G a Van Wielingen v. Minister of National Revenue, [1976] CTC 2238, 76 DTC 1182

Delmer E Taylor:—This is an appeal from an income tax assessment for the year 1970. The matter at issue is an amount of $20,625 included in the taxable income of the appellant as a benefit arising from his purchase of 7,500 shares of stock, this being the difference, according to the respondent, between the amount paid by the appellant for the shares and the value of the shares. The significant point in dispute is whether these shares were acquired for purposes of income tax liability on January 1, 1970 (at which date it is agreed between appellant and respondent that the value was $4 per share); or on December 31, 1970, at which date it is also agreed the value was $6.75 per share. Both the appellant and the respondent relied upon subsections (1) and (2) of section 85A of the Income Tax Act, RSC 1952, c 148 as amended, for support of their respective cases. Both agreed that the significant word requiring determination was “acquired” as used in paragraph 85A(1)(a): “if the employee has acquired shares . . .”.

The appellant, Mr G A Van Wielingen, was at all material times president of Sulpetro of Canada Ltd (hereinafter called the “Company”), a Canadian private corporation with its head office in Calgary, Alberta. His shareholdings, again at all material times, approximated 11% of the issued capital stock, and there were other shareholders with larger blocks of stock. During 1969 shares were issued to shareholders at a price of $8 per share. Pursuant to a shareholders’ resolution dated December 23, 1969, existing common shares were altered by a two-for-one subdivision, and the number of authorized common shares was increased by 1,500,000, making available for subscription 1,753,500 common shares with a nominal or par value of 50¢ per share and a fair market value of $4 per share.

Provision was also made by a resolution of the board of directors dated December 31, 1969 to make available to certain employees, the appellant being one, stipulated amounts of the newly available shares of capital stock. The progression and the sequence of events by which the appellant participated in this offer is the basis for this hearing.

Witnesses were called and exhibits introduced only by counsel for the appellant. The witnesses called were Mr R B Diaper, a chartered accountant who was assistant secretary and treasurer of the Company, and the appellant himself, Mr G A Van Wielingen. Exhibits introduced were the following:

A-1—Resolution of the Directors of Sulpetro of Canada Ltd dated December 31, 1969

A-2—A letter from the appellant to the Company dated January 1, 1970

A-3—A letter from the appellant to the Company dated December 31, 1970

A-4—Resolution of the Directors of Sulpetro of Canada Ltd dated December 1, 1970

A-5—Certificate for 7,500 Company shares in the name of the appellant dated December 31, 1970

Counsel for the respondent did not cross-examine either witness, nor question the introduction of any of the exhibits.

Exhibit A-5 is a standard document, and other than providing evidence that a share certificate was in fact issued, does not contain any significant information. The other documents are significant, and must be regarded in total for an adequate comprehension of the matter. Accordingly they are reproduced, in the cases of Exhibits A-2, A-3 and A-4, in total and, in the case of Exhibit A-1, only the portion pertaining to the appellant:

Exhibit A-1

RESOLUTION OF THE DIRECTORS OF SULPETRO OF CANADA LTD PASSED PURSUANT TO ARTICLE 113 OF THE

COMPANY.

WHEREAS, by a recent Shareholders Resolution dated the 23rd day of December, AD 1969, wherein the existing common shares were altered by a two for one subdivision and the authorized common shares were increased by 1,500,000 shares, there is now available for further subscription a total of 1,753,500 common shares with a nominal or par value of 50 cents per share.

AND WHEREAS, it is the belief of the Board of Directors of this Company that it would be beneficial to the Company if designated key directors, officers, employees and associates (hereinafter called “employees”) of the Company would be permitted to purchase a portion of the said common shares.

AND WHEREAS, by a Shareholders Resolution dated the 30th day of December, AD 1969, the Shareholders authorized the Board of Directors to sell and issue to the said employees a maximum of 50,000 shares with a nominal or par value of 50 cents per share, and to sell and issue the certificate or certificates evidencing the same in such proportions and upon such terms and at such times as the Board of Directors deem advisable, be it,

RESOLVED, that the Board of Directors of this Company do hereby set aside a total of 50,000 shares of the said common shares of this Company for sale and issuance to designated key employees upon the following terms and conditions:

1. In the case of G A Van Wielingen, President—

(a) Subscription—Mr Van Wielingen may subscribe for 7,500 of the said common shares; such written subscription must be received by the Treasurer of the Company within seven (7) days after the date hereof. Such subscription must be for the full 7,500 of the said common shares; whereafter Mr Van Wielingen shall be compelled to pay for the full said subscription as follows;

(b) Price—The price per share to Mr Van Wielingen shall be the same as the effective price per share at the last and current recorded sale

on the records of the Company, which is $4.00 per share.

