Margeson 1.C.J.:
By reassessment, notice of which was dated October 7, 1986, the Minister of National Revenue (the Minister) assessed the Appellant for the 1983 taxation year by including in his income an amount of $83,900 received from Canadian Reserve Oil and Gas Limited (Canadian Reserve). The Minister contended that he properly included the amount of $83,900 in the Appellant's income for the 1983 taxation year pursuant to paragraph 7(1)(b) of the Income Tax Act (Act) on the basis that the Appellant transferred or otherwise disposed of his rights under a share purchase agreement in respect of some or all of the shares to a person with whom he was dealing at arm’s length, receiving as consideration, the amount of $83,900.
In the alternative, the Minister submitted that if the amount of $83,900 constituted damages, then it was required to be included in income pursuant to paragraph 6( I )(a) of the Act in that it constituted a benefit enjoyed by the Appellant in respect of, in the course of, or by virtue of his employment.
In the further alternative, it was submitted that the amount was required to be included in income pursuant to subsection 6(3) and section 5 of the Act, as being an amount received by the Appellant during a period when he was in the employment of the payor or on account, in lieu of payment or in satisfaction of an obligation arising out of an agreement made by the payor with the Appellant which could reasonably be regarded as (1) consideration or partial consideration for entering into the contract of employment or (ii) remuneration or partial remuneration for services under the contract of employment.
It was further submitted that if the Court should find that the amount in question was capital property within the meaning of subsection 248(1) and paragraph 54(b)(ii) of the Act, the release of those rights by the Appellant constituted a disposition of property pursuant to subsection 54(c) of the Act, with an adjusted cost base to the Appellant, as defined in paragraph 54(a)(ii) of the Act, of nil and the amount received by the Appellant would therefore be a capital gain pursuant to subsection 39(1) of the Act.
It was the position of the Appellant that the amount of $83,900 was not required to be included in the Appellant’s income for the 1983 taxation year since the amount was received as damages for a unilateral breach or termination of the share purchase agreement which gave rise to a cause of action by the Appellant for damages.
It was submitted that the amount could not be taxable under sections 3, 5 or 6 of the Act and that paragraphs 7( 1 (a), (c) and (d) of the Act do not apply to the case at hand. The payment was not in the nature and character of consideration received from a transaction whereby the Appellant can be said to have transferred or otherwise disposed of rights under the subject option agreement pursuant to paragraph 7( 1 )(b) of the Act. Further, the facts do not fit within the provisions of paragraphs 7(1)(a), (b), (c) or (d) of the Act. There is no basis for treating the total release payment as income in the hands of the Appellant.
Facts (L8/R5176/T0/BT0) test_marked_paragraph_end (1332) 1.048 0179_5531_5663
The parties agreed that the Appellant was an employee of Canadian Reserve during which time Canadian Reserve was a public company whose shares were listed on various stock exchanges including the Toronto Stock Exchange. Prior to January 23, 1980, approximately 86 per cent of the shares of Canadian Reserve were held by Reserve Oil and Gas Company (Reserve Oil), a corporation incorporated under the laws of the State of California.
On July 2, 1982, the Appellant entered into an agreement with Canadian Reserve pursuant to which he was granted an option to acquire 5,000 shares of Canadian Reserve at a price of $9.22 per share. By way of an information circular and an Amalgamation Agreement dated June 22, 1983 (Amalgamation Agreement), Getty and Canadian Reserve outlined their plans for the amalgamation of Canadian Reserve with Getty Oil (Canadian operations) Limited (Getty Canada), a wholly owned subsidiary of Getty, to form a single corporation hereinafter called "Amalco". These plans consisted of, among other things, having the shares of Canadian Reserve held by the minority shareholders of Canadian Reserve converted into redeemable preferred shares of Amalco at a redemption price of $26 per share.
Under the terms of the Amalgamation Agreement, on the effective date of the amalgamation, each outstanding option (whether or not then exercisable) to purchase any shares in the capital of Canadian Reserve would be terminated and a payment was to be made to the option holders in accordance with the formula set out therein.
At an extraordinary general meeting of the shareholders of Canadian Reserve held on July 29, 1983 (the meeting), the shareholders of Canadian Reserve adopted the Amalgamation Agreement.
On July 29, 1983, a certificate of amalgamation was issued to Amalco by the Alberta Registrar of Corporations confirming the amalgamation of Getty Canada and Canadian Reserve.
The Appellant disclosed the receipt of the total release payment in his 1983 tax return by way of the following statement:
As a result of the take-over of Canadian Reserve by Getty Oil Company during 1983, damages in the $83,900 for a stock option breach were received.
By Notice of Reassessment dated October 7, 1986, the Minister reassessed the tax payable by the Appellant for the 1983 taxation year. In computing the tax payable pursuant to the Notice of Reassessment, the Minister added the total release payment in computing the income of the Appellant for the 1983 taxation year.
Issue (L10/R5212/T0/BT0) test_marked_paragraph_end (1610) 1.035 0180_5893_6023
The only issue is whether or not the amount of $83,900 is required to be included in the Appellant’s income for the 1983 taxation year.
