John Kazakoff v. Minister of National Revenue, [1980] CTC 2889, 80 DTC 1783

D E Taylor:—This is an appeal heard in the City of Montreal, Québec, on June 10, 1980 against an income tax assessment for the year 1977 in which the Minister of National Revenue assessed an amount of $70,650 to tax with the following explanation:

Your 1977 tax return has been assessed under section 115 of the Canadian Income Tax Act.

During the 1968 taxation year, and more particularly until February 28, 1972, the appellant was a Canadian resident. During the said period he was employed and remunerated by the Canadian International Power Company Ltd (and/or its subsidiaries or associated companies) (hereinafter referred to as Cl Power Co). Under the terms of a stock option agreement dated February 9, 1968, the appellant was given the option to purchase 4,000 common shares of the C! Power Co at the price of $12.60 per share. In 1972, he ceased to be a resident of Canada and took up employment in Bermuda with the Hemisphere Investments Limited, an affiliated company of Cl Power Co. During the taxation year under appeal, he exercised his rights under the said stock option agreement and acquired the said 4,000 shares of Cl Power Co. At the time the appellant exercised the said option, the value of the shares acquired exceeded the price paid therefor by the appellant by the sum of $70,650.

In assessing the appellant, the respondent relied, inter alia, upon subsection 2(3), paragraphs 6(1)(a), 7(1)(a), subsection 7(4) and subparagraph 115(1)(a)(i) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Contentions

For the appellant:

I accept being subject to whatever obligations section 115 may impose on me but at the same time feel I have erroneously been denied the privileges it affords me.

For section 115(2)(c) the rules under section 115(2)(e)(i)(B) apply. The taxable income therefore is

Total income	$70,650
Less—Attributable to duties of an office or employment
performed outside Canada	$70,650
Taxable income	0
For the respondent:

The appellant is deemed to have received, in the 1977 taxation year, a benefit by virtue of his employment in accordance with subsections 7(1) and 7(4) of the Act, the value of which must be brought into income by virtue of paragraph 2(3) and determined in accordance with Division D and specifically subparagraph 115(1)(a)(i) of the Act.

Evidence and Argument

Testimony as to the facts was given by the appellant. Counsel for the respondent relied substantially upon the jurisprudence in Vincent N Hurd v MNR, [1978] CTC 2349; 78 DTC 1282 and [1979] CTC 450; 79 DTC 5369. The taxpayer distinguished his case from that of Hurd (supra) in the following manner:

In the brief opportunity given me 14th November, 1978, to discuss this assessment, it was mentioned that it arose out of the decision in the Vincent N Hurd case, judgment given 15th March, 1978.

Over the forty years of paying taxes, mostly in Canada, one becomes familiar with general intent and spirit of the tax law which can be generally stated as follows:

(1) A resident of Canada pays taxes in Canada on his World Income except where specific exemptions are given. I paid taxes on all income while a resident of Canada.

(2) A Anon-resident of Canada pays taxes in Canada on Canadian Source Income except where specific exemptions are given. See Page 6—“Income Tax and the Non-Resident”. “Return must include income from sources inside Canada”.

(3) The interpretation of the Law and facts must be reasonable.

In the Hurd case the appellant received a benefit from his Stock Option from a person resident in Canada with operations in Canada, source of income in Canada, for employment totally attributable to duties of office in Canada. I quote from the judgment:

“The increase in the value of the benefit is not referable to further “work” or “employment” which the appellant performed after he left Canada.

I am of the view that the benefit the appellant realized when he acquired the shares in question is properly considered to be part of his 1973 income and, in addition, since the gain he realized was only referable to his Option (and the Stock Market value) and not to duties performed after his rights in the Option became vested in him, there is no basis for any apportionment of that benefit”.

The only similarity between my case and Mr Hurd’s case was we both received a benefit from a person resident in Canada. Otherwise my circumstances were:

The benefit that I realized when I acquired the shares in question (1977) was from a person resident in Canada but with operations almost (see Note 1 & 2 below) exclusively outside of Canada, source of income almost (notes 1 & 2 below) entirely outside of Canada for beneficial employment totally attributable to duties of office outside Canada.

Under paragraph 7(1)(a) I am deemed to have received a benefit by virtue of employment in the year 1977 when I acquired the shares under my option.

I do not believe subsection 7(4) is applicable because I continued to be employed by the Company (CI Power) or its subsidiaries. This was the condition of my employment and my stock option. (See Exhibits D and E).