(c) Payment—The payment of the said 7,500 shares will be made in installments, over a period not exceeding three (3) years from the date of subscription, with the right of prepayment. The first installment shall equal one-third of the total said purchase price and shall be due and payable within one (1) year of the subscription date; the second installment shall equal one-third of the total said purchase price and shall be due and payable within two (2) years of the subscription date; the third installment shall equal one-third of the total said purchase price and shall be due and payable within three (3) years. of the subscription date.

(d) Issue of Shares—The said shares will be issued from time to time as the same become fully paid either by regular installment or prepayment as aforesaid; only upon such issuance will the subscriber have, with respect to such shares, any rights of a shareholder.

In the event that any installment is not paid on its due date, the Company shall have the right to return to the subscriber any installment or installments standing to his credit, without interest, and cancel the balance of such subscription.

Exhibit A-2

G A VAN WIELINGEN 1780 Elveden House CALGARY 2, ALBERTA

January ist, 1970

Supetro of Canada Ltd

1780 Elveden House

Calgary 2, Alberta

Dear Sirs:

Pusuant to a Resolution of the Board of Directors of Sulpetro of Canada Ltd passed on the 31 day of December, AD 1969, I hereby subscribe for 7,900 common shares of Sulpetro of Canada Ltd with a nominal par value of 50$ per share for the purchase price of $4.00 per share. Also, I hereby agree to comply with the terms as to subscription, price, payment, issuance of shares and also such other terms regarding the said shares as described in the aforesaid Resolution of the Board of Directors of Sulpetro of Canada Ltd.

Yours very truly,

(Sgd) G A Van Wielingen G A Van Wielingen

Exhibit A-3

G A VAN WIELINGEN 2300 Three Calgary Place Calgary 1, Alberta

December 31, 1970

Sulpetro of Canada Ltd

2300 Three Calgary Place

355 - 4th Avenue SW

CALGARY 1, Alberta

Dear Sirs:

RE: Employee Share Subscription

and Option Program—Resolution

of Directors, December 31, 1969

Pursuant to paragraph 1 of the above referred to Resolution, I! would advise as follows:

1. I confirm my subscription for 7,500 common shares of the capital stock of the Company with a nominal or par value of 50¢ per share at the purchase price of $4.00 per share which said subscription was received by the Treasurer of the Company before January 7, AD 1970 in accordance wtih paragraph 1(a) of tne said Resolution.

2. In accordance with paragraph 1(c) of the said Resolution, I herewith tender full payment for the said shares in the amount of $30,000 by promissory note, payable on or before January 1, 1973.

3. Further, I agree that the 7,500 shares so issued to my name shall be held by Messrs Ballem, McDill and Maclnnes, solicitors for the Company until the Company advises the said solicitors that the subscription monies in the amount of $30,000 have been paid in full; thereupon, the said solicitors will be authorized to deliver the shares unto me.

Yours very truly,

(Sgd) G A Van Wielingen G A Van Wielingen

Exhibit A-4

RESOLUTION OF THE DIRECTORS OF SULPETRO OF CANADA LTD PASSED PURSUANT TO ARTICLE 113 OF THE

COMPANY.

WHEREAS Mr G A Van Wielingen has subscribed for 7,500 common shares of the Company with a nominal or par value of 50¢ per share at the purchase price of $4.00 per share for a total sum of $30,000.00.

AND WHEREAS Mr G A Van Wielingen has tendered a promissory note in the amount of $30,000.00 payable to the Company without interest on or before January 1, 1973.

NOW THEREFORE BE IT RESOLVED:

1. That the said subscription by Mr G A Van Wielingen be and is hereby accepted and the Treasurer is directed to issue 7,500 common shares as fully paid and non-assessable to Mr G A Van Wielingen.

2. That until the said promissory note is paid in full, the said shares are to be held on trust by Messrs Ballem, McDill & Maclnnes, solicitors for the Company. Upon the Company advising the said solicitors, in writing, that payment of the note has been received by the Company in full, the solicitors will be authorized to deliver the shares unto Mr G A Van Wielingen.