Evidence (L2/R4896/T0/BT0) test_marked_paragraph_end (4006) 1.032 0180_6799_6929
Mr. Leroy Douglas English was employed by Revenue Canada Taxation. He was referred to as a team leader and his job involved supervising auditors in the year 1983. He had involvement with this case. He was the group leader of the auditor who processed this case. He reviewed the work of this auditor and insured that the audit work was carried out in the proper manner.
He indicated that this was not a normal audit with a great deal of field work involved. The Department depended on other information available in the office. This witness was responsible for deciding what facts were considered in the assessment.
Exhibit A-4 was introduced by consent. This was a Memorandum of the Department dated November 5, 1985 from the Head Office with respect to the case of Dundas v. Minister of National Revenue (1995), 95 D.T.C. 5116 (Fed. C.A.) . This Memorandum suggested the approach to be taken when reassessing Appellants under similar circumstances including the Appellant in the case at bar. Generally, it suggested how these taxpayers were to be taxed.
This witness indicated that he had not interviewed any other option holders, that he did not find any information that indicated that any other option holder acted in the same way as Mr. Dundas did or that they did not intend to pursue their options. He had no specific facts to conclude that Mr. Buccini had acted like Mr. Dundas.
He was unaware of any information that would lead him to conclude that Mr. Buccini had entered into an agreement not to proceed with his option. This was a suspicion only. He had no information to indicate that Mr. Buccini had agreed to accept anything else but damages.
He was aware of the difference between surrendering an option and deciding not to proceed with the exercise of the option. He had no evidence to indicate that Mr. Buccini had voluntarily surrendered his option. He could not recall seeing the actual Release, Exhibit A-1, but he assumed that it was available for his use at that time.
He possessed no facts which would lead him to conclude that the release was not legitimate or that the Release signed by the Appellant was not correct.
He was referred to page 3, paragraph I, of the Release indicating that the payment was accepted as damages. He had no facts to suggest that this was not true and no reason to believe that this was not true. He also indicated that he was directed by Ottawa to look into the situation regarding the others (presumably those other than Mr. Dundas). He had no facts to suggest that the documents did not actually set out what the parties had agreed to.
In re-direct, he was referred to Exhibit A-l, at Tab 8. He agreed that he had received this letter from Mr. Buccini and that he had read it before he made his conclusions. However, it did not change his answers.
Mr. David N. Talbot, was a Chartered Accountant who in the year 1983 was employed with Canadian Reserve as Vice-president Finance and Corporate Secretary. He was in charge of the benefit plan and the stock option plan of this company. Getty had acquired 80% interest in Canadian Reserve and they wanted to put the two companies together. This witness had no specific input into this amalgamation as it was basically done by Getty’s US people. “They wanted to take out the option holders and become a private company. We were not too happy with the private company idea,” he said.
This witness was unhappy as an option holder. He wanted to keep this option down the road.
The Amalgamation Agreement was dated June 22 and ratified on July 29. The witness did not know whether the shareholders were going to approve it. He identified Exhibit A-l at Tab 6. It was a form of Notice of Termination which was sent to each option holder. He also identified the Release at Tab 7 which was also sent to all option holders. This witness sent them out. He was secretary of the corporation.
In cross-examination he was referred to the Release at Tab 7. He was asked if this was sent out with a covering letter. He did not know. He assumed there was a covering letter sent with the Release. It was not likely that he received it before the 29th.
Mr. Frederick J. Buccini was the Appellant. He is an engineer. He is now a consultant and is self-employed. He is a reservoir engineer in the natural gas field. He evaluates oil and gas assets for future investment purposes in the oil and gas industry. In 1982 he was a senior reservoir engineer with Canadian Reserve. He was not responsible for running the company but provided information to it. He had no direct input into producing any information circular or any legal documents surrounding it. He did get involved indirectly by providing information to Dominion Securities who were retained to make a valuation of Canadian Reserve for the shareholders.
He received stock options. To the best of his knowledge he received information that they would be terminated around about the same time that the information circular was issued on July 7, 1983. His reaction was mixed. He liked Getty’s commitment to Canada and the prospect of continued employment but he believed that Getty had under-valued the shares and was disturbed that his options would be taken away in an ongoing company and it was his intention to work for that company. As far as he was concerned tax planning went out the window at that point in time.
He received payment from Canadian Reserve which he considered was a payment for a breach of the contract that the company had with him. He did receive advice after the information circular was placed in his hands. As far as he was concerned his alternatives were narrow. He believed that he could sue Getty as an individual but would not likely receive greater compensation than that which was offered.
He was asked if he discussed his reaction with anyone and he indicated that he had. There were a couple of meetings where his opinion was put forward.
In cross-examination he identified his stock option as Exhibit A-l at Tab 4, dated July 2, 1982. He was employed in March 1982 and was aware that the option was determined after the evaluation of his performance. It was his position that he had earned the option as an employee of Canadian Reserve. Up to July 29, 1983 he did not exercise any option. In 1983 he believed that if there was an amalgamation he would be entitled to shares in the new company. By July 29, 1983 his option would have been cancelled. However, at the time of the circular, he would have preferred to continue the option. He would have liked the company to have consulted him. He liked the company. It had strong management and strong assets and the skills that he had were important to the company. He has not changed his mind up to today. He was asked specifically why he signed the Release. His answer was that he was not prepared to sue his employer. He was asked if he had signed the Release before or after the meeting. He said that it was signed at the same time as the group signed theirs and that would be after the meeting on July 29, 1983.
