1977, B.X. granted to the appellant ” . . . the sole and exclusive right and option to purchase Sixty Thousand (60,000) fully paid and non-assessable freely trading shares of the capital of the Company . . . such option to be exercisable at any time up to and including the 28th day of February, 1978, . . . ” The appellant duly exercised the option on February 23, 1978, and tendered a certified cheque to B.X. in the correct amount.

B.X. encountered a problem in fulfilling its obligation. The shares which it was to sell were to be “freely trading shares". Subject to certain exceptions, the Securities Act, R.S.B.C. 1979, c. 380, prohibited persons from trading in a security "where the trade would be in the course of primary distribution to the public of the security" unless a prospectus had been filed. That prohibition would, in the absence of the filing of a prospectus or other proceeding, have applied to prevent sale by the appellant of shares issued by B.X. to him pursuant to the option.

The Superintendent of Brokers of the Province of British Columbia did have power under the Securities Act to rule that a trade or intended trade in a security would not be in the course of primary distribution to the public. It would seem that the appellant and B.X. contemplated that such a ruling be obtained in respect of the sale of the shares which the appellant was to acquire pursuant to the option. However, the Superintendent of Brokers refused, in February of 1978, to issue the required ruling so long as criminal proceedings were pending against the appellant.

For some months after February of 1978 no attempt was made to issue shares to the appellant and qualify them as "freely trading” either by the filing of a prospectus or by filing a statement of material facts as permitted by the Securities Act. Eventually, in August of 1979, the Superintendent of Brokers issued a favourable ruling. On August 30, 1979, a meeting of the directors of B.X. was held at which authority was given for the execution of a treasury order directing the transfer agent of the company to allot and issue to the appellant the 60,000 shares called for by the option.

Counsel for the appellant took the position that when the appellant tendered the money to the company he became a shareholder and in a position to demand a certificate and that he then "acquired" shares within the meaning of subsection 7(1). He argued that a ruling under section 56 does not affect title to the shares and is required not for the issuance of a share to a director, but only for purposes of resale by the director. The question whether a share had been issued did not, he said, depend on whether the appellant had been entered in the register of shareholders. It followed, he said, that the shares were "acquired" at the time of exercise of the option, that is to say, the time of acceptance by the appellant of the company's offer to issue the shares to him. In this connection he referred to the following passages from the decision of the Ontario Court of Appeal in Cooper v. Cayzor Athabaska Mines Ltd. (1960), 24 D.L.R. (2d) 544, (a) at pages 550 and 551:

In the absence of such statutory definitions and of any regulations, the allotment and issue of shares of capital stock of the company could be made in many ways. In Nicol's Case (1885), 29 Ch.D. 421 at p. 426, Chitty J. said:

What is termed "allotment" is generally neither more or less than the acceptance by the company of the offer to take shares. To take the common case, the offer is to take a certain number of shares, or such a less number of shares as may be allotted. That offer is accepted by the allotment either of the total number mentioned in the offer or a less number, to be taken by the person who made the offer. This constitutes a binding contract to take that number according to the offer and acceptance. To my mind there is no magic whatever in the term "allotment" as used in these circumstances. It is said that the allotment is an appropriation of a specific number of shares. It is an appropriation, not of specific shares, but of a certain number of shares . . . In most cases the act of placing the person who has agreed to become a member on the register is a mere matter of form, and may be described as a mere ministerial act.

It will be observed from the judgments in that case that s. 23 of the Companies Act of 1862 made the placing of the name of a shareholder on the register a condition precedent to membership. There is no such provision applicable to the company in the instant case and no such condition precedent.

In Nelson Coke & Gas. Co. et al. v. Pellat (1902), 4 O.L.R. 481 at p. 489, Maclennan J.A., with whom Osler and Moss JJ.A. concurred, said:

As applied to a fixed quantity of anything, or a fixed number of shares, the word "allotment" can mean nothing more than to give, to assign, to set apart, to appropriate. The word has all these meanings. Nor does the word "issue" in the present case mean the doing of any particular act, and I think "issue" and "allotment" taken together mean no more than some signification by the company of its assent that the defendant now was or had become the owner of the number of shares which he agreed to take.

He stated on authorities referred to by him that all that was required was "a response, in writing, or verbally, or by conduct, something to shew the applicant that there was a response by the company to his offer". He quoted, in particular, the words of Montague Smith J. in Re Richards & Home Ass'ce Ass’n (1871), L.R. 6 C.P. 591 at p. 595: "Anything emanating from the company which indicates to the party that the shares have been allotted to him, and which binds them, will be sufficient".

and, (b) at page 552:

It was contended that no certificates had been issued and therefore the shares were not issued within the meaning of the Companies Act. It was held that the issue of the certificate was not necessary to the issue of shares within s. 25 of the Companies Act. In Alberta Rolling Mills Co. v. Christie (1919), 45 D.L.R. 545 at p. 551, 58 S.C.R. 208 at p. 217, Anglin J. said:

The register is only evidence of an application for shares and its acceptance, or of an allotment in the nature of an offer and its acceptance, constituting in either case membership: Lindley on Companies, 6th ed., p. 77. It is the contract that creates the membership, not the registration. Allotment is no doubt essential in the ordinary case. But the entry of it in the directors' minutes is merely evidentiary. The absence of such an entry and of a formal notice of allotment are not conclusive against membership.

Further he referred to the following passage from William Russell Steen v. The Queen, [1986] 2 C.T.C. 394 at 399; 86 D.T.C. 6498 at 6501:

The meaning of the word “acquired” in paragraph 7(1)(a) of the Act has been the subject of judicial comment. In the case of Anderson et al. v. The Queen, [1975] C.T.C. 85; 75 D.T.C. 5042 (F.C.T.D.), Mr. Justice Gibson, in obiter, commented on those situations that would trigger the operation of section 85A of the I.T.A. (section 7 of the I.T.A., S.C. 1970-71-72, c. 63, as amended). He noted the following (at 87 (D.T.C. 5044)):

Section 85A of the Income Tax Act deals specifically with benefits to employees of a company who acquire options, contracts or other agreements to purchase shares or to have issued to them shares of companies. Paragraph 85A(1)(a) [7(1)(a)] refers to the situation where the employee has exercised his option to purchase shares from a corporation. Paragraphs 85A(1)(b), (c) or (d) refer to situations where the employee transfers or otherwise disposes of his option to purchase shares to a-third person or persons who subsequently acquires such employee's rights under a contract option. [Emphasis added.]

Thus it would appear that according to Gibson, J. an employee acquires shares pursuant to a stock option agreement at the time he exercises his option to purchase shares from his corporate employer.

The appellant’s argument rests on the premise that the exercise of the option resulted in a binding contract for the sale to the appellant of B.X. shares. That premise is incorrect because the description of the contract is incomplete. The contract expressly called for the delivery of “freely trading shares". A failure on the part of B.X. to deliver shares having that quality would have resulted in a restriction on marketability so severe as to constitute breach of an undertaking essential to the contract: Faced with the inability of B.X. to deliver such shares in February of 1978, the appellant chose to wait until B.X. was in a position to secure a favourable ruling from the Superintendent of Brokers. He refused to treat the breach of the contract as a discharge of it and the parties tacitly extended the time for performance by B.X. of its obligation. As soon as B.X. received a favourable ruling the freely trading shares were delivered. That happened in August of 1979. There is, therefore, no basis for saying that the appellant acquired the shares prior to August of 1979. The appellant therefore fails on this issue as well.

The appeals will therefore be dismissed.

Appeals dismissed.