Citation: 2007TCC636
Date: 20071114
Docket: 2006-82(IT)G
BETWEEN:
SHOPPERS DRUG MART LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bowman, C.J.
[1] This appeal is from
an assessment made under the Income Tax Act for the 1999 taxation year.
The issue is whether the appellant, Shoppers Drug Mart Limited (“SDM”), was
prohibited from deducting in computing its income for 1999 the amounts of
$54,447,037 and $537,067 by reason of paragraph 18(1)(b) of the Act.
These amounts were paid to its parent Imasco Limited (“Imasco”) to
reimburse it for payments made by Imasco to SDM’s employees on the surrender of
options held by them to acquire shares of Imasco under the Imasco Stock Option
Plan (the “Imasco SOP”). No viva voce evidence was called.
[2] The parties entered
into a Statement of Agreed Facts (“SAF”) and it is attached as Schedule A to
these reasons. Also, a number of documents were entered on consent and some
portions of the examinations for discovery were read into evidence.
[3] Paragraph 18(1)(b) of the
Act reads as follows:
18. (1) — In computing the
income of a taxpayer from a business or property no deduction shall be made in
respect of
(b) — an
outlay, loss or replacement of capital, a payment on account of capital or an
allowance in respect of depreciation, obsolescence or depletion except as
expressly permitted by this Part;
The
French version of paragraph 18(1)(b) reads:
18. (1) — Dans le calcul du revenu du contribuable tiré d’une entreprise ou d’un bien, les éléments
suivants ne sont pas déductibles :
b) — une dépense en capital, une perte en capital ou un remplacement de
capital, un paiement à titre de capital ou une provision pour amortissement,
désuétude ou épuisement, sauf ce qui est expressément permis par la présente
partie;
[4] It is important to emphasize that the Minister on
assessing, and the respondent before this court, did not rely upon or argue
paragraph 18(1)(a) of the Act. That paragraph prohibits the
deduction of any amount in the computation of income from a business or
property except to the extent that “it was made or incurred for the purpose of
gaining or producing income from the business or property”.
[5] I specifically
asked counsel for the respondent if she was relying upon paragraph 18(1)(a)
and she agreed that she was not. From this I take it to be accepted that the
payments were made or incurred for the purpose of gaining or producing income
from SDM’s business.
[6] I shall not repeat
the details in the SAF. It is sufficient that I summarize the facts that appear
relevant to the appeal.
[7] SDM was a wholly owned subsidiary of Imasco and it
carried on the drugstore business. Its officers and key employees (as well as
those of Imasco and Imasco’s other subsidiaries) were granted options to
purchase Imasco shares. Employees holding vested options could elect to
exercise their options and receive Imasco shares upon payment of the option
price. In 1995 the Imasco SOP was amended to permit Imasco to offer an option
holder the right to surrender the option for cash rather than exercising it.
[8] Paragraph 10
of the Imasco SOP, as amended in 1995, read as follows:
10. ELECTION TO SURRENDER OPTION FOR CASH
(AVAILABLE IN CERTAIN CIRCUMSTANCES)
From time to time, the Corporation may
offer an Optionee the right to elect, at the Optionee’s discretion, to
surrender an option, or any portion thereof, in lieu of exercising same, and to
receive upon such surrender a cash payment equal to the amount of the excess of
the then market value of one Share over the purchase price per Share specified
in the option multiplied by the number of Shares purchasable upon exercise of
the option, or portion thereof, so surrendered. For this purpose, the market
value of one Share shall be the closing price per Share on The Toronto Stock
Exchange on the day the option, or portion thereof, is surrendered, or if
Shares are not traded on The Toronto Stock Exchange on such day, then the next
preceding trading day on which such a trade took place shall be used.
[9] This was simply a formal confirmation of what Imasco
had occasionally done prior to the 1995 amendment. It still left it within
Imasco’s discretion whether to offer an optionee a right to surrender the
option for cash.
