Stanley J Powell v. Minister of National Revenue, [1978] CTC 2306, 78 DTC 1259

A W Prociuk:—The appellant, Stanley J Powell, of Calgary, Alberta, an employee of Shell Canada Ltd, appeals from the respondent’s reassessment of his income for the taxation year 1975 wherein an amount of $2,223.19 was added to his taxable income for that year. This amount represents the difference between the value of 312 Shell Class A common shares as of date of withdrawal, accrued share dividends and interest, plus $81.15 unused cash contribution, all totalling $5,894.68, and the sum of $3,671.49 being the appellant’s contribution to his employer’s deferred profit sharing plan. The appellant agreed that he was obliged to pay tax on accrued interest and share dividends totalling $626.53, but not on the sum of $1,515.51 which represented an increase in value of the 312 shares aforesaid which were purchased for him earlier by the trustee, on his request and instructions, and delivered to him in March of 1975 when the employees’ contributions to the plan were discontinued.

Briefly stated, the issue is the characterization of the sum of $1,515.51 representing the share value increase. Is it income, capital gain, or simply a book entry and not taxable at all since the said shares were not disposed of in that year?

It was established by the appellant at the hearing of this appeal that the sum of $2,223.19 is made up as follows:

As stated above, the appellant is a long-time employee of Shell Canada Ltd. In 1966 the company established a deferred profit sharing plan known as Shell Canadian Provident Fund (1966). Each employee had the option of contributing an amount not exceeding 10% of his or her yearly salary to the fund. The company matched these contributions. Employees’ contributions were not tax-sheltered. A trust agreement was executed as of January 1, 1966 and a trust was created to be administered by trustees upon terms and conditions as set out in that document (see Exhibit R-2). An employee had an option of directing the trustee to have his contributions invested into a stock (Shell) purchase plan or to purchase Canada Savings Bonds. The appellant chose the stock purchase plan. It was a term of the agreement that an employee could withdraw up to 60% of his contributions each year either in cash or shares or bonds and cash, depending on the nature of the employee’s option. The appellant in this manner withdrew annually shares purchased by the trustee for him and some cash as shown in the annual member’s statements which the appellant filed with his notice of appeal.

In March of 1975 there was a change in the said plan in that the employees’ contributions were discontinued but the employer, that is Shell Canada Ltd, continued to make contributions on behalf of the employees. The plan’s name was changed to Shell Savings Fund. Accordingly, the appellant received a statement from the plan, dated September 30, 1975 which he annexed to his notice of appeal as “Attachment Ill” and which reads as follows:

SHELL SAVINGS FUND

STATEMENT OF WITHDRAWAL AS AT SEP 30/75

S J POWELL EMPLOYEE NUMBER 5940 DALMEAD ORES NW 113457 CALGARY, ALTA TBA 1 E6

SAVINGS PLAN
Latest member balance		$ 674.39
Interest Earned in current year		33.29
Total savings plan		707.68
SHELL STOCK PLAN
312 Shares issued @ 16.6250	$5187.00
Shares sold @
Total Shell stock plan		5187.00
TOTAL VALUE OF WITHDRAWAL		5894.60
CALCULATION OF TAXABLE BALANCE
Total value of withdrawal as above	$5894.68
Less net tax paid contributions:
Cumulative member contributions	$9175.00
Minus: Cumulative withdrawals	5503.51
Net tax paid amount	3671.49
Gross taxable balance	2223.19

Less transfers to:

— RRSP F		with
— Additional Pension Plan
Net Taxable balance			$2223.19
DETAILS OF PAYMENT
Transfers as above			CR
Federal tax @ 10% of net taxable balance			222.320R
Provincial tax @	% of net taxable balance		CR
Value of 312 shares to be delivered			5187.000R
AMOUNT OF CHEQUE NO J4528 ATTACHED			$ 485.36

The appellant stated at the hearing that this represented the 40% of his accumulated contribution to date of discontinuance. It will be observed that the trustee concluded in the said statement that the entire sum of $2,223.19 was taxable income and he issued a T4A to the appellant accordingly.

