Robin E Anderson, Patrick M Reynolds, Herman Hagerman Huestis and Keith E Steeves v. Minister of National Revenue, [1974] CTC 2135, 74 DTC 1103

A J Frost (orally: February 5, 1974):—These four appeals in respect of income tax assessments for the taxation year 1969 were heard simultaneously on common evidence.

The only witness called on behalf of the appellants was the appellant Keith E Steeves, who stated he was secretary-treasurer of Bethex Explorations Limited (hereinafter referred to as “Bethex”), a company incorporated under the Companies Act of British Columbia in 1965. He said that in 1967, as a condition of employment, he was granted an option to purchase 5,000 shares of Bethex per year for five years, commencing May 1, 1967, at 60 cents per share. On August 6, 1968 he exercised the option as to the second 5,000 shares and paid $3,000 for them.

On January 23, 1969 a shareholders’ resolution was passed to the effect that the affairs of Bethex be wound up and its assets distributed. In order to accomplish this it was necessary that all the obligations of Bethex be terminated or extinguished, including the obligations arising under the various share options.

On February 7, 1969 a settlement was reached with the option holders, including the appellants, whereby they were to receive shares of Bethlehem Copper Corporation Limited (hereinafter referred to as “Bethlehem”) in compensation for the cancellation of their share options then outstanding. According to the evidence, at the time of settlement the options held by the appellants were worth more than the shares of Bethlehem received by them in settlement.

Under the agreement of February 7, 1969 Mr Steeves agreed to dispose of his rights under his option in consideration for 1,500 shares of Bethlehem, which had a market price on that date of $20.50 per share, for a total market value of $30,750, which the Minister of National Revenue assessed as a benefit to him as an employee under section 85A of the Income Tax Act. The other three appellants, under the same agreement of February 7, 1969, each agreed to accept 2,000 shares of Bethlehem in compensation for their respective share option rights, for a total market value of $41,000. In all other respects the evidence given by Mr Steeves applied equally to his fellow appellants.

The respondent has contended that the employee share option agreement with Bethex was an agreement described in subsection 85A(1) of the Income Tax Act; that the shares of Bethlehem were received as consideration for the disposition of rights under the employee share option agreement within the meaning of paragraph 85A(1)(b), or, alternately, were shares acquired under the option agreement within the meaning of paragraph 85A(1)(a); that accordingly the amounts of $30,750 and $41,000 respectively are benefits deemed to have been received by the appellants by virtue of their employment and have been properly included in computing their income pursuant to paragraph 5(1)(a) of the Income Tax Act.

Paragraphs 85A(1)(a) and (b) of the Income Tax Act as applicable at the time read:

85A. (1) Where a corporation has agreed to sell or issue shares of the corporation or of a corporation with which it does not deal at arm’s length to an employee of the corporation or of a corporation with which it does not deal at arm’s length,

(a) if the employee has acquired shares under the agreement, a benefit equal to the amount by which the value of the shares at the time he acquired them exceeds the amount paid or to be paid to the corporation therefor by him shall be deemed to have been received by the employee by virtue of his employment in the taxation year in which he acquired the shares;

(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 for 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 appellants objected to their respective assessments on the following grounds:

No shares were acquired under the option as contemplated in paragraph 85A(1)(a).

With respect to paragraph 85A(1)(b), there was no disposition of the rights under the option to a person since

(a) there can be no disposition of a thing “to a person” unless the thing alleged to have been disposed of has continuing existence in the hands of the person to whom it is disposed.

(b) the legislation contains no applicable provision such as subparagraph 20(5)(c)(ii) of the Income Tax Act then in force or clause 54(c)(ii)(A) of the current Income Tax Act from which an extended meaning of the word dispose can be inferred.

If it were intended to tax compensation payable in respect of cancellation, there is no provision in section 85A that applies in the case of cancellation by an employee who did not deal at arm’s length with the corporation paying the consideration, from which it may be inferred there was no intention to tax an arm’s length cancellation either.

The consideration received should be considered as a settlement of the damage claim which (the appellants) would otherwise have been able to present for the wrongful cancellation of (their) option(s) which would otherwise have occurred from the implementation of the shareholders’ resolution of Bethex passed January 23, 1969, providing for the liquidation of Bethex.

The issue in this case concerns the words “transferred or otherwise disposed of” in the said section 85A of the old Income Tax Act. The appellants claim that their shares of Bethex were worth considerably more than the consideration they received. However, the Board does not consider this to be of any significance. The most effective and, for the respondent, the most troublesome basis of the appellants’ appeals, in my opinion, is that they did not dispose of their option rights to purchase Bethex shares to a specific person. They claim that they gave up those rights in consideration for a certain compensation, that compensation representing the damages for the premature cancellation of their option rights.

Counsel for the appellants has contended that such cancellation of rights is not what the Act means by “transferred or otherwise disposed of” under the section described above. The word “disposition” means, in his opinion, the transfer of an asset to another person in whose hands it will continue to exist, and that no such disposition took place in this case.

It appears to me that this interpretation of the facts and of the applicable relevant statutory provisions does not hold ground. It happens many times that an asset, tangible or intangible, is disposed of to a person but does not thereafter continue to exist. The words “to a person” have in this case the meaning of “for the benefit of”, “at the direction of”, or “for the account of” that person. The fact that a certain compensation is paid in consideration of such disposition shows that the person to whom that disposition was made, and who paid for it, attributed a value to it and wished to acquire it. Other examples of the disposition to another person of an asset which at the moment of transfer ceases to exist are, for instance, the disposition of an easement to the owner of a property on which the easement rests. The right of easement dissolves automatically. The same is true where the disposition of an account receivable goes to a person in whose hands it will be extinguished in compensation for a liability of the assignee to the debtor of that receivable; or consider the case wherein spoiled or poisonous merchandise is returned to the vendor for destruction. In all such cases a disposition takes place to— meaning “for the account of” or “for the benefit of” a person, even though there is no continuing existence of the disposed asset in the hands of the person to whom it is disposed.

One should keep in mind that the words of the Act are nothing more than a vehicle through which Parliament has tried to impose certain rules of behaviour on a continuously changing society and it is therefore necessary to understand the ideas which the words of the statute convey in the context in which they are used. A responsibly applied measure of flexibility is thereby inevitable. In some cases Parliament has tried to clarify certain expressions, sometimes for greater certainty, sometimes to prevent too broad an interpretation, but this should not necessarily be construed as implying that such expressions cannot be given such interpretation elsewhere in the Act because Parliament has not taken the trouble to add that particular statutory interpretation. In this case, the Act has in general provided that the value of shares or rights which are issued or granted by virtue of a contract of employment should, as a benefit under that employment contract, be added to the employee’s income. In so far as that value exceeds the price or consideration paid by the employee for those shares or rights, subsection 85A(1) makes it clear that what is taxable is the benefit which the employee ultimately received from such arrangement. That benefit should be taxable in his hands as derived from employment. This. is exactly what happened in the present instance; the appellants obtained certain rights under the terms of their employment, and in disposing of these rights by giving them up to— meaning “for the account of”—their former employer, they realized the benefits which had been conferred on them when they received the rights.

There is no question in my mind that, under the provisions of paragraph 85A(1)(b) of the Income Tax Act as it read at that time, the appellants were taxable on these benefits. I do not feel that I have any alternative but to dismiss the appeals and the appeals are therefore dismissed.

Appeals dismissed.