[10] In March 1999, British American Tobacco p.l.c. (“BAT”)
approached Imasco to discuss a proposal that BAT would acquire the common
shares of Imasco held by the public. Prior to entering into an agreement with
respect to this proposal, Imasco on June 9, 1999, amended the Imasco SOP so
that paragraph 10 read as follows:
10. ELECTION TO SURRENDER OPTION FOR CASH
At the Optionee’s discretion, an Optionee may elect
to surrender an option, or any portion thereof, in lieu of exercising same, and
to receive upon such surrender a cash payment equal to the amount of the excess
of the then market value of one Share over the purchase price per Share
specified in the option multiplied by the number of Shares purchasable upon
exercise of the option, or portion thereof, so surrendered. For this purpose,
the market value of one Share shall be the closing price per Share on The
Toronto Stock Exchange on the day the option, or portion thereof, is
surrendered, or if Shares are not traded on The Toronto Stock Exchange on such
day, then the next preceding trading day on which such a trade took place shall
be used.
[11] The effect of the amendment was to give the holder of
the option the right to surrender the option for a cash payment equal to the
excess of the fair market value of the share over the option price.
[12] On August 2, 1999, a Transaction Proposal
Agreement was entered into by BAT, British American Tobacco (Canada) Limited (“Bidco”) and Imasco. It
is fair to say that this agreement contemplated significant changes in Imasco’s
holdings and share structure. Among the changes contemplated were the
acquisition by BAT, through its subsidiary Bidco, of all of the outstanding
Imasco shares not held by BAT indirectly through Bidco, a change in the
articles relating to the Imasco shares converting them into special shares and
a disposition of the business of SDM. It is worthwhile to set out the recitals
to the Transaction Proposal Agreement as they demonstrate the extent of the
reorganization. They read:
Transaction Proposal Agreement, as amended and restated
THIS TRANSACTION PROPOSAL AGREEMENT as amended and
restated as of August 2, 1999.
AMONG:
BRITISH AMERICAN TOBACCO p.l.c., a corporation
incorported in England and Wales, (“BAT”)
— and —
IMASCO LIMITED, a corporation continued under the
laws of Canada, (“Imasco”)
— and —
BRITISH AMERICAN TOBACCO (CANADA) LIMITED, a
corporation formed under the laws of Canada, (“Bidco”)
RECITALS
WHEREAS:
1. BAT is the indirect holder of
184,174,155 common shares of Imasco. In this Agreement, the term “Imasco
Shares” shall refer to all of the outstanding common shares in the capital of
Imasco, the term “Subject Imasco Shares” shall refer to the Imasco Shares
indirectly held by BAT and the term “Imasco Shareholders” shall refer to all
holders of Imasco Shares.
2. At July 28, 1999, there were
432,906,353 Imasco Shares outstanding and 8,185,260 Imasco Shares issuable at
prices between $7.00 and $34.00 upon exercise of stock options.
3. Imasco is the indirect holder
of 117,174,584 common shares of CT Financial Services Inc. (“CTFS”). In this
Agreement, the term “CTFS Shares” shall refer to all of the outstanding common
shares in the capital of CTFS and the term “Subject CTFS Shares” shall refer to
CTFS Shares indirectly held by Imasco.
4. Bidco is a wholly-owned
indirect subsidiary of BAT.
5. Bidco wishes to acquire all
of the Imasco Shares.
6. The parties have agreed on a
transaction structure which would make it possible for Bidco to acquire all of
the Imasco Shares not then owned by Bidco. The transaction structure agreed
upon by the parties includes an amendment to the articles of Imasco (the
“Reorganization”), pursuant to which, among other things, the rights,
privileges, restrictions and conditions attaching to the Imasco Shares will be
changed so as to provide, upon a notice being provided by Imasco to its
transfer agent, for the transfer to, and acquisition by, Bidco of such shares
as set out therein. Following the Reorganization, in this Agreement the Imasco
Shares as so amended are referred to as the “Special Shares”.
7. Following the Reorganization,
subject to the terms and conditions of this Agreement, Imasco and BAT have
agreed to exchange the Special Shares indirectly held by BAT for common shares
in the capital of Imasco (the “BAT Exchange”) and following such exchange, upon
a notice being provided by Imasco to its transfer agent and subject to the
terms and conditions of this Agreement, Bidco has agreed to acquire all of the
outstanding Special Shares in accordance with the share provisions thereof (the
“Going Private Transaction”).
8. If the Going Private
Transaction is completed, Imasco shall effect a consolidation of the Special
Shares and thereafter Bidco and Imasco shall amalgamate (the “Bidco
Amalgamation”). In this Agreement, the term “BAT Canada” shall refer to the
corporation to be formed on the Bidco Amalgamation.