He was referred to the Release at Tab 8 and he said that he had signed it. He read it recently. He sent it in and that there was nothing in it that was not true. In re-direct, he was asked who drafted the Release and he said that he did not know. He did not draft it.
In answer to a forgotten question by his counsel, he said that in July of 1983 he could have exercised the option if he wanted to. Further to that question, in answer to a question put to him by counsel for the Respondent, he said that he had expected to be employed with the new company and was employed with the new company until December of 1984. By March of 1984, he would have completed his two years as an employee.
A further question was allowed from Counsel for the Appellant and the witness said that in March of 1984 no option existed for him to exercise. It was terminated on July 29, 1983 after the shareholders’ meeting.
Argument on behalf of the Appellant (L6/R2630/T0/BT0) test_marked_paragraph_end (1920) 1.023 0183_8481_8653
In his opening remarks, counsel for the Appellant likened the present case to the factual situation in R. v. Reynolds (1976), 77 D.T.C. 5044 (S.C.C.) and unlike Dundas v. Minister of National Revenue, (supra). In the Reynolds case (supra), the amount was held to be a tax-free receipt. Coun- sel was prepared to acknowledge that the alternative argument that the amount was a capital gain and subject to some tax, might have been correct. He pointed out that in Dundas (supra) the Appellant was the Chief Executive Officer of Canadian Reserve, was also a shareholder and that the amount was found to be fully taxable. In that case the Appellant had signed off his option agreement before the amalgamation took place. It was clear that he did not intend to preserve his option and the Court held that he had voluntarily disposed of his rights under the option agreement. However, in the case at bar, the Appellant was only an engineer. He was not involved in the management of the company nor in the deal making.
Counsel disagreed with the presumption contained in paragraph 10(f) of the Reply to the Notice of Appeal that the Appellant disposed of his rights under the stock option agreement and in consideration therefore received $83,900 from Canadian Reserve. However, this fact was not assumed by Revenue Canada when it made the assessment. This can be shown from the evidence produced in Court.
Further, paragraph 10(g) of the Reply is not correct where the Respondent presumed that the rights created by the stock option agreement did not pass out of existence prior to agreement being reached with Canadian Reserve to pay the amount in question to the Appellant. This was not assumed by the Minister when the assessment was raised, according to the evidence. Paragraph 10(h) of the Reply was also incorrect. The Appellant did not voluntarily dispose of his rights under the stock option agreement. This could not have been assumed by the Minister because according to the evidence there was no evidence on which he could assume this fact.
It was counsel’s position that the reason that the matter is before the Court is because the Minister relied upon Dundas (supra) and drafted the pleadings accordingly. These comments were made by counsel for the Appellant in his opening remarks.
After the evidence, in argument, he proposed that the real question is whether or not the case at bar comes within Reynolds (supra) or Dundas (supra).
He took the position that he had no disagreement with Revenue Canada as to how one should regard Dundas. In that case, it was clear that Mr. Dundas had said that he had not intended to exercise the option. Therefore, he was unable to say that he received damages. Revenue Canada refused to accept the argument that he gave up his rights in the option for the amount of the settlement. One must look to the facts in each case.
He repeated his opening remarks with respect to paragraph 10 of the Reply to the Notice of Appeal indicating that these presumptions were not correct. Mr. English’s evidence was so clear that one must conclude that the facts alleged were not true. The assessors did not assume those facts and in any event, they were not true.
This was also confirmed by the evidence of Mr. Talbot because he indicated that the holders of the options were unhappy and they were not voluntarily handing over the options. This was also indicated by Mr. Buccini. This was not challenged.
Revenue Canada merely decided to go ahead and to assess the Appellant on the same basis as the parties had been assessed in the other cases. The assumptions referred to in the Reply were not made but if they were, they were not true.
According to him, the Court must decide what the character of the payment was. Was it money received for giving up the option or was it in settlement of the rights under the option and consequently properly characterised as damages?
This was not a voluntary disposition of rights. It was a settlement amount to release the company from further action. It was therefore, damages. The facts in the case at bar are different from those in Dundas. There, the amount was fully taxable under section 7 of the Income Tax Act.
Mr. Gerald Greiner, on behalf of the Appellant, made submissions with respect to the appropriate law. He said that the question is whether or not it is a non-taxable windfall or a taxable capital amount. It was his position that the provisions of paragraph 7(1)(b) do not contemplate a unilateral action by the company such as that which took place in the case at bar. A right to damages is not consideration but comes about because of the operation of law.
The cases of Reynolds and Dundas (supra), established that damages are not taxable under section 7 of the Act where the action is involuntary. Dundas, supra, indicated that Reynolds, supra, did not apply to the facts in Dundas. The issue of the amount being a capital item was not considered in that case. However, Dundas should not be taken as to having overturned Reynolds, which was earlier decided. There were different sections of the Income Tax Act under consideration. Reynolds is still good law.
Counsel submitted that Parliament intended that section 7 be of limited scope. It should not apply where remuneration was given by the company for the breach that it committed.
