Jerry E Cox v. Minister of National Revenue, [1978] CTC 2651

The Assistant Chairman:—In early September of 1969, Jerry E Cox (the appellant) became an employee of Trans-Canada Resources Ltd (hereinafter referred to as “TCR”). Prior to that he had been the general manager of International Drilling Fluids Ltd (hereinafter referred to as “IDF’’). In September of 1969, TCR acquired control of that company and made it a Division of TCR. The appellant, with several other employees of IDF, became employees of TCR. According to Mr Cox, he was a key employee of TCR after he became an employee of that company and, in his opinion, that Division would not have been viable for TCR if he and the other former employees of IDF who joined TCR with him had not joined and stayed on as employees of TCR. It should be mentioned that Mr Cox was an employee of TCR until about November 1, 1972, when that relationship was severed. At some later date (after the 1973 calendar year) he did return and once again became an employee of TCR and he was such an employee at the time of this hearing in April 1978.

Mr Cox, as of January 3, 1970 (after TCR bought the shares of IDF), entered into an agreement with TCR which I shall call the “Contract”. The contract is what one would classify as an employment contract. It set forth the terms pursuant to which TCR did employ the appellant, and of course the terms pursuant to which the appellant did work for TCR. While many terms were covered in the contract, only one term was mentioned by the parties during the course of the hearing. I shall reproduce the relevant portions of it (paragraph 2 thereof) and One other (paragraph 3). The contract was filed as Exhibit A-1. It should be noted that the reproduction herein of paragraph 2 is after the initialled changes have been made. The words “Registered Note” are shown in the reproduced paragraph but, before those words were inserted, the word in the paragraph was “debenture”. At times in the case the word “note” was referred to instead of debenture or registered note. Suggested explanations were given by counsel but neither counsel was of the view that anything turned on the word used by them or exhibit A-1. As will be mentioned later, no evidence was given to establish that the note referred to in paragraph 2 was made, however, no one could say the note was not made. Paragraphs 2 and 3 of the contract after the amendments read as follows:

2. For services rendered by the employee as hereinbefore required the employer shall pay to the employee a salary of $19,200 per year payable by the employer in equal semi-monthly installments in arrear on the 1st and 15th days of each month, which salary may be increased by the employer at the employer’s option. In addition thereto in consideration of the services being provided by the employee and in consideration of further services to be provided by the employee, and in consideration of the continued employment of the employee, the employer hereby agrees that on the 3rd day of January in each year as set forth in Schedule “A” in which the employee is employed by the employer to grant at the option of the employer to the employee either a sum of cash equivalent to the amount set forth in Schedule “A” or to grant a registered note with a face value equivalent to the amount set forth in Schedule “A” to the employee, which registered note shall be for a term of 15 years and bear an interest rate of 3% per annum and shall contain a conversion privilege which will allow the holder of such registered note at his option to convert the face value of the registered note into the common shares of the employer within 60 days of the date of issue of such registered note, the number of such common shares to be determined by dividing the face value set forth in the registered note by the last board lot sales price obtained for the employer’s shares on the Vancouver Stock Exchange on the 3rd day of September of the previous year in which such registered note was issued if the Vancouver Stock Exchange is open on such day and a board lot is traded or the first day preceding the 3rd day of September of the previous year in which such registered note was issued on which a board lot sales price was obtained for the employer’s shares, . . . and further it is understood and agreed that the employer shall establish a stock option plan for its employees, which stock options shall be issued to the employee on the same basis as for other employees of the employer.

3. The term of employment shall be 5 years from the date hereof.

Schedule “A”

As stated, Mr Cox was an employee of TCR until about November 1, 1972, and, I believe, in all years 1969 to 1973 inclusive (at least in 1971 and 1973) he filed an income tax return. He reported as income from TCR in each of the 1971 and 1973 years the amount reflected on a T-4 (his salary in paragraph 2 of Exhibit A-1, namely, $19,200) and a T-4A (the amount shown on Schedule A of Exhibit A-1, namely, $12,965). Later, by notice of reassessment, the Minister added to those amounts the increase in value of the shares of TCR between the “3rd day of September’’ (hereinafter called the “September date’’) and the “3rd day of January’’ (hereinafter called the “January date’’) as used in exhibit A-1, multiplied by the number of shares the appellant could acquire. For the 1971 year this amount was $5,041, and for the 1973 year it was $8,184. The appellant objected and, following confirmation, appealed each year’s assessment to this Board. Neither the notices of objection nor the notices of appeal said that the appellant had properly filed his income tax returns and that each reassessment was incorrect by the amount it added to the reported income; rather, they said the reassessments were wrong and, in fact and in law, the income shown on the income tax returns as filed was also incorrect. Counsel stated that the appellant has the right in law to appeal from an assessment even though in part or even totally it may have been computed on the premise stated by the appellant. An assessment assesses tax and, if an appellant follows the procedure set forth in the Income Tax Act, he has the right to appeal that assessment. Nowhere does the Income Tax Act restrict that right of appeal to changes in reported income of an appellant made by the Minister, but rather, since the Minister, as his duty requires him by section 152 of the Income Tax Act after tax reform, SC 1970-71-72, c 63 (hereinafter called the “Act”), does