9. Imasco and BAT have agreed to
undertake an auction process in respect of the business of the Shoppers Drug
Mart group (“SDM”) with the objective of BAT and a third party purchaser
reaching a binding agreement that will provide, subject to the completion of
the Going Private Transaction, for the purchase and sale of the shares of a
company that would own all or substantially all of the business of SDM.
10. Imasco will undertake an
auction process in respect of the business of Genstar Development Company, a
division of Imasco Enterprises Inc., Genstar Land Company and their respective
subsidiaries (collectively “Genstar”) with the objective of reaching one or
more binding agreements with one or more third party purchasers for the
purchase and sale of all or portions of Genstar.
11. The Board of Directors of
Imasco believes it appropriate for the auction process in respect of the SDM
business and the auction process in respect of the Genstar business to be
substantially advanced or completed and for the Going Private Price (as such
term is defined in Section 3.1 of this Agreement) to be determined prior to
making a determination whether to recommend that the Imasco Shareholders vote
in favour of the Reorganization.
12. The Board of Directors of
Imasco believes it appropriate for the Imasco Shareholders generally and the
holders of Imasco Shares other than the Subject Imasco Shares separately to
have an opportunity to consider the Reorganization by way of shareholder vote
provided that this Agreement has not been terminated in accordance with its
terms prior to the time of such a shareholder vote.
13. BAT has advised Imasco that
contemporaneously with the execution of this Agreement, BAT and The
Toronto-Dominion Bank (“TD”) have entered into an agreement (the “Support
Agreement”) pursuant to which TD has agreed to make an offer (the “Offer”) to
purchase all of the CTFS Shares and BAT has agreed, subject to completion of
the Going Private Transaction, to cause BAT Canada to enter into an agreement
to deposit the Subject CTFS Shares to the Offer. BAT has provided Imasco with a
copy of the Support Agreement.
[13] Section 5.8 of the Agreement
reads:
Section 5.8 Outstanding Stock Options and Employment Arrangements of Imasco.
Imasco agrees and represents that its board
of directors will unanimously resolve to encourage all persons holding options
to purchase Imasco Shares pursuant to Imasco’s employee stock option plan, to
exercise or surrender their options immediately prior to the completion of the
Reorganization. Imasco further agrees and represents that the board of
directors of Imasco will also resolve and will authorize and direct Imasco to,
subject to the receipt of any necessary regulatory and stock exchange
approvals, cause the vesting of option entitlements under its employee stock
option plan to accelerate prior to the completion of the Reorganization, such
that all outstanding options to acquire Imasco Shares become exercisable prior
to the completion of the Reorganization, and to arrange for all Imasco Shares
that are fully paid thereunder to be distributed to those persons entitled
thereto so as to be able to be acquired by Bidco in connection with the Going
Private Transaction and to thereafter satisfy all other obligations of Imasco
under such plan.
BAT and Bidco acknowledge that the
completion of the Going Private Transaction will constitute a “Fundamental
Change” under Imasco’s incentive and other employment related arrangements
resulting in the acceleration of the vesting, funding and/or payout of rights
under such arrangements, a summary of which plans and arrangements are
contained in the disclosure letter provided by Imasco to BAT on the date hereof
(the “Imasco Disclosure Letter”).
[14] On November 18, 1999, the Transaction
Proposal Agreement was amended to set the purchase price of the Imasco common
shares at $41.60. On December 14, 1999, Imasco accelerated the vesting of
the options. In fact, 88.73% of the options had already vested.
[15] On January 27, 2000, SDM wrote to Imasco as follows:
Payments Related to the Imasco
Employee Stock Option Plan
As you know, a number of employees and
former employees (the “Employees”) of Shoppers Drug Mart Limited (“Shoppers”)
participate in the Imasco Employee Stock Option Plan (the “Plan”). We
understand that certain Employees of Shoppers who participate in the Plan have
surrendered or may surrender their Imasco stock options for cash and are or will
be entitled under the Plan to receive the difference between the closing price
of Imasco common shares on The Toronto Stock Exchange on the date of the
surrender of such stock options and the exercise price under such stock
options.
In consideration for the undertaking
by Imasco Limited to fund the cash payments forthwith upon the surrender by
such Employees of Shoppers of their Imasco stock options, which Shoppers
acknowledges directly benefit Shoppers’ business, Shoppers hereby irrevocably
and unconditionally agrees to pay Imasco Limited an amount equal to all such
cash payments to be made by Imasco Limited to Employees of Shoppers.