Counsel’s position was that paragraph 6(1)(a) does not apply to this case because damages for breach of an employment contract are not employment income. Therefore, how can a breach of a stock option be considered to create employment income? Further, paragraph 6( I (a) cannot be meant to apply to cases where stock options were cancelled, because the result would be absurd in that those people who had their options cancelled would be subject to higher taxation than those who would have exercised their options.
Counsel referred to R. v. Atkins (1976), 76 D.T.C. 6258 (Fed. C.A.) in support of his position that such a sum as paid in the present case was in respect of a breach and not as a benefit under the contract and was therefore not taxable. Therefore, damages for breach of a stock option cannot be taxable.
This case is appropriate when considered in the context of section 7. This section was designed to preclude taxation on the basis of any other section. Subsection 7(1) refers to dispositions under an agreement. Under subsection 7(3), the result is the same. Under paragraph I 10(1)(d) a deduction is now allowed even when the option holders are pushed out.
The Supreme Court of Canada cases go to establish the point that the Income Tax Act should not generally impose a tax where a specific section does not. See Schwartz v. R. (1996), 96 D.T.C. 6103 (S.C.C.). Likewise, R. v. Savage (1983), 83 D.T.C. 5409 (S.C.C.) is to the same effect. It does not look back to a general section to attract tax.
Counsel said that Dundas and the present case are entirely different since the proper tax treatment depends upon the actions of the individual taxpayer-employee and whether he consented to the disposition of his option. On the evidence Mr. Dundas did so. Mr. Buccini did not.
In further argument, Mr. Meghji, on behalf of the Appellant, briefly referred to the windfall argument. It was his position that the law in this area is ambiguous. He was not prepared to say that the amount in question was necessarily a windfall.
Argument on behalf of the Respondent (L4/R2472/T0/BT0) test_linespace (270>253.98) 1.000 0186_8347_8513
In argument, counsel for the Respondent took the position that paragraph 7(1)(b) of the Act covers the situation at bar. The facts disclosed by the evidence justify the Minister’s assessment under that paragraph. Further, the Minister’s assessment is justified under the provision of paragraph 6( 1)(a) of the Act.
Under paragraph 7(1)(b) of the Act, the Appellant received an employment benefit. It was the Appellant’s evidence that he received a stock option, was not entitled to exercise it as at July 29, 1983, but he would have been had he remained in the employment of the company for two years. On July 29, 1983, his rights were not extinguished and the Appellant could have asked for specific performance of his rights under the stock option agreement provided that he had qualified for the exercise of the option. His evidence was incorrect when he stated that he no longer had that right because of the amalgamation.
Counsel’s position was that the stock option agreement between the parties could only be changed by another agreement during that period. That new agreement took place on July 29, 1983 when the Appellant allowed his rights to be extinguished by signing the Release.
This is not a case where a court ordered damages, in which case the contract would be at an end. The only agreement in existence other than the stock option agreement was the discharge agreement and that is where the variation in the original agreement took place. In accordance with Norfolk v. Aikens (1989), 64 D.L.R. (4th) 1 (B.C. C.A.), at 15, if the Appellant had declined to accept the repudiation, then the contract was still alive. His rights continued until the Release was signed when they were at an end. In accordance with Johnson v. Agnew, [1979] 1 All E.R. 883 (U.K. H.L.), at 890, there must be a Court order to terminate the rights. In accordance with W.C. Pitfield & Co. v. Jomac Gold Syndicate Ltd., [1938] 3 D.L.R. 158 (Ont. C.A.), at pp. 164 and 165, an agreement for shares is no different than a contract for the sale of goods. If there is no delivery of the shares in accordance with the agreement then the Appellant would be entitled to be put in the position that he would have been if he had received them. By the corporate activity of the corporation on July 29, 1983, the Appellant “was not left with nothing”. To say that he was is an incorrect statement of law.
In accordance with Heyman v. Darwins Ltd., [1942] 1 All E.R. 337 (U.K. H.L.) at p. 340, the Appellant had the right to insist upon the performance of the agreement. Repudiation of the agreement by one party alone does not terminate the contract. Mr. Buccini had the right to the shares until he signed the Release.
According to the text, Injuction and Specific Performance, Robert J. Sharpe (Second Edition) pages 8-26 to 8-28, specific performance is often awarded to enforce contracts for the purchase and sale of shares in corporations. In Gilbert v. Barron (1958), 13 D.L.R. (2d) 262 (Ont. H.C.), at pp. 263, 264-266, the plaintiffs were entitled to specific performance of the agreement for the issuing of shares claimed by them.
In the case at bar the Court is not here to decide if the Appellant would have received specific performance of the contract but he had the right to claim it until he signed the Release. See also McGregor v. Curry (1914), 20 D.L.R. 706 (Ont. C.A.) at p. 709, where specific performance was granted. When the Appellant signed the release on July 29, 1983 he was an employee who had transferred or otherwise disposed of his rights under his share agreement, therefore he was caught by the provisions of paragraph 7(1)(b) of the Act.
The same issue was dealt with in the case of Dunclcis (supra). Counsel argued that paragraph 6( 1)(a) of the Act was also a basis for the Minister’s assessment. He referred to R. v. Savage (1983), 83 D.T.C. 5409 (S.C.C.) at p. 5414. Also, the Appellant received his stock option as an employee. Therefore, when he received the money it was a benefit by virtue of his employment.
