Ronald J Wiebe, Raymond R Bastien v. Minister of National Revenue, [1985] 2 CTC 2346, 85 DTC 635

St-Onge, TCJ [ORALLY]:—The appeals of Messrs. Raymond R Bastien and Ronald J) Wiebe were originally heard first on October 5, 1984 and then adjourned and set down for January 18, 1985, because of an alternative argument presented by counsel for the appellants at the very last minute, which the respondent was not prepared to deal with.

The issue is whether the appellants received a benefit from their employer with respect to their 1978 taxation year.

Paragraphs 2, 3 and 4 of the reply to the notice of appeal of the appellant Bastien (being the same for Wiebe) read as follows:

2. He admits that the Appellant received an employment offer in 1972 which included the right to purchase shares of Mitchell Installations Ltd for 1.00 per share.

3. He admits that the Appellant did receive a share of the company’s profits in the form of bonus payments as an employee during the years in question.

4. He admits that $19,995.00 was added to the income of the Appellant for 1978 as a taxable benefit by Notice of Reassessment dated August 16, 1982.

The Minister reassessed the appellants on the following grounds. Paragraph 5 of the reply to the notice of appeal reads as follows:

5. In so reassessing the Appellant’s income for 1978, the Respondent assumed inter alia as follows:

(a) the five shares issued to the Appellant were registered with an effective date of transfer on August 30, 1978 in Mitchell Installations Ltd’s register of members;

(b) the Appellant advanced the funds for purchase of the 5 shares in 1978;

(c) the Appellant received no dividends from Mitchell Installations Ltd until 1978;

(d) the Appellant did not acquire the five shares until 1978 nor did the shares vest in the Appellant until 1978;

(e) the fair market value of the 5 shares at the time the Appellant required them in 1978 was not less than $4,000.00 per share and that the taxable benefit was $19,995.00 as the Appellant paid $1.00 per share.

The amended notice of appeal as well as the amended reply to the notice of appeal are an integral part of my judgment (see annex I and annex Il).

At the outset of the hearing on January 18, 1985, both parties agreed that the sale of shares took place in 1978.

The only issue to be decided is whether there was a new agreement in that year.

The evidence has shown that Mr Bastien was hired in 1972 and Mr Wiebe in 1975 with an informal option to buy five shares at one dollar each.

From the date of their employment contract up to 1978 inclusive, they never received any dividends. All employees of the company signed the buy-back agreement after the company was able to repurchase the shares of the departing shareholders.

Even if the company changed its policy with respect to shares to be granted to key employees, this change in policy did not change anything with respect to the agreement between the appellants and the company. As a matter of fact, the appellants signed the buy-back agreement after becoming shareholders in the company.

It is also well established by Mr Rosen and the two appellants that they were free to sign the agreement when they acquired the shares and the signing of the buy-back agreement was never a condition for them to become shareholders of the company.

As to the fair market value of the shares, the respondent filed documents to show that in September 1978, Mr Panek sold to Mr Bastien two common shares for $8,000; and in 1979 the company purchased from Mr Panek three shares for $12,000. Furthermore, the appellants signed their liability to the bank for $20,000 each, which means five shares at $4,000 each.

Mr Barry Ford, an evaluator with respect to business equity evaluation for Revenue Canada, testified that the fair market value was $4,000 per share in 1978. On the other hand, the appellants did not produce any evidence to refute this evaluation.

According to the evidence adduced, the options were never revoked by the company, the appellants were free to sign the sale agreement and the other agreements that they signed with the company were never a condition imposed by the latter to allow the appellants to become shareholders of Mitchell Installations Ltd.

The appellants became shareholders of the company folowing their option to buy at one dollar a share — what they did in 1978. Consequently, in that year they received a benefit from their employer by virtue of paragraph 7(1)(a) of the Income Tax Act, SC 1970-71-72, c 63 as amended.

For these reasons, the appeals are dismissed.

Appeals dismissed.

ANNEX I

TAX COURT OF CANADA

IN THE MATTER OF THE INCOME TAX ACT

83-747

AND:

RONALD J WIEBE

APPELLANT

83-748

AND:

RAYMOND R BASTIEN

APPELLANT

AMENDED NOTICE OF APPEAL

This matter came on for hearing at Vancouver, British Columbia on 5 October, 1984, before His Honour Judge St Onge. During cross-examination of Appellants’ witness, the Crown sought an adjournment of the hearing sine die on grounds that the Crown was not prepared to deal with an alternative defence put forward by Counsel for the Appellants as such argument did not appear in the pleadings filed by agents for the Appellants. Appellants are therefore filing the alternative defence.