[16] On January 28, 2000, the holders of Imasco shares
voted to approve the BAT–Imasco Transaction. In January of 2000, employees of
SDM exercised 62,800 options to receive Imasco shares and on January 28, 2000,
SDM employees holding 2,190,380 options to acquire Imasco shares elected to
surrender their options in return for the difference between the TSE closing
price of Imasco shares ($41.40) and the price of the options. A payment was also
made to reflect the difference between the price paid by BAT ($41.60) and the
TSE closing price ($41.40). This point is not germane to the issue here.
[17] Also, the payments made to the option holders to
surrender their options were grossed up to reflect the fact that it was
believed that the cash payments for the surrender of the options did not
attract the economic equivalent of the capital gains treatment under
paragraph 110(1)(d) that was accorded to subsection 7(1)
benefits. Whether I agree or disagree with this view is not relevant. The
payments were made.
[18] The total amount paid by SDM to Imasco to reimburse it
for the payments (called the “Cash Surrender Chargeback”) which it made to the
employees to surrender their options was $54,447.037. The additional amount
paid by SDM to reimburse Imasco for the gross up to achieve the
paragraph 110(1)(d) result (called the “Make‑Up Chargeback”)
was $537,067. The total amount in issue is therefore $54,984,104.
[19] The question is whether these amounts are “outlays of
capital” or “payments on account of capital”. The distinction between these two
expressions is not relevant to the question here. Jackett P. (as he then
was) in Algoma Central Railway v. M.N.R., 67 DTC 5091 at 5093 said:
Leaving aside allowances in
respect of depreciation, obsolescence or depletion, section 12(1)(b)
prohibits the deduction of
(a) “an outlay
. . . of capital”,
(b) “a(n) . .
. loss . . . of capital”,
(c) “a(n) . .
. replacement of capital”,
or
(d) “a payment
on account of capital”.
As far as I know, the precise
significance of these various expressions in section 12(1)(b) has
not been the subject of judicial consideration. Whether or not there might be “an
outlay . . . of capital”* that would escape the prohibition in section 12(1)(a)
and would not fall within the expression “a payment on account of capital”, I
need not consider, for, as far as the expenditures in dispute are concerned, I
am satisfied that, if they are not payments on account of capital, they are
not, within the meaning of section 12(1)(b) outlays “of capital”. I
propose to consider, therefore, whether the expenditures in dispute were
payments “on account of capital”. In other words, the question, as I understand
it, is: Is such an expenditure in substance “a revenue or a capital
expenditure”? (See British Insulated and Helsby Cables v. Atherton, (1926)
A.C. 205, per Viscount Cave, L.C. at page 213.)
[The usual test]
The “usual test” applied to
determine whether such a payment is one made on account of capital is, “was it
made ‘with a view of bringing into existence an advantage for the enduring benefit
of the appellant's business’”? See B.C. Electric Ry. Co. Ltd. v. Minister of
National Revenue, (1958) S.C.R. 133 [58 DTC 1022], per Abbott J. at pages 137‑8,
where he applied the principle that was enunciated by Viscount Cave in British
Insulated and Helsby Cables, Ltd. v. Atherton, supra, and that had been
applied by Kerwin J., as he then was, in Montreal Light, Heat & Power
Consolidated v. Minister of National Revenue, (1942) S.C.R. 89 at 105 [2 DTC
535 at 537].
_______________________
*
A distribution on winding up or on reduction of capital would presumably be an
outlay “of capital” but not a payment “on account of capital”. It may be that
all outlays “of capital” are adequately covered by section 12(1)(a) and
need not have been covered by section 12(1)(b).
[20] Jackett P.’s judgment in Algoma Central Railway was
upheld by the Supreme Court of Canada, [1968] S.C.R. 447. The Supreme Court of
Canada quoted the Privy Council in B.P. Australia Ltd. v. Comr. of Taxation
of the Commonwealth of Australia, [1966] A.C. 224 at 264. In that decision
Lord Reid said:
. . . Nor on the other hand can any
useful comparison be made with British Insulated and Helsby Cables v.