In the case of Schwartz v. R. (1996), 96 D.T.C. 6103 (S.C.C.) , the Supreme Court of Canada found that Mr. Schwartz was not employed at the time he received the benefit. Therefore, it was not an employment benefit.
In the case at bar, Mr. Buccini continued to be employed after July 29, 1983. He was entitled to receive the shares but he received something else of the same value. This was merely two forms of the same thing.
On the issue of capital gain counsel again referred to Schwartz (supra) saying that all capital property has a value. At the time of the disposition, there is either a gain or a loss. In Schwartz (supra) the Appellant had a right on that date to be employed. It had a value but it was a personal service contract and it was not amenable to specific performance nor to be classified as a capital gain.
In Reynolds (supra) there was no possibility of having the shares issued because of the steps that the company had taken to dissolve. As in Greiner v. À. (1984), 84 D.T.C. 6073 (Fed. C.A.) at p. 6078, a stock option is merely that. There is no compulsion to exercise it. The obligation to perform by the company granting the option arises only when the decision to exercise it occurs. There is no option to keep it alive until the option holder decides to exercise (absent any specific clause to that effect). Therefore, there was no right to the shares in that case but there was the common law right of damages.
In R. v. Huestis (1975), 75 D.T.C. 5393 (Fed. C.A.), at p. 5394, the shares that the option holder received were not pursuant to the option agreement. Therefore, they did not fall under the appropriate sections. In R. v. Harvey (1980), 80 D.T.C. 1701 (T.R.B.), the company was unable to deliver because it put itself into a position where it could not live up to its option agreement and so had a liability to the Appellant which was settled by the payment of money
In accordance with Greiner (supra), counsel argued that income does not become non-income because of the legal action. The situation at bar is the same as that which existed there. The rights were alive. The option holder chose not to sue. Mr. Buccini disposed of his rights voluntarily in the release.
It was counsel’s position that the appeal should be dismissed and the Minister’s assessment confirmed with costs.
Reply (L12/R5136/T0/BT0) test_marked_paragraph_end (2842) 1.024 0189_4493_4657
Counsel for the Appellant acknowledged that his belief that the Respondent would rely upon Dundas (supra) was an incorrect position. Here the Respondent was basically saying that the factual situation in the case at bar is opposite to that in Dundas.
It was further submitted that the cases under section 7 indicate that where the rights under the option are taken away, that is not a disposition under section 7. Here, the company did continue to exist even though it was amalgamated.
It was counsel’s position that there must exist more than a right of action for damages for tax to be applicable.
He submitted that the principles in Atkins (supra) are still good law and that damages for breach of an employment contract are not income and are not taxable under section 6.
Counsel submitted that at the Tax Court level in Dundas, the case was wrongly decided.
Further, the Supreme Court of Canada dealt with the Atkins principles in Schwartz (supra), addressed it in the section dealing with retiring allowances and since that section does not include such payments there one cannot look to some other section to make them taxable. In Jasper v. R. (1997), 98 D.T.C. 1253 (T.C.C.), the payment received was damages for the breach of an employment contract and was not taxable as an employment benefit.
If the Atkins principle is good law, then it has to be accepted that if the amount was received as a result of the stock option then it is not taxable. Judge Rip basically said that it was taxable because he believed that Arkins was not good law.
Section 7 is a code for the taxation treatment of these option matters and if it does not apply, then the only other question is whether or not it is a capital item.
At the end of submissions counsel for the Appellant asked that an adjournment be granted in order to provide further authorities by way of statute or case law. The single issue was whether or not the Appellant was prohibited from pursuing any course of action except an action for damages up to the time that he signed the Release on July 29, 1983.
The Court granted an adjournment on that basis alone, and gave the Appellant until June 30th to submit the cases and further argument on them. The Respondent was to reply by July 31st.
These submissions were received by the Court and considered and the Court is satisfied that neither counsel exceeded their extended mandate in that regard.
Analysis and decision (L8/R3892/T0/BT0) test_linespace (270>256.00) 1.012 0190_5477_5643
As indicated in the outline of facts in this case, there is no real dispute as to the facts. The Court is satisfied that the ultimate decision must be based upon the determination as to the legal rights of the Appellant on July 29, 1983 when he signed the release which is referred to in Exhibit A-1 at Tab
7. Not to much attention was given to the actual words in the Release by either parties during the hearing nor in argument but the Court is satisfied that the actual words in the Release do provide some assistance. It refers specifically to the rights of valuation and payment but also refers to “such other rights to which he might reasonably be entitled”. It further states that “the employee has ascertained that no useful purpose would be served in dissenting and insisting on an appraisal and such other rights to which he may be entitled”. This reflects a value judgment that the Appellant made and he confirmed the same in his testimony in Court.
What rights the Appellant was relinquishing are not determined by what the Appellant thought, nor by what advice he was given by lawyers or others, or by what rights Canadian Reserve believed that the Appellant was relinquishing but rather upon a finding as to what rights the Appellant was relinquishing by signing the Release, based upon the application of the appropriate law to the facts of this case.
In this regard, the law of contract is of great significance and it is necessary for the Court to consider the fundamental principles of the law of contract in order to reach its decision in this case.
