Ronald J. Wiebe v. Her Majesty the Queen, [1986] 1 CTC 171, 86 DTC 6015

Denault, J.:—The plaintiff is appealing from a decision of the Tax Court of Canada. The facts in this matter are the same as those of a co-employee Ray Bastien (T-507-85) and since these actions were heard together on common evidence, the Court will consider both cases at the same time.

Facts:

The plaintiffs Bastien and Wiebe became employees of Mitchell Installations Ltd. (“Mitchell”) in 1972 and 1975 respectively. They maintain that “Mitchell” is a Canadian-controlled private corporation (C.C.P.C.) as defined in paragraph 125(6)(a) of the Income Tax Act (I.T.A.). It appears that each plaintiff received at the time he was hired and as a term of his contract of employment or was informed, shortly thereafter, of the general policy of the company to offer to its key employees an option to purchase five shares in the company at $1 per share.

In 1978, the company issued each plaintiff a share certificate for five shares. The defendant concluded that these shares were issued pursuant to the options received by the plaintiffs when they were hired; it therefore reassessed the plaintiffs’ 1978 income tax returns and pursuant to the Income Tax Act paragraph 7(1 )(a) included in their income an amount representing the fair market value of the shares ($4,000 x 5) less the amount paid for them ($1 x 5). The plaintiffs appealed that reassessment to the Tax Court of Canada, and now appeal that Court's dismissal of their case to the Federal Court. Assuming that “Mitchell” is a C.C.P.C., the income tax treatment accorded to the employees, and hence the outcome of this appeal, will depend on whether the agreement giving them the right to acquire the shares was entered into before or after March 31, 1977.

The plaintiffs maintain that “Mitchell” did not agree to sell them shares in the company until late 1977. In that year, after the withdrawal from the company of two former shareholders (Mr. Bryant and Mr. Marmont) in a litigious manner, a new policy was introduced whereby employeeshareholders were required to satisfy certain terms and conditions, including the requirement that they sign buy-sell agreements whereby they agree to sell their shares back to the company upon leaving its employ. The plaintiffs argued before this Court as before the Tax Court that these terms and conditions formed part of a new share purchase option and in effect rendered the original option null and void.

The share certificates were formally issued to the plaintiffs in the company's books on August 30, 1978. On December 22, 1978 the plaintiffs signed the buy-sell agreements and, according to the plaintiffs, their applications to purchase the shares were approved by the Board of Directors on December 29, 1978. The plaintiffs argue that this was, therefore, the purchase of shares in a C.C.P.C. pursuant to an agreement made after March 31, 1977, and that because they did not dispose of the shares within two years of acquiring them, the value should, pursuant to the Income Tax Act subsection 7(1.1), be included in their income only upon their disposition.

The defendant, however, argues that the option agreements made when the plaintiffs were hired had not been revoked, cancelled or changed until the issuance of the shares in August of 1978. It maintains that the requirements that the plaintiffs enter into buy-sell agreements with the company could not have been a condition precedent to the issuance of the shares as the shares were issued almost four months before the agreements were signed in December 1978; therefore, the defendant argues, the shares were not issued pursuant to an agreement entered after March 31, 1977, the Income Tax Act subsection 7(1.1) is not applicable, and the value of the shares must by the operation of the Income Tax Act paragraph 7(1)(a), be included in the plaintiffs’ 1978 income.

Issue:

The issue in this case is whether the initiation, in 1978, by the employer "Mitchell" of a policy in respect of the issuance of shares to be granted to key employees, constitutes an agreement to sell or issue a share of the capital stock of a corporation after March 31, 1977 within the meaning of paragraph 7(1)(a) and subsection 7(1.1) of the Income Tax Act.

The determination of whether the policy established by “Mitchell” in late 1977/early 1978 — as stated in paragraph 7 of the “statement of claim” — constituted a new stock-option benefit plan would appear to be resolved by the characterization of the policy.

Specifically, the plaintiffs contend that the company change in policy constituted a share-purchase agreement. Therefore tax liability with respect to the acquisition of any shares pursuant to that agreement is governed by subsection 7(1.1) of the Income Tax Act.

It is essential, in determining the validity of the plaintiffs’ contention, to consider whether the terms and conditions established as part of the policy constitute conditions precedent to the acquisition of shares. If they do not, then the proposition that Mitchell's company policy issued in late 1977/early 1978 is a new stock-option agreement available to key employees

— which option was exercised by the plaintiffs in 1978, is untenable.

Evidence:

During the trial, an admission has been made by the plaintiffs as to the value of one share of the stock company in 1978, being $4,000.

The evidence has shown or established the following facts:

(a) both plaintiffs knew from their employment by “Mitchell” or shortly thereafter — before March 31, 1977 — that they had the opportunity to buy the company's shares;

(b) the quantity and price of shares allocated to both of them was known (5 shares each, $1 per share) from the beginning;

(c) both had indicated their interest in buying these shares;

(d) they considered themselves as shareholders even though they did not have their shareholder's certificate in hand. It appears from D-3, written on February 25, 1982 that Mr. Wiebe knew from as soon as May 1975 that “the shares had been promised and allocated to me in May of 1975”. It appears also that Mr. Bastien considered himself as a shareholder of the company even before the official date of acquisition of his shares (August 30, 1978) since he signed a guarantee of indebtedness for $20,000 in May 1978 (P-14);

(e) the litigation with Mr. Bryant and Mr. Marmont took place in 1976 and was finally settled in May 1976 as to Mr. Bryant and in February 1977 as to Mr. Marmont. Only after that did the company put forward a change in its policy, imposing new conditions, i.e. the signing of a buysell agreement in case a shareholder would leave the company, and a guarantee of indebtedness. But there was no change as to the general policy agreed upon prior to 1977 being the acquisition of 5 shares at $1 per share.

The analysis of evidence brought before the Court indicates that the terms and conditions established pursuant to Mitchell's change in company policy cannot be characterized as conditions precedent to the acquisition of company shares but as conditions put forward because of this litigation with Mr. Bryant and Mr. Marmont. These conditions did not interfere with the basic elements of the company policy stock-option agreement. The inscription of Mr. Bastien and Mr. Wiebe in the “register of member” as of August 30, 1978 did not change anything in the previous basic agreement between the company and the plaintiffs.

Therefore, it would appear that the original stock-option benefit plan was still in effect at the time at which the plaintiffs chose to exercise that option. As the employer's new stock issuance policy does not constitute a revocation of the previous stock-option plan, the defendant was right in considering that the corporation had agreed to sell or issue shares of its capital stock prior to March 31, 1977, and in assessing the stock holdings in issue pursuant to paragraph 7(1 )(a) of the Income Tax Act.

Therefore, the appeal is dismissed with costs.

Appeal dismissed.