Atherton. There a company’s contribution of over £30,000 to form the
nucleus of a fund and provide the amount then necessary to provide pensions for
its staff was held to be a capital payment on the ground that:
“when an expenditure is made, not only
once and for all but with a view to bringing into existence an asset or
advantage for the enduring benefit of a trade . . . there is very good reason
(in the absence of special circumstances leading to an opposite conclusion) for
treating such an expenditure as properly attributable not to revenue but to
capital.”
Those words are useful as an
expression of general principle on prima facie indications, but the benefit in
the particular case was the foundation of a fund that would endure for the
whole life of the company and provides no analogy to the present case.
The solution to the problem is
not to be found by any rigid test or description. It has to be derived from
many aspects of the whole set of circumstances some of which may point in one
direction, some in the other. One consideration may point so clearly that it
dominates other and vaguer indications in the contrary direction. It is a
commonsense appreciation of all the guiding features which must provide the
ultimate answer. Although the categories of capital and income expenditure are
distinct and easily ascertainable in obvious cases that lie far from the
boundary, the line of distinction is often hard to draw in border line cases;
and conflicting considerations may produce a situation where the answer turns
on questions of emphasis and degree. That answer:
“depends on what the expenditure is
calculated to effect from a practical and business point of view rather than upon
the juristic classification of the legal rights, if any, secured employed or
exhausted in the process”:
per Dixon J. in
Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation. As each new
case comes to be argued felicitous phrases from earlier judgments are used in
argument by one side and the other. But those phrases are not the deciding
factor, nor are they of unlimited application. They merely crystallise
particular factors which may incline the scale in a particular case after a
balance of all the considerations has been taken.
[21] “Felicitous
phrases”, to use Lord Reid’s expression, can be found in the cases to support
either conclusion that an expenditure is revenue or capital but they are
essentially descriptive, not defining. The ultimate answer, as Lord Reid said,
depends upon a common sense appreciation of all of the guiding factors. This
statement, which was adopted by the Supreme Court of Canada in Algoma
Central Railway, supra, has a fine authoritative ring to it, but so
far as providing any guidance in determining questions of this sort it is of
little assistance.
[22] I start from the premise that in the ordinary course a
payment made by an employer to an employee for the surrender of his or her
option under a stock option plan to acquire shares of the company is a
deductible expense to the company. This conclusion is not based on any specific
provision of the Income Tax Act. It is simply part of employee
compensation and is therefore a cost of doing business under section 9.
[23] Why then does a payment to employees who are option
holders become a capital expense just because it is made in the course of a
corporate reorganization of the parent company? The short answer is that it
does not. The business of SDM continued throughout the reorganization of the
Imasco corporate structure. SDM, as a separate corporate entity, was not being
reorganized. It had payrolls to meet and expenses to pay. It may possibly be
that the reason for accelerating the vesting of the stock options was to enable
as many employees as possible either to exercise their options or surrender
them so that BAT could achieve its goal of obtaining all outstanding shares of
Imasco. This does not turn the payment of what is patently a revenue expense
into a capital expense.
[24] On assessing the Minister relied upon a decision of the
Federal Court of Appeal in The Queen v. Kaiser Petroleum Ltd., 90 DTC
6603. In that case, Desjardins J.A. of the Federal Court of Appeal stated
that the sole question for determination was whether a payment made by the
respondent in order to extinguish a stock option plan held in favour of certain
of its officers and key employees, constituted a deductible expense or an
outlay on account of capital. The facts upon which the Federal Court of Appeal
based its decision to reverse Joyal J. are set out in the judgment. In
summary, they are these: the taxpayer, Kaiser Petroleum Canada Ltd., formerly
known as Ashland Oil Canada Limited (“Ashland Canada”) was controlled by
Ashland Oil Inc. (“Ashland US”). Ashland US entered into an agreement to sell its shares of Ashland Canada to Kaiser Resources Ltd. (“Kaiser
Resources”). Ashland Canada had an employees stock option plan. Clause 4.2 of the
agreement between Ashland US and Kaiser Resources provided
as follows:
4.2 Employee Stock Options. Prior to the Close Date,
AOCL shall (i) make an offer to each of its employees who holds an employee
stock option of AOCL to obtain the cancellation of such option upon the payment
by AOCL to such employee of an amount per share covered by such option equal to
the difference between the exercise price per share under such option and Cdn.
$33.50 per share and (ii) upon the request of any such employee, to the extent
such employee's option may not be exercisable by its terms, amend such terms so
that the option shall become immediately exercisable.