The Court is satisfied that according to the pleadings, the evidence as adduced by the examination and cross-examination of the witnesses, by the argument presented in Court and by the written arguments that the Respondent’s position was that the Appellant had disposed of his rights under the stock option agreement in consideration of the payment of the lump sum. Although the Reply did not specifically refer to the Release dated July 29, 1983, that is the only document that it could have been referring to. In order for the Court to determine whether or not the presumptions should be upheld, close scrutiny must be paid to the fundamental law of contract. The Respondent was certainly within its rights to pursue that position. In response thereto counsel presented clear argument in support of his position as well as a detailed review of the fundamental principles of the law of contract with an enumeration of cases in support of his conclusion.
Counsel for the Appellant lead evidence of Leroy Douglas English, who was an employee of Revenue Canada, Taxation, at the relevant time. The nature of the cross-examination of this witness was obviously designed to destroy the basis for the Minister’s assessment, particularly paragraphs 10(f), (g) and (h). The basis for this was obviously the position of the Appellant that when the Minister addressed the assessment in issue he did so on the basis that prior to the signing of the Release, the Appellant had entered into an agreement not to proceed with his options. This had been done in the case of Dundas (supra).
On cross-examination the witness made it clear that at the time of the assessment, he was not possessed of any information that would allow him reasonably to reach this conclusion. It was made apparent that Ottawa had told him to look into the situation regarding other option holders such as the Appellant, in light of the factual situation that existed in Dundas. However, none of this evidence had the effect of the demolishing the assumptions upon which the Minister based his assessment, particularly in light of the fact that the Court is satisfied that the Minister had before him, as part of the filed material, the release which was signed by the Appellant, which in essence, (although not specifically enumerated) set out what rights the Appellant was intending to release. It would be reasonable to conclude that this Release, as well as other material information contained in the file lead the Minister to make the presumptions above referred to. In presuming as the Minister did in subparagraph (h), he was not necessarily concluding that the Appellant had disposed of his rights under the stock option agreement voluntarily by acting as the Appellant did in Dundas, but was relying upon the Release that the Appellant signed on July 29, 1983 in support of this presumption.
The Court is satisfied that the case at bar is dissimilar in that respect from Dundas because in that case, the Federal Court of Appeal accepted the Trial Judge’s decision not to attribute any tax consequences to the Release Agreement because if anything, it was “evidence of an arrangement worked out prior to the effective date of the amalgamation contemplating the disposition by the Appellant of his options in accordance with the Amalgamation Agreement.”
In the case at bar, there is no doubt that the Appellant did not act as the Appellant did in Dundas (supra), nor is there any question that before he signed the Release he had made any arrangement to do so nor did his actions in any way indicate that he had done so. However, this does not answer the issue in the case at bar where the effects of the release agreement signed on July 29, 1983 are all important.
The Court is satisfied that the issue can be decided by looking to the legal effect of the signing of the release on July 29, 1983 and by deciding what rights if any, the Appellant had remaining to him under the stock option agreement on that date and what rights he gave up by signing the Release on that date.
In order to answer these questions, the Court must look to the facts in the case as disclosed by the evidence, in light of the stock option agreement, the Release, the general law of contract, the effect of the Amalgamation Agreement on the rights of the Appellant and whether or not any federal or provincial statutes acted so as to effectively remove from the Appellant any right of action with the exception of seeking damages for the unilateral action of Canadian Reserve which had in fact decided not to honour the rights of the Appellant under the stock option agreement.
The Court will deal with the issues involved under the following headings:
I. What rights did the Appellant have under the stock option agreement dated July 2, 1982?
2. Did the Appellant do anything to disentitle himself to any of those rights up to the signing of the release on July 29, 1983?
3. What remedies were available to the Appellant under contract law up to the date that he signed the release on July 29, 1983?
4. What did the Amalgamation Agreement purport to do to the rights of the Appellant under the option agreement and did the passing of this resolution by the shareholders of Canadian Reserve on July 29, 1983 have the effect of removing one or more of those remedies either by the nature of the agreement itself or by any applicable federal or provincial statutes?
5. What rights or legal remedies did the Appellant give up by signing the Release for the consideration in issue?
6. Does a reasonable interpretation of the relevant sections of the Income Tax Act permit the application of tax to the amount in question or would its application lead to an absurd result?
7. Could the amount in question be reasonably regarded as a windfall?
8. Was the amount that the Appellant received a capital gain as the result of the disposition of a capital asset?
Questions 1 and 2 (L0/R4158/T0/BT0) test_marked_paragraph_end (2250) 1.035 0193_5767_5927
The Court is satisfied that in accordance with the share option agreement dated July 2, 1982, the Appellant had a binding agreement with Canadian Reserve under which he was entitled to acquire 5,000 shares of Canadian Reserve at a price of $9.22 per share and there was nothing in the evidence to suggest that he had done anything to effect his rights under the share option agreement. The Court is satisfied that those rights continued up until the time that he signed the release dated July 29, 1983 at which time that he accepted payment of $83,900 which was referred to as the “total release payment”.