The oral evidence given by both Mr Diaper and the appellant was to the effect that the action taken by the appellant as signified by Exhibit A-2 made a contract between the parties and that the appellant was irrevocably bound to perform accordingly, as at that date. Counsel for the appellant argued that, when this action was related to the intention of the Company as indicated in Exhibit A-1, an agreement binding on both parties had been reached and the appellant had therefore acquired the shares on January 1, 1970, the Company having made an offer to the appellant on December 31, 1969 and the appellant having accepted that offer on January 1, 1970. Counsel for the respondent argued that such acquisition could not have taken place until there had been signification by the appellant of his intention to participate in the Company plan, acceptance of this application by the board of directors, and the passing of a resolution of the board of directors approving the issue of such shares.

That the Company made shares available for the appellant under certain terms and conditions, there can be no doubt; and that the appellant subscribed for these shares in the appropriate manner there can be no doubt. What remains at issue is the status of the appellant from the date of January 1, 1970 through December 30, 1970—that is. whether he was a subscriber for shares, with the rights and privileges of that position, or a shareholder, with the rights and privileges of that position. To address ourselves to this question most directly, it would be useful to examine the words used by the Company in its resolution of December 31, 1969 (Exhibit A-1). The board of directors is the active, legally constituted mechanism by which the Company carries out its affairs. The important early part of this document therefore is: “RESOLVED, that the Board of Directors of this Company do hereby set aside . . .”. The reason for setting aside appears quite obvious; it would be to allow participation, up to a certain extent and under certain conditions, by some key employees, in the newly available shares, before these were made more widely available. The stipulation later in that resolution requiring that “written subscription must be received by the Treasurer of the Company within seven (7) days after the date hereof”, is perfectly understandable. The Company wishing to retain as treasury shares Only the minimum number of shares for which “written subscription" had been received. It can be concluded that it was the desire and intention of the Company to make available after January 8, 1970, in a wider sphere, the balance of the newly available shares including any of those set aside on December 31, 1969 for employee participation for which written subscriptions had not been received within the 7-day period.

The position of the appellant then on January 1, 1970 is clear. He was a subscriber, and the Company had the obligation to hold for him 7,500 treasury shares awaiting his completion of the terms and conditions attached to his subscription. That the Company fulfilled its obligation, and it is suggested that it was the Company’s only obligation, to hold these shares, is evidenced by the fact that 7,500 shares were indeed available and were made the property of the appellant on December 31, 1970 through the share certificate referred to as Exhibit A-5, when the board of directors passed the resolution on the same date, accepting as adequate fulfilment of these terms and conditions the promissory note of the appellant.

Turning now to the action taken in the letter by Mr Van Wielingen on December 31, 1970, the Board can find little support therein for the contention of the appellant. This letter (Exhibit A-3) merely states "I confirm my subscription . . .”. The fact that the appellant now tendered a promissory note for the full amount of his original subscription, merely reflects his obligation to make a first instalment of one-third within one year of the subscription date, but he did have the right of prepayment. Therefore, unless some arrangement to complete at least his obligation for the one-third payment could be made, he was in danger of losing even his rights as a subscriber. The fact that the board of directors chose to accept a promissory note for the full amount as adequately meeting the “payment” conditions is a business decision for the board of directors which has not been challenged by the respondent. It might well be pointed out, however, that it is doubtful if the board of directors had received more either in the way of substance or security by way of the formal promissory note than the Company already held as a result of the promise and commitment of the appellant by his letter of January 1, 1970.

Finally, with respect to the most material point—the physical issue, transfer and receipt of the share certificate—, this was accomplished only after the resolution of the board of directors dated December 31, 1970, and can only be regarded as the implementation of clause (d) of item 1 of Exhibit A-1. In addition to the reference to the procedure for issue of such shares, it must be pointed out as significant that

. only upon such issuance will the subscriber [italics mine] have, with respect to such shares, any rights as a shareholder”.

The board of directors of the Company therefore does not appear to have had the right to pass a share-allotting resolution, let alone to issue the shares on January 1, 1970, and in fact they did not do so. The appellant does not appear to have had any right to receive the shares, nor to receive any rights as a shareholder in them at that date.

The stated opinion of the appellant regarding the nature of the contractual arrangement, even if corroborated by the Company secretary, cannot be taken to supersede or to act as a substitute for the required legal action with respect to the issuance of such shares, a matter for which only the board of directors was responsible. It might be argued that his implementation of the subscription rights on December 31, 1970 by proffering a promissory note might just as easily have been done on January 1, 1970, and if accepted by the board of directors in satisfaction of his obligations, would have then given him the position and rights of a shareholder. The fact is that this was not done, and this Board concludes that there was no acquisition of the shares as of January 1, 1970 as contended by the appellant, and that the evidence available shows that the earliest possible date at which he could claim such acquisition was December 31, 1970.

The appeal is dismissed.

Appeal dismissed.