[25] This was done: the plan was amended, the offer was made
to the option holders, who accepted it, the plan was cancelled and the payment
of $2,722,317 was made to the option holders. Joyal J. held the payment
was on revenue account. Desjardins J.A., with whom Marceau and Linden
JJ.A. agreed, held it was on capital account. She quoted from Algoma Central
Railway and B.P. Australia Ltd., to which reference was made above.
It is important that I set out in full her reasoning:
Undoubtedly, the reasons for
establishing the Stock Option Plan was to motivate key employees and to better
the respondent's business. Had the respondent pursued the compensation plan,
shares would have been issued in due course in return of the employees' payment
as agreed under the individual option agreements. Such monies would then have
been added to the company's working capital.
This course was not followed. In view of
the uncertainty of a change of management and the desire to have key employees
realize their gain immediately and develop interest in the new company,
amendments were made to the plan following the undertaking under the sale
agreement, so as to accelerate the process and make the options exercisable
immediately. Monies were offered which represented the difference between the
exercised price per share under the option and Cdn. $33.50 per share.
Following the sale offer at Cdn. $33.50
per share, the potential shares of Ashland Canada in the Stock Option Plan had, in all
probability, acquired the same market value. This increase would have reflected
itself in the hands of the potential owners of the shares of the Stock Option
Plan through a share acquisition, had the plan properly unfolded. Monies,
reflecting the increase in value of the shares, were offered instead of shares.
The respondent, in buying out rights under the plan, parted with an asset (the
purchase price) and effected a sterilization of future issues of shares. The
disbursement made was a once and for all payment which had a direct effect on
the capital structure of the corporation. In fact, the Stock Option Plan was
later cancelled. Although the plan originated as a form of compensation and
immediate compensation was one reason for its termination, and although the
arrangement may appear to have been 'seeming novations of the original deal',
as characterized by the trial judge (probably since the compensation was in
money terms instead of shares), it does not follow that the payment, from the
point of view of the respondent, had the character of an operating expenditure.
What is important is not the purpose pursued by the respondent but what it did
and how it did it.
Although I come to the same conclusion
as the one reached in the case of Canada Forgings Ltd. v. The Queen,
[1983] C.T.C. 94, 83 DTC 5110 (F.C.T.D.). I note two differences of facts
which were pressed upon us by the respondent and which do not make this case
applicable. There, the taxpayer corporation, Canada Forgings Limited, had
entered into contracts with its president and vice-president granting to each
an option to purchase 25,000 common shares at a price of $4 per share. The
offer was to expire in 1980. In 1975, another company, Toromont Industries
Limited, offered to buy and eventually bought 85% of all the outstanding shares
of Canada Forgings Limited at $17 per share. In November 1979, the president
and vice-president of Canada Forgings Limited entered into an agreement with
Canada Forgings Limited whereby they relinquished all their rights to purchase
shares pursuant to the option plan. The taxpayer company paid to each in return
the sum of $325,000, an amount arrived at by subtracting $4 from the $17, the
difference being $13, multiplied by 25,000 shares. Canada Forgings Limited
treated the amount as a current business expense in its 1976 taxation year
since it considered it as a benefit or compensation paid to key employees. The
deduction was disallowed. It was clear from the evidence at trial that Toromont
Industries Limited desired to obtain all the shares in the taxpayer corporation
so that there would be no minority group of shareholders therein. It had made
separate agreements with the president and vice-president of Canada Forgings
Limited who undertook not to exercise their options. They further agreed to
give Toromont the right to purchase the optioned shares at $17 per share should
Canada Forgings Limited refuse the agreement for payment of the $325,000 to
each officer. The Court concluded that the contractual provisions contained in
the documents established an intention to ensure the acquisition by Toromont of
such optioned shares rather than a bonus to employees. The expenditure was
determined to be attributable to capital and not to revenue.
In the case at bar, there is no evidence
that the undertaking of July 11, 1978 was conditional to the sale agreement so
as to ensure a share acquisition by Kaiser Resources Limited. There is,
however, evidence that compensation was one element pursued when the termination
of the Stock Option Plan took place. Nevertheless, the compensation was made by
means of a reshaping of the capital structure of the respondent's organization.
This feature, in my view, dominates the whole set of circumstances revealed by
the evidence and constitutes the guiding element under the test set in the B.P.
Australia Ltd. case cited above.