Question 3
On July 29, 1983, at the end of the extraordinary general meeting of the shareholders of Canadian Reserve, even after the shareholders of Canadian Reserve had adopted the Amalgamation Agreement the Appellant as well as the other option holders were in no different legal position with respect to their remedies than they were prior to the resolution having passed. Under general contract law at that point in time, since the Appellant had not done anything to breach the agreement, he had the right to insist upon any of his legal remedies under the agreement. In accordance with the cases referred to by counsel for the Respondent, the Appellant had the right to accept the unilateral factual repudiation of the contract by Canadian Reserve and to sue for damages or to treat the contract as continuing in existence and insist upon compliance with the agreement by placing the Appellant in the position that he would have been in if he had received his shares. In essence, the Appellant had the right to ask for specific performance of the agreement, as difficult as that might have been for Canadian Reserve and as difficult as it may have been for the Appellant personally, to insist upon specific performance of the agreement. In any event, the Court is satisfied that specific performance is available to enforce a contract for the purchase and sale of shares in corporations. The Court is satisfied that the Appellant had the right to the shares until he signed the Release. The Court accepts the argument of counsel for the Respondent that it is not up to this Court to decide if the Appellant would have received specific performance of the contract. The Court is satisfied that he had the right to claim it until he signed the Release.
Question 4
In accordance with the terms of the Amalgamation Agreement which is reproduced in Exhibit A-l at Tab 5, paragraph 3.05 provides, inter alia, that the amalgamated corporation would give notice that all of the outstanding shares of Canadian Reserve held by the minority shareholders would be converted into redeemable preferred shares of Amalco at a redemption price of $26.00 per share and further that on the effective date of the amalgamation, each outstanding option to purchase any shares in the capital of Canadian Reserve (stock option) was terminated and ceased to exist and did not attach to and was not exercisable in respect of any shares in the capital of the amalgamated corporation. Therefore, in essence, the terms of the Amalgamation Agreement represented a unilateral action on behalf of Canadian Reserve. This purported to have the effect of cancelling any rights that the option holders, including the Appellant, had on the basis of their stock option agreement. However, it is interesting to note that in the Amalgamation Agreement, clause 2.02 states as follows:
On the effective date of the amalgamation; --- an existing cause of action, claim or liability to prosecution is unaffected.
This clause would appear to contemplate, in spite of the unilateral action of Canadian Reserve to cancel the rights of the option holders without any agreement therefore, that there would continue to exist a cause of action against the amalgamated corporation.
Indeed, it would be difficult for the Court to conclude, in the absence of any specific legislation or agreement covering the matter, that the corporation could even purport to, let alone effectively conclude the rights of the option holders unilaterally without being subject to a cause of action by the option holders.
Consequently, the Court is not satisfied that the Amalgamation Agreement actually did purport to take away the rights of the option holders to an action in damages and or specific performance and indeed recognised in this clause of the Amalgamation Agreement that such causes of action might continue to exist.
In any event, if this was the purpose of the Amalgamation Agreement, it could not have had such a legal effect in the absence of any specific agreement or legislation.
The Court is satisfied that the Amalgamation Agreement could not have had the effect of eliminating any of the rights that the Appellant had under contract law as a result of the option agreement that he held. Further, the Court is satisfied that there was no statute in effect either provincially or federally which would have had the effect of removing one or more of those remedies as of the relevant date.
Question 5
The Appellant signed a Release dated July 29, 1983, which is reproduced in Exhibit A-l, Tab 7. There is some interesting language in this Release. It provides, inter alia, “...WHEREAS the employee would have, as owner of the stock options, no greater rights than a shareholder of the Company to prevent the said amalgamation which rights would be limited to valuation and payment”. That might have well have been a proper statement of his position with respect to the amalgamation. But the Court is satisfied that it was not a correct statement to suggest that his rights would be limited to valuation and payment as the Court has indicated above.
Further, the Release sets forth as follows:
AND WHEREAS the Employee has ascertained that the Total Release Payment represents a fair and reasonable valuation of his rights resulting from the Unilateral Termination of the Stock Option and no useful purpose would be served in dissenting and insisting on an appraisal and such other rights to which he may be entitled.
This clause reflects a conscious decision on behalf of the option holder, as confirmed by his evidence in Court, that in the end result, that he might not obtain a larger amount than that which was being offered for cancellation of the share option agreement and consequently it would not be worthwhile for him to continue to dissent and insist on an appraisal “and such other rights to which he may be entitled.” However, that is not to suggest that there was not a recognition even on his behalf that he had rights to have an appraisal of the value of his option and that he had other rights apart from actual damages.
Further, the Release provided that the employee had agreed to accept the total release payment in full satisfaction of the employee’s rights resulting from the unilateral termination of the stock option. In essence, the Appellant had agreed to give up his rights under the stock option agreement, whatever those rights may have been, in consideration of the payment of the amount of money which was being offered in satisfaction of any of his rights under the stock option agreement.
Further, at paragraph 1 :
The Employee hereby accepts the payment ... in full settlement, satisfaction and discharge of any and all claims and rights and entitlement to damages in respect of or arising out of or relating to the Unilateral Termination of the Stock Options or arising out of or relating to any agreement, arrangement, relationship, contract or dealing whatsoever arising out of or relating to the Stock Options which have been, or might have been asserted against the Company, Getty Canada or the Amalgamated Corporation of the respective employees, agents, representatives, shareholders or any of them in respect of or arising out of or relating to the Stock Options.