Under section 115

(2) Where, in a taxation year (1977) a non-resident person was

(c) an individual who had in any previous year, ceased to be resident in Canada and who was, in the taxation year (1977), in receipt of remuneration [benefit from stock option under paragraph 7(1 )(a)] in respect of an office or employment that was paid to him directly or indirectly by a person resident in Canada

The following rules apply:

(d) For the purposes of 2(3) he shall be deemed to have been employed in Canada in the year.

(e) For purposes of subparagraph (1)(a)(v) the aggregate determined under this paragraph in respect of the non-resident person is the aggregate of

(i) Any remuneration in respect of an office or employment that was paid to him directly or indirectly by a person resident in Canada and was received by the non-resident person in the year (1977) Except to the extent that such remuneration was attributable to the duties of an office or employment performed by him anywhere outside Canada* and (. . .)

(B) is paid in connection with . . . the rendering of services for his employer or a foreign affiliate of his employer.

Note 1 In 1973, (after my transfer from Canada), Cl Power acquired stock in

Norcen Energy Resources Limited perhaps with the idea of a Canadian operation with a value of $3,276,000 in a total asset value of $250,077,000. The contribution to income from Norcen in the years 1973-1977 was 0.15 per Cl Power share. Exhibit J. The contribution to my benefit was negligible and my duties of office were never attributable to the Norcen acquisition.

Note 2 It was not till after my departure from Canada that Services became sufficiently

established to undertake outside business. Ownership of this subsidiary was reduced to 70% (30% to the employees), and effective 1st January 1977, it became wholly owned by the employees.

The contribution to income of Cl Power by this subsidiary was $0.03 per Cl Power share, (Exhibit J). The benefit to my Option was negligible. My duties of office are not attributable to this subsidiary after February 1972. After May 1971 I ceased to be an Officer.

Board’s note: The specific words in the Act are .. performed by him in a country other than Canada ..

To deem that my benefit was paid to me for the duties of office performed for the three Canadian companies, Cl Power, IP Co and CI Power Services which had no operations during my terms of office with them and that contributed no income to enhance the value of Cl Power stock during my terms of office with them, and a negligible amount after leaving office with them, would not be reasonable.

It would be less reasonable to deem that no part of my duties of office or employment in an organization such as Cl Power in 1968-1977 with 11-12 active revenue producing foreign subsidiaries in five to six foreign countries for which I had varying responsibility at one time or another were attributable to duties of office performed outside Canada as is apparently the contention in this assessment.

Findings

Dealing first with the point raised by the appellant that subsection 7(4) does not apply—it would appear to me that if subsection 7(4) does not apply because he continued to be employed by the same employer, then paragraph 7(1)(a) certainly applies to bring the benefit into income. Whatever else may follow, that cannot be in issue.

I now turn to the main argument of the appellant—based upon subparagraph 115(2)(e)(i) of the Act: “My duties ... were performed in the operating companies which were outside of Canada.” (during the years 1968 to 1972). He was a resident of Canada during those years; he visited some of the company (or subsidiary) establishments outside of Canada from time to time; when in Canada his duties related to the services provided by these subsidiary corporations; the source of his salary was the income of “the group”; and he paid tax during those years on his “World Income”. The extension of these factors in the taxpayer’s mine is that his Situation did not change on moving to Bermuda in 1972—he continued to be employed “outside Canada”, but now as a non-resident.

It is clear that the taxpayer performed some of his duties outside Canada during the years 1968 to 1972, when he was travelling on business. However, that does not lead to a conclusion that all or even a major part of his total duties in question in this appeal were performed by him when he was physically outside Canada. The taxpayer is attempting to equate the administrative distribution and allocation of his work load to the various related companies, as synonymous with physical presence outside this country in the same proportions. This is not an acceptable interpretation of the section of the Act upon which he relies. It might be argued that a division of his total duties could be made to allow for those duties actually performed outside Canada, and some proportionate allocation made to permit the use of subparagraph 115(2)(e)(i) to give the taxpayer some advantage. No such argument nor calculation was presented to the Board, however. It should be noted that in such a case the taxpayer might well be required to overcome an additional obstacle which was not referenced at the hearing by either party—whether or not the amount in question is actually remuneration. That term “remuneration” is found in subsection 115(2) but it is not found in subsection 115(1). It certainly is a benefit and taxable as income, according to the provisions of the Act—but it may not fall within the definition of “remuneration” to be found in Regulation 100 of the Act.

Conclusion

For purposes of subparagraph 115(2)(e)(i) of the Act, “duties of office or employment” to be performed “in a country other than Canada” requires the physical presence of a taxpayer in a country outside Canada during the period of such performance. Technical allocation of time, work, or services in an administrative or “head office” sense, does not fill that requirement. For all practical purposes the facts in this case are identical to those in Hurd (supra).

Decision

The appeal is dismissed.

Appeal dismissed.