The payment was therefore properly
treated as an “outlay . . .of capital” under paragraph 18(1)(b) of the
Act.
[26] It is of some interest to note that the Canada
Revenue Agency (“CRA”) in its
administrative practice stated in effect that Kaiser should be confined
to its own facts. In Technical Interpretation 2000‑0048355 the CRA, after
quoting at some length from the Federal Court of Appeal judgment in Kaiser
stated:
In our view, the result in Kaiser follows from the
facts in that particular case and is not inconsistent with our position that
the payment by an employer of cash rather than shares pursuant to the terms of
a stock option plan, in the absence of evidence to the contrary (e.g. the fact
situation in Kaiser), will be a deductible expense to the employer.
[27] The administrative practice of the CRA is of course not
determinative but it may in some circumstances be of interest.
[28] In Kaiser Desjardins J.A. based her
conclusion on the factual finding made by her that:
. . . The disbursement made was a once and for all payment
which had a direct effect on the capital structure of the corporation. . . .
[29] Here, the rearrangement of the Imasco corporate structure
did not impinge in any way on the corporate structure of SDM.
Desjardins J.A. appears to have felt that the cancellation of the stock
option plan of the appellant, Kaiser Petroleum Ltd., was an advantage for the
lasting benefit of the appellant. I do not see how a payment by SDM to Imasco
to reimburse it for payments made to employees of SDM created or achieved anything
of lasting benefit to SDM. The business of SDM went on as usual.
[30] The payment was made to reimburse Imasco for payments
it made to SDM’s employees but the practical effect was identical to that which
would have prevailed if SDM had made the payments directly to its employees. It
was the options issued by Imasco to acquire Imasco shares that were affected by
the offer to pay for the surrender of the options. The option holders could
exercise the options, surrender them for cash or do nothing.
[31] Counsel for the appellant in his written and oral
argument drew a number of other distinctions between this case and Kaiser.
He emphasized two however. The first was that in Kaiser the payment was
made to terminate the stock option plan and here it was not. The second is that
in Kaiser the genesis of the payment was the takeover agreement and here
it was in the stock option plan itself. Whatever may be the merits of this
second distinction it is sufficient to add that here, no lasting benefit of a
capital nature was achieved by the payment. The fact that a subsidiary reimburses
its parent for compensation paid to the subsidiary’s employees does not turn the
payment into a capital expenditure just because the parent company is in the
midst of a corporate reorganization.
[32] In the course of her argument, I asked counsel for the
respondent whether, assuming I accepted the factual basis of the Crown’s case
that the change to the stock option plan as well as the payments to the
employees for the surrender of their options were the result of the overtures
made by BAT to acquire the shares of Imasco, this turned the payments to the
employees through Imasco into capital payments. I do not think that the Crown
could possibly answer that the payments of compensation were transformed into
capital payments because they were made in the context of a takeover and
reorganization of the shares of SDM’s parent. Desjardins J.A. said in Kaiser
that what was achieved by the extinguishment of the stock option plan was a
benefit of an enduring nature to Kaiser. On the evidence before me I cannot
make the same finding of fact that paying for the surrender of the Imasco options
achieved a benefit of a lasting nature to SDM.
[33] I close these reasons by repeating what Desjardins J.A.
said at the termination of her reasons:
In the case at bar, there is no evidence that the
undertaking of July 11, 1978 was conditional to the sale agreement so as to
ensure a share acquisition by Kaiser Resources Limited. There is, however,
evidence that compensation was one element pursued when the termination of the
Stock Option Plan took place. Nevertheless, the compensation was made by
means of a reshaping of the capital structure of the respondent’s organization.
This feature, in my view, dominates the whole set of circumstances revealed by
the evidence and constitutes the guiding element under the test set in the B.P.
Australia Ltd. case cited above.
[Emphasis added.]
The feature which she set out, if I understand it
correctly, evidently dominated all other considerations. No such dominant
feature pointing in the direction of a capital expenditure exists in this case.
[34] The appeal is allowed with costs and the assessment is
referred back to the Minister of National Revenue for reconsideration and
reassessment on the basis that the amounts paid to Imasco to reimburse it for
the Cash Surrender Chargeback and the Make‑up Chargeback are payments on
revenue account and are deductible in computing the appellant’s income.
Signed at Ottawa, Canada, this 14th day of November 2007.
“D.G.H. Bowman”
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