Assess the tax for the taxation year and the interest and penalties if any payable

and the person is a person who, pursuant to subsection 165(1) of the Act,

. .. objects to an assessment . . .

and the person is one who has satisfied all of the above conditions, he may, in the words of section 169 of the Act,

appeal to the Tax Review Board to have the assessment vacated or varied after either

(a) the Minister has confirmed the assessment or reassessed.

I accept the position taken by counsel for the appellant in his submission. I must say, counsel for the Minister did not dispute this position. It is assessments of tax which are in dispute. The appellant says in his notices of appeal that the assessments are wrong in certain respects. That is the issue. Of course the onus is on the appellant to prove that the assessments are wrong. If he does not, his appeals are dismissed. However, he has the right to establish that the assessments appealed from are wrong, and assuming he can prove that fact (that the assessments are wrong), the respondent cannot refute that proven fact merely by relying on the appellant’s income tax returns.

The appeals of six other persons were called for hearing at the same time as the appeals of Mr Cox. Those persons, namely, William H Banister, Edward A O’Brien, William F Wyze, Peter A Sturek, Robert E Hardie and William D Hans, were assessed and all of them appealed to this Board for both the 1971 and 1973 taxation years, except the last-named person (Hans) who only appealed for 1971. All of these persons joined TCR as employees at the same time as Mr Cox and signed contracts similar to that signed by Mr Cox. Regardless of how each one filed his income tax return, each was assessed to tax, in principle, as was Mr Cox. They too objected and, following confirmation, appealed to this Board. Counsel for Cox, the appellant, was also counsel for all those other appellants and, when those cases were individually called, he advised that in those appeals the Board should give the same judgment as it gives in the Cox appeals. Counsel for the Minister, in each of the other appeals, concurred.

The appellant says that each assessment is incorrect. They are incorrect in the amount of tax that they assess inasmuch as the Minister has treated the three amounts mentioned previously as income which should be assessed without reference to any special rules. Counsel for the appellant contends that the amount shown on the T-4 is to be assessed without reference to any special rules. He then contends that the value of the “bare note” which the appellant received is to be assessed in the same manner. However, he contends the convertibility feature of the note was a benefit and is to be assessed by a special rule. The respondent contends that the appellant was properly assessed and there are no special rules which apply to any or all of those three amounts for either or both of the years 1971 and 1973. Counsel for the appellant contended that that benefit to the appellant was within the ambit of subsection 85A(1) of the Income Tax Act, RSC 1952, c 148 (hereinafter referred to as “the old Act’’) for 1971 and subsection 7(1) of the Act for 1973, and the value of that benefit was to be assessed pursuant to subsection 85A(2) of the old Act and section 44 of the Income Tax. Application Rules (hereinafter referred to as “ITAR”).

The submission by both counsel, except for amounts, proceeded as though there were only one appeal, namely, 1973, and the only section with which we were concerned was section 7 of the Act. The respondent’s position was that such amounts as the Minister assessed (the amounts reported on the T-4A and the further addition) were part of his salary, wages or other remuneration, and were within'" the ambit of sections 5 and 6 of the Act. The appellant’s position was that the value of the “bare note” was within sections 5 and 6 of the Act, but the value of the convertible aspect, being virtually all of the value which he received on the January date, was within section 7 of the Act and so subject to section 44 of the ITAR. Insofar as all amounts from TCR were concerned, the respondent’s position was that nothing was within the ambit of section 7 of the Act but, if anything were within that section, it would also be within section 44 of the ITAR. He continued that the only amount within section 7 would be the increase in value of the shares between the January date and the date of acquisition of the shares.

In 1970 the appellant worked for TCR. On January 3, 1971, he was advised (how, I do not know) that, pursuant to paragraph 2 of Exhibit A-1, TCR would not be giving him cash of $12,965 pursuant to that clause but instead the “Registered Note” for the same amount. The appellant did not receive the “note” but he at least received advice and in some fashion, within the time limit set in paragraph 2, let TCR know he would take the shares. I know nothing of the advice the appellant received in 1972, but he was paid cash of $12,965. There was no mention as to its taxability but I know of no appeal with respect to that year. In 1973 the events were the same as 1971 except that the appellant sent a notice to TCR (Exhibit A-2) as follows:

January 12th, 1973.