ALTERNATIVE

In the event that the Learned Judge does not find that Appellants “acquired” the subject shares in 1972 or 1975, but are deemed to have acquired shares in August, 1978, Appellants submit in the alternative as follows:

COMMON STATEMENT OF FACTS

1. Mitchell Installations Ltd is a private Canadian company, having been incorporated under the laws of the province of British Columbia in 1972, its shares being sold privately and not on any public exchange.

2. At the outset there was a standing company policy that key employees could purchase 5 shares from the company at $1.00 each, these shares being, in effect, street certificates, with little, if any, restrictions on their sale or transfer. This policy was verbal and informal and some employees were issued shares.

3. The company had felt that the Appellants were entitled to their shares in 1972 and 1975, but no formal certificates were issued because the company was dilatory in keeping up its records.

4. In 1977 two other employees who had been issued shares gave notice that they were leaving the company to set up a competing business. The majority shareholders then found themselves in a tenuous and dangerous situation because these shareholders from the competing business were entitled to attend and vote at annual meetings with a right of access to the company’s corporate documents.

5. After difficult and bitter negotiations the company was able to repurchase the shares of these departing shareholders.

6. In 1978, because of the difficulties with the departing employee shareholders in 1977, the Company completely changed its policy with respect to shares to be granted to key employees to ensure that the Company’s shareholders remained with the Company, accepted financial responsibility and kept the Employers’ majority shares within the Company upon the demise of the employer.

7. The Company’s policy now was that any shares issued to key employees were now subject to:

(a) the employee entering into a buy-sell agreement that provided, inter alia:

(i) Immediately upon a shareholder ceasing to be an employee, the shareholder

will be obligated to sell all his shares to the Company;

(ii) If the shareholder ceases to be employed within one year from the date of issue of his shares, the purchase price shall be equal to the subscription price;

(iii) If the shareholder ceases to be an employee after one year he shall sell his shares to the Company at the book value of his shares based on the latest audited financial statements of the Company at a date prior to cessation of employment;

(iv) The shareholder agrees to assume personal guarantees in accordance with his percentage of ownership.

(b) The employee-shareholder entering into a personal guarantee for some of the indebtedness of the company.

(c) The employee-shareholder entering into a Master Surety Agreement with Fidelity Insurance Company of Canada and the United States Fidelity and Guaranty Company.

(d) The employee-shareholder signing a Share Purchase Agreement whereby the company will buy out the employers’ shares upon the death of the employers.

(e) The employee-shareholder entering into a Trust Agreement to take out life insurance on employers’ life.

8. In 1978 the company’s president, Cal Rosen and his wife Tanya Rosen owned 100% of the outstanding common shares in the company. Both Cal Rosen and his wife were Canadian residents.

9. On 30 August, 1978, 5 shares were physically issued to each Appellant.

10. On 29 December, 1978, by Consent Resolution of the Directors of the company the application for the purchase of the 5 shares to each Appellant were approved subject to execution of the approved “buy-sell agreement”.

11. On 10 May, 1978, Appellant Bastien, signed a personal guarantee with the Bank of Montreal and on 22 December, 1978, signed the buy-sell agreement.

12. On 4 July 1984, Appellant Wiebe signed the personal guarantee and signed the buy sell agreement on 22 December, 1978.

13. On 27 September 1979 both Appellants signed the Master Surety Agreement. On 21 February 1980 both Appellants signed the Share Purchase Agreement. On 22 February 1980 both Appellants signed the Trust Agreement.

14. Neither Appellant is related by blood or in any other way to the Canadian controlling shareholders, the Rosens.

15. Neither Appellant has disposed of his shares within two years from the date the shares were acquired.

ARGUMENT

1. If the Appellants are deemed to have “acquired” their shares in 1978, then they acquired them pursuant to an agreement so fundamentally different from the verbal standing offer in 1972 that the new agreement, in effect, revoked the 1972 offer and formed a new offer in 1978 so as to bring the agreement to sell shares within Section 7(1.1) of the Income Tax Act. In this case the employee Appellants cannot be assessed on their shares until they dispose of them.

2. In any event, the company could not “agree” to sell shares to its employees until its offer to sell was accepted thereby forming an agreement or contract, and this occurred in 1978.

3. Pursuant to the buy sell agreement the shares acquired a book value after one year. If the shares are assessable before Appellants disposed of the shares, then they would only be assessable in 1979.

4. If the Appellants are to be assessed on their shares in 1978, then the shares must be based on the value to which they had covenanted to sell to the company which, in 1978, would be $1.00 per share. In the remoter alternative, the shares must be valued by the book value as set out in the audited financial statement.

NATURE OF ORDER SOUGHT

That the Appellants’ appeal be allowed, the 1978 assessment be vacated or referred back to the Minister for reconsideration.