(Underlining is mine.)
This is a clear indication that the Appellant was giving up more than just a right to claim damages by signing the Release. Further, in paragraph 2:
the Appellant by signing the Release, releases the company from ... any actions and suits, causes of action, claims and demands whatsoever, which the Employee now has or which it may hereafter have arising out of or relating to the Unilateral Termination of the Stock Options or arising out of or relating to any agreement, arrangement, relationship, contract or dealing whatsoever arising out of or relating to the Stock Option.
This wording again obviously contemplates that the Appellant was releasing more than just his rights to an action for damages.
Question 6
The Court is satisfied that a reasonable interpretation of section 6 of the Act dictates that this section is not applicable to the factual situation in the case at bar. The Court is satisfied that whatever the Appellant received, was received only indirectly as a result of employment and the inclusion of such an amount was not contemplated by this section.
Counsel for the Appellant argued in his written submissions and in his oral submissions that damages for breach of a contract of employment are not taxable under sections 5 and 6 of the Act and referred to the cases already cited in that respect. However, the Court has already decided that what was received here was not damages in respect to a breach of his rights under the stock option agreement and consequently, the arguments raised thereunder and the cases referred to need not be discussed further because the factual situation in those cases is different than the facts as disclosed here.
Both R, v. Atkins (supra) and Pollock v. R. [(1981), 81 D.T.C. 5293 (Fed. T.D.)] dealt with a payment made by the employer after dismissal without notice and the monies paid thereunder were considered by the Court to have been paid as damages from that wrongful dismissal and did not have the same character as the monies received in the present case.
The Court is satisfied that the proper tax treatment of the amount in question can be found within the provisions of section 7 of the Act. The wording of this section is relatively simple. For the purposes of the case at bar, I recite it as follows:
(b) if the employee has transferred or otherwise disposed of rights under the agreement in respect of some or all of the shares to a person with whom he was dealing at arm’s length, a benefit equal to the value of the consideration of the disposition shall be deemed to have been received by the employee by virtue of his employment in the taxation year in which he made the disposition.
The Court is satisfied that the facts in this case bring it squarely within the provisions of this paragraph. The weakness in the argument of counsel for the Appellant as set out in his written argument and in his oral argument was his conclusion that the amount received was damages for breach of a stock option agreement and the Court has already rejected this argument.
With respect to the general argument of counsel for the Appellant that the provisions of section 7 were designed to exclude the operation of any other section of the Act, that would not appear to be an unreasonable argument. However, whether or not the section of the Act was intended to cover every situation where corporations grant options to employees, it is clear from the facts in the present case that the provisions of paragraph 7(1)(b) apply to the present case.
In light of the Court’s finding that section 6 does not apply to the factual situation in the case at bar, it is unnecessary to discuss further the arguments raised by counsel for the Appellant that a finding that section 6 could apply would lead to a result that Parliament could not have intended. Further, since the Court has decided that paragraph 7( 1)(b) applies to the present case, it is unnecessary to consider further the arguments of counsel for the Appellant that where specific provisions of the Act are designed to provide for the tax treatment of particular matters relating to employment that the Court should not look to a general provision to a taxpayer. This would not appear to be an unreasonable argument.
The Court is satisfied that the application of the provisions of paragraph 7(1)(b) of the Act to the present situation would not lead to any absurd result and the Court is satisfied, as already indicated, that this is the appropriate provision to consider in respect of the issues in this case.
Question 7
With respect to the question of windfall, this argument was put forward by counsel for the Appellant but not forcefully and the Court is satisfied that the amount that was received could not reasonably be regarded as a windfall.
The Court is satisfied that the argument put forward by the Respondent that paragraph 7(1)(b) of the Act covers the situation at bar is well taken. The facts disclosed by the evidence do justify the Minister’s assessment under that paragraph. The Court is satisfied that under the said provisions the Appellant on the facts of this case received an employment benefit. On July 29, 1983, prior to the signing of the Release Agreement, the Appellant’s rights under the option agreement had not been extinguished either by the operation of law, by any appropriate provincial or federal statute, by any agreement to which the Appellant was a party prior to the signing of the Release and the unilateral action of the company resulting in the amalgamation did not and could not have had the effect of extinguishing any of the rights to which the Appellant was entitled under the stock option agreement.
The Court is satisfied that the argument of counsel for the Respondent is well put when he stated that the rights of the Appellant in the stock option agreement could only be changed by another agreement and that such a change was accomplished by the Release Agreement that he signed on July 29, 1983. At that time, the Appellant allowed his rights to be extinguished by signing the Release. What the Appellant received as the result of signing the Release Agreement was something other than the shares, being a sum of money in consideration for the signing of the Release which was accepted in lieu of the shares.
The Minister properly assessed the Appellant under the provisions of paragraph 7( 1)(b) of the Act.
Question 8
On the issue of capital gains, the Court is satisfied that if the amount were not properly taxable under paragraph 7(1)(b) of the Act then it was at the time of signing of the Release, capital property, which was disposed of at a gain which was equal to the amount of consideration received for the Release and would therefore be taxable as a capital gain.
The appeal is dismissed with costs to the Respondent to be taxed.
Appeal dismissed.
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