Secretary,

Trans-Canada Resources Ltd,

310 Ninth Avenue SW,

Calgary, Alberta.

T2P 1K5

Dear Sir:

Please be advised that I hereby exercise my option to convert the promissory note of Trans-Canada Resources Ltd which I hold in the amount of $10,834 into common shares of the Company. I understand that the conversion is on the basis of 90 cents per share and look to receiving the appropriate share certificate for 12,038 shares in due course.

Please register share certificates as follows:

Name: Gerald Edward Cox

Ste 7032 (illegible).

The appellant did not receive the full $12,965 in 1973 as he had left TCR’s employ in early November 1972 and that amount was prorated. The appellant stated in substance that he did not keep the shares in either years—some were soon put into a registered retirement savings plan pursuant to section 146 of the Act, and others were sold within a few months of acquisition. As I recall the evidence and argument of counsel in this appeal, no stress was made as to the difference between the January date and the date the appellant elected for the shares and later sold the shares, although the respondent did add to the appellant’s reported income the increase in value of the shares between the September date and the January date multiplied by the number of shares he could acquire.

I do not believe I am incorrectly stating the position taken by counsel for the appellant by stating that he said, on the January date the appellant received not a note, but a note which gave him a right to keep it or buy shares from TCR. The bare note, based on the evidence of Mr Howell—a chartered accountant who was called as an expert witness by the appellant to value the bare note and the convertibility aspect—was worth X dollars and the convertibility right was worth Y dollars. The X dollars, he stated, should be assessed to the appellant’s income in lieu of the amount shown by the T-4A and the Minister’s addition, and the Y dollars should be assessed pursuant to section 7 of the Act with the averaging provision as set up by section 44 of the ITAR.

The respondent’s position is that, in effect, the group of words after the $19,200 are still part of the appellant’s salary and, pursuant to sections 5 and 6 of the Act, it is this total value which is to be included in the appellant’s income. He received, in cash, $19,200 in the course of the year and in the year he received a note, which note was convertible into cash by buying a certain number of shares and selling them at the then stock market price. In each year the value of the note was the amount shown on the T-4A, which the appellant reported, plus the further amount which the Minister added. The submission of counsel for the respondent was that, in effect, the salary of the appellant was $19,200 plus either cash on the January date of $12,965 or a note which had a value in the amount assessed. TCR reserved to itself a choice, but the further salary was to be $12,965. That amount, as TCR chose, was to be given to the appellant as either:

(a) cash, or

(b) a note for that value which, in accordance with the Contract, was to be paid to the appellant at the end of 15 years with interest to him at the rate of 3 per cent and, in the meantime however, with the right to the appellant, which may be exercised within 60 days of the January date, to compel TCR to turn over to him (today, or on the day he exercised the option—within 60 days) a number of shares—fully paid—of TCR based on the cost of those shares on the Vancouver Stock Exchange on the September date.

Since in 1971 and 1973 TCR said it would only opt for the option in (b) above and since on that date in each of those years the value or worth of those shares was an amount equal to the amount the appellant reported based on the said T-4A and the additional amount the respondent added by the reassessments ($4,032.90 in 1971 and $8,184 in 1973), respondent’s counsel submitted the assessments appealed from were correct. It is to be noted that the Contract (Exhibit A-1) at paragraph 2 referred to Schedule A, and that Schedule A, for each of the years 1971 to 1974 (1975 was cut off), showed an amount of $12,965. The respondent says that the amount to be added to the appellant’s income is the number of shares the appellant could acquire on the January date based on his Contract, multiplied by the market price of those shares on the Vancouver Stock Exchange, which in this case is the amount the appellant reported based on the T-4A plus the further amount the Minister added.

There has not been any real dispute on the facts between the parties except, of course, with respect to what the appellant did receive. The respondent says the appellant received his pay—a right which, in effect, was worth the amount assessed. The appellant says in reality, yes and no. If one looks at the matter superficially that would be correct, but One cannot look at the problem in such a fashion. On the January date an obligation arose which TCR must meet and concurrently a right was vested in the appellant. TCR, pursuant to paragraph 2, must either pay the appellant cash or give him the special note in compliance with that paragraph in the contract, and concurrently the appellant, if he does not receive cash, has the right at his option to keep the note on its previously stated terms or to, within 60 days of the January date, in effect tell TCR to give him (on that date) the number of shares of TCR which he could purchase with the note he was to receive based on what the Vancouver Stock Exchange said those shares were worth on the September date

—not the January date.