DATED AT VANCOUVER, BRITISH COLUMBIA, THIS 17th DAY OF OCTOBER, 1978.

Solicitor for the Appellants

THIS AMENDED NOTICE OF APPEAL is filed by Kenneth S Specht, of the firm of LeBlanc & Co, Barristers and Solicitors, whose address for service is 1826 West Broadway, Vancouver, British Columbia V6J 1Y9 Telephone: 731-4628

ANNEX II

83-748

TAX COURT OF CANADA

IN RE the Income Tax Act

BETWEEN:

RAYMOND BASTIEN

Appellant

— and —

THE MINISTER OF NATIONAL REVENUE

Respondent

AMENDED REPLY TO NOTICE OF APPEAL

In reply to the amended Notice of Appeal dated October 17, 1984 the Respondent, the Minister of National Revenue, says as follows:

A. STATEMENT OF FACTS

1. He admits the allegations of fact contained in paragraphs 1, 4, 5, 8, 9, 10, 11, 12, 14 and 15 of the amended Notice of Appeal under the heading "common Statement of Facts”.

2. He denies paragraphs 1, 2, 3 and 4 under the heading “argument” contained in the amended Notice of Appeal.

3. In reply to the allegations contained in paragraph 2 of the amended Notice of Appeal, he says that at the outset the company’s policy was to induce key employees giving them an option to purchase five common shares at $1.00 per share with no restrictions. He also states that the offer was made verbally and some employees were issued shares.

4. In reply to the allegations contained in paragraph 3 of the amended Notice of Appeal, he says that the company felt the Appellants were entitled to their shares in 1972 and 1975 because the Appellants had the right to purchase 5 shares each. He admits that no formal certificates were issued until 1978.

5. In reply to the allegations contained in paragraph 6 of the amended Notice of Appeal, he says that the new company policy applied to any employee shareholder with respect to the employee financial responsibility and share buy-back agreement.

6. In reply to the allegations contained in paragraph 7 of the amended Notice of Appeal, he says that the company's buy-sell policy applied to any and all employee shareholders according to the terms set out in subparagraph 7(a) only of the amended Notice of Appeal.

7. In further reply to the allegations contained in paragraph 7 of the amended Notice of Appeal, he says that subparagraph 7(b) is a repetition of subparagraph 7(a)(iv) and that subparagraph 7(c) (d) and (e) are not terms of the employee buy-sell agreement.

8. In reply to paragraph 13 of the amended Notice of Appeal, he admits that the documents were eventually signed in 1980 but they are irrelevant.

9. In assessing the Appellant’s income for 1978 as set out in the Minister's reply dated July 27, 1983 the Respondent assumed, inter alia, as follows:

(a) the Appellant received an offer of employment in 1972 which included the option to purchase 5 common shares of Mitchell Installations Ltd for $1.00 per share;

(b) five shares of Mitchell Installations Ltd were issued to the Appellant in August of 1978;

(c) the Appellant received no dividends from Mitchell Installations Ltd until 1978;

(d) the employment contract between the Appellant and Mitchell Installations Ltd, a term of which was the share option granted in 1972, was not revoked or cancelled at any time;

(e) the value of the five shares at the time the Appellant acquired them was no less than $4,000 per share for a total benefit to the Appellant of $19,995.00 (fair market value of 5 x $4,000 less agreed price of 5 x $1.00).

B. THE STATUTORY PROVISIONS UPON WHICH THE RESPONDENT RELIES AND THE REASONS WHICH HE INTENDS TO SUBMIT

10. The Respondent relies, inter alia, upon sections 7(1)(a), 7(1.1) of the Income Tax Act.

11. The Respondent submits that a change in corporate policy in 1977 did not legally revoke or cancel the Appellant's 1972 employment contract to purchase five shares of Mitchell Installations Ltd.

12. The Respondent further submits that there was no consideration paid for any revocation, cancellation or change of the Appellant's share option.

13. The Respondent submits that the value of the shares as at 1978 is not determined by the buy-sell agreement for purposes of the Income Tax Act.

14. The Respondent submits that the value of the benefit conferred on the Appellant by virtue of his employment and option to purchase shares was $19,995.00 which has been properly calculated and included in the Appellant's income for 1978 in accordance with s 7(1 )(a) of the Income Tax Act.

WHEREFORE the Respondent submits that this appeal be dismissed.

DATED at Vancouver, British Columbia this 14th day of January, 1985.

Jane E Rush-LeBlanc

Solicitor for the Respondent

TO:	The Registrar
	Tax Court of Canada
	Vancouver, BC

AND TO: Kenneth S Specht

Barrister & Solicitor

1826 West Broadway

Vancouver, BC

V6) 1Y9