In filing his income tax return for 1975 the appellant attempted to treat the increase in value of the shares as capital gain but the respondent disallowed that attempt and treated it as income. When the appellant filed his notice of objection, the District Taxation Office apparently endeavoured to obtain some further information from the trustee and by letter dated November 15, 1976, filed as Exhibit R-1, the manager of the plan, Mr R M Madill, wrote to the Appeal Division of the Calgary office as follows:

SHELL SAVINGS FUND

Box 400, Terminal “A”

TORONTO, ONT M5W 1E1

November 15, 1976

Revenue Canada

Taxation

205 - 8th Avenue SE

Calgary, Alberta

T2G 0L1

Attention: Carol M Duncan - Appeals Division

Dear Sirs:

RE: Your File - Room 303 - 231-4325

S J Powell - SIN 611-099-474

The Shell Savings Fund (formerly Shell Canadian Provident Fund) is a registered Deferred Profit Sharing Plan No 10209. In 1975, contributions from Shell Canada employees were discontinued; contributions by Shell Canada to the Savings Fund, however, on behalf of employees were continued. Employees were permitted to withdraw their own contributions and earnings.

The T4A returns were prepared in consultation with the Department of National Revenue, Ottawa, who advised us that the Income would not qualify for the $1,000 interest income exemptions.

We regret that it-is not practical for us to give you working papers and back up documents given the size of the file, the investment portfolio and the computerized system. In brief, earnings are accumulated during the year from the invested funds and at the end of the year are allocated to the accounts of the members.

For your information, we have enclosed a copy of the 1975 Annual Report, which is distributed to all members, and which may give you the information requested.

If you require additional information, please write again.

The assessment was confirmed and this appeal followed.

It was submitted by Miss J Watchuk, counsel for the respondent, that the trustee purchased the shares and at no time was the appellant the registered owner of same prior to actual delivery. The registration in the appellant’s name was effected when the plan was discontinued. She relied on Article XVIII of the trust agreement (Exhibit R-2) stating that the appellant had no power to deal with the said shares while they remained in the hands of the trustee. Article XVIII reads as follows:

ARTICLE XVIII — NON-ALIENATION OF RIGHTS

Except as otherwise provided in the Regulations, no moneys or securities Standing to the credit of any Member under the provisions of the plan shall be capable in whole or in part of anticipation, alienation, surrender, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt so to anticipate, alienate, surrender, sell, transfer, assign, pledge, encumber, or charge the same shall be void; nor shall any such: moneys or securities be in any manner liable for or subject to the debts, contracts, liabilities, engagements, or torts of any Member.

The respondent’s position was that the increase in value is in actuality the earnings of the appellant’s contributions and as such are properly taxable as income in accordance with sections 56 and 147 of the Income Tax Act. lt could not be classified as capital gain as the plan was not terminated as would be the case if subsection 147(10) applied. If, at the material time, the value of the shares had dropped below cost, the appellant could not claim any loss, Capital or noncapital.

The appellant submitted on his behalf that in so far as his contributions were concerned, the trustee acted as his agent. He could direct the trustee to buy shares or to sell the shares and to buy bonds instead. Article XVIII clearly states “moneys or securities standing to the credit of any Member”. Whether or not the shares purchased were registered in the name of the trustee, they were earmarked as being the appellant’s property. The appellant could not encumber or hypothecate nor in any way deal with the securities and cash which were held by the trustee for him for obvious reasons.

I am inclined to the view that when the appellant directed the trustee to purchase shares on his behalf, with his contributions, he was directing the trustee as his agent in that behalf. An agent cannot have greater power than his principal. The shares appreciated in value after their purchase. The fact that physically they remained with the trustee is, in my humble opinion, of no consequence. Had they depreciated in value, the respondent submits that the appellant could not claim a loss of any kind. Why then, should the appellant be taxed on the increase when the shares were not disposed of by him? He merely received, from the trustee, what was his ab initio. The appellant would be taxed on any gain should he choose to dispose of the shares. It therefore follows that the respondent was in error in his assessment and undoubtedly he acted in this manner on the basis of the information he received from the plan which initiated the error.

The appeal accordingly is allowed and the matter is referred back to the respondent for reassessment on the basis that no tax is exigible on the sum of $1,515.51 representing increase in value of the 312 Class A common shares from date of. purchase by the trustee to date of delivery of same to the appellant, nor on the sum of $81.15 which the appellant contributed in cash to the plan and in respect of which the appellant had already paid tax.

Appeal allowed.