If I recall correctly the position taken by counsel for the appellant, he stated that his position was taken solely because of the convertibility of the note into shares. It was this feature which, in his submission, brought section 7 of the Act into play and, assuming that there was an amount determined pursuant to that section, then the effective rate of tax on that amount would be that calculated pursuant to section 44 of the ITAR. Counsel stated that if TCR had given the appellant, on the January date, a note with no convertibility provision to exchange the note for shares, or had given the appellant a new car of a stated make and model, there would be no problem. The value of the note on that date or the value of the car would be within sections 5 and 6 of the Act and not within the ambit of section 7, and so section 44 of the ITAR would have no application. While he did not go that far, nor was he required to, counsel for the appellant, following a query from me, suggested that were the “wages” to an employee of a limited company X shares of its capital stock per month, it could be argued, and possibly successfully, that the value of those shares should be assessed pursuant to subsection 7(1) of the Act and section 44 of the ITAR, not sections 5 and 6 of the Act. Counsel for the respondent does admit that if any amount in either year is within the ambit of section 7 (and he says that no amount is), then section 44 of the ITAR would apply to that amount.

The relevant portions of sections 5, 6 and paragraph 7(1)(a) and subsection 7(3) are as follows:

5. (1) Subject to this Part, a taxpayer’s income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by him in the year.

6. (1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:

(a) the value of board, lodging and other benefits of any kind whatever . . . received or enjoyed by him in the year in respect of, in the course of or by virtue of an office or employment.

7. (1) Where a corporation has agreed to sell or issue shares of the capital stock of the corporation . . . to an employee of the corporation . ..

(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;

(3) Where a corporation has agreed to sell or issue shares of the capital stock of the corporation . . . to an employee of the corporation . . .

(a) no benefit shall be deemed to have been received or enjoyed by the employee under or by virtue of the agreement for the purpose of this Part except as provided by this section, and

(b) the income for a taxation year of the corporation . . . shall be deemed to be not less than its income for the year would have been if a benefit had not been conferred on the employee by the sale or issue of the shares to him or to a person in whom his rights under the agreement have become vested.

Counsel for the appellant contended that the employer, TCR, entered into an agreement with the appellant, who was one of its employees, to issue its shares to the appellant and, if there were a benefit to the appellant on the issuance of those shares, then that benefit is to be assessed to tax pursuant to the provisions of section 7 of the Act and section 44 of the ITAR. He submitted that the bare note which the appellant received (or could have received) is to be valued (which value, according to the evidence, would range between $376 and $2,312) and that value should be taxed as income pursuant to sections 5 and 6, and the value of the convertible note (which ranged from a high of $18,350 to a low of $16,414) would be taxed on the formula in section 44 of the ITAR.

Counsel for the respondent stated that, since the appellant did not receive cash on the January date, the value of what he received on that date is income to him pursuant to section 5 and section. 6 of the Act. That value is that which the appellant could have received for that note on that date. In effect, that value would be arrived at by determining, according to the contract, the number of shares the appellant could demand from his employer (TCR) and. multiplying that number by the market price of those shares on the Vancouver Stock Exchange on the January date. The respondent’s counsel continued that section 7 would only come into consideration when the appellant exercised the option to take the shares. His submission was that there would be a benefit within section 7 if, on the January date, the shares were worth, for example, $1 and let us say that on March 1st when the appellant decided to exercise the option the shares were worth $1.10. Per share there would be 10¢ within the ambit of section 7 but that would only be determined when the appellant exercised the option. The assessment is based on the. value of the note on the January date regardless of whether or not the appellant exercises the option. Counsel contrasted the stock the appellant could acquire with the note, and the stock he could acquire pursuant to the concluding words of paragraph 2 of the contract. It is noted by paragraph 3 of the said contract that the term of employment was for five years. Note should also be taken of the appellant’s statement that he was a key employee of the International Drilling Fluids Division of TCR if that fluid division were to remain viable.

On January 3, 1970, the appellant entered into a five-year contract of employment with his employer. His employer was to pay him $19,200 in cash throughout the calendar year and on the 3rd day of January of the immediately succeeding year the employer was to give him a further sum of $12,965 or a note for that amount, which note was to have certain rights. In 1972 the appellant received cash from his employer. In 1971 and 1973 he received the note. I am of the opinion that on that date (the January date), regardless of whether or not the appellant keeps the note to maturity, sells or assigns it, or exercises any option he may be given, the value of what he received on that date is to be added to his income and is to be assessed to tax in the same manner as the $19,200 cash salary he received. The amount of income from TCR on which the Minister assessed the appellant for each of the years 1971 and 1973 is correct and neither subsection 85A(1) of the old Act nor section 7 of the Act have any application to those amounts.

Judgment will issue dismissing the appeals of the appellant, Jerry E Cox. Similar judgments will also issue in the appeals of William H Banister, Edward A O’Brien, William F Wyze, Peter A Sturek, Robert E Hardie and William D Hans.

Appeal dismissed.