Greiner v. The Queen, 81 DTC 5371, [1981] CTC 477 (FCTD), aff'd 84 DTC 6073, [1984] CTC 92 (FCA)

Addy, J:—These two cases were, on consent, ordered to be tried together on common evidence. They are in effect appeals by both individual taxpayers against reassessments made against them for income tax purposes by the Minister of National Revenue for the 1977 taxation year.

Both were employees of MEPC Canadian Properties Ltd (hereinafter referred to as “MEPC Canada” in managerial capacities. The company was engaged in the real estate business. Approximately 65% of its stock was owned by a British corporation which in turn was a wholly-owned subsidiary of MEPC Ltd of London, England (hereinafter called “MEPC UK”).

Following the enactment of the Foreign Investment Review Act in 1974 and the enactment by certain provinces of legislation restricting land speculation and investment by foreign corporations, the activities of MEPC Canada which was controlled by MEPC UK were greatly curtailed and the latter company became interested in divesting itself of its MEPC Canada shares.

A Canadian corporation known as Morguard Properties Ltd (hereinafter called “Morguard”), which managed real properties for several pension plans, approached MEPC UK with a view to having the shares of MEPC Canada acquired by the pension plans. In order for pension plan groups or corporations to benefit from the income tax exemptions granted to them, no members of the group were allowed to engage in any active business. In addition, one hundred per cent of the stock of any participating corporation had to be owned by the pension plans and no decision could be made by any such corporation without the consent of the trustees of the plan. It was therefore an absolute requirement for the purchase of the pension plans scheme that all of MEPC Canada stock be acquired. It was also agreed as part of the acquisition scheme that MEPC Canada would amalgamate with a pension plan member corporation known as Pension Fund Properties Ltd (hereinafter called “PPL”).

MEPC Canada had, in 1975, granted to about twelve of its senior managerial employees, including the two plaintiffs, stock purchase options of five years’ duration which terminated in 1980. These options replaced previous options granted before 1975. The 1975 options provided for the right of the employees to purchase at the end of each year, at a price of $7.20 per share, one-fifth of the shares covered by the option. All such rights were cumulative in that they could, if not exercised at the end of any year, be exercised during the year following or at any later time before the expiry date of the options in 1980.

The amalgamation actually took place and, immediately previously, both plaintiffs surrendered their stock options to MEPC. This surrender was done pursuant to a new arrangement between themselves and the company under which they undertook immediately to either surrender to the company their rights in their options or have all the shares issued to them at option price and paying for same, and then selling them to the pension plan in return for the acceleration of their rights to exercise their options and to a further right to either receive immediately from the plan the difference between the market value of the shares and the option price should they decide to surrender their options, or the full market price of the shares, should they elect to have the shares issued.

The plaintiff Greiner had acquired an option to purchase 15,000 shares in 1975 and was holding this amount at the time of amalgamation. The plaintiff Stephens had acquired an option for 10,000 shares and was still holding it. Both options provided for a purchase price of $7.20 per share. On the surrender of their options the plaintiff Greiner realized the profit of $96,000 and the plaintiff Stephens a profit of $64,000 representing in each case the difference between the option price of $7.20 and the market value of each share, on surrender, of $13.60.

The first issue before the Court relates to these two amounts of $96,000 and $64,000. The plaintiffs claim that the amounts were received on the surrender of their stock options and were tax-free capital receipts, while the defendant maintains that the amounts are, in effect, income from an office or employment under subsection 5(1) or a benefit by virtue of an office or employment under paragraph 6(1 )(a) or, in the alternative, a capital gain within the meaning of section 38.

The following provisions of the Income Tax Act are relevant to the issues before me: subsection 5(1); paragraph 6(1 )(a); paragraphs 6(3)(a), (c), (d) and (e); paragraph 7(1 )(a) and (b); paragraph 7(3)(a); and, finally subsection 38(a). They are reproduced hereunder:

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:

VALUE OF BENEFITS

(a) the value of board, lodging and other benefits of any kind whatever (except the benefit he derives from his employer’s contributions to or under a registered pension fund or plan, group sickness or accident insurance plan, private health services plan, supplementary unemployment benefit plan, deferred profit sharing plan or group term life insurance policy) received or enjoyed by him in the year in respect of, in the course of, or by virtue of an office or employment;

(3) An amount received by one person from another

(a) during a period while the payee was an officer of, or in the employment of, the payer, or

shall be deemed, for the purposes of section 5, to be remuneration for the payee’s services rendered as an officer or during the period of employment, unless it is established that, irrespective of when the agreement, if any, under which the amount was received was made or the form or legal effect thereof, it cannot reasonably be regarded as having been received

(c) as consideration or partial consideration for accepting the office or entering into the contract of employment,

(d) as remuneration or partial remuneration for services as an officer or under the contract of employment, or

(e) in consideration or partial consideration for a covenant with reference to what the officer or employee is, or is not, to do before or after the termination of the employment.

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

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

38. For the purposes of this Act,

(a) a taxpayer’s taxable capital gain for a taxation year from the disposition of any property is /2 of his capital gain for the year from the disposition of that property; and

The plaintiff claims that the taxpayers are exempt because, pursuant to paragraph 7(3)(a), no benefit can be deemed to have been received or enjoyed under or by virtue of the agreement to sell or issue shares except as provided for in section 7 and because under that section the surrender of an option is not specified as one of the cases where benefits would be deemed to arise.

The plaintiff relied mainly on Patrick M. Reynolds et al v Her Majesty The Queen, [1975] CTC 85; 75 DTC 5042. This case is clearly distinguishable on the facts from the case at Bar. My brother Gibson, J found that the benefit obtained and which the Minister attempted to tax was not consideration for a disposal of shares or of share options but value in the form of shares taken in settlement of a right to damages for breach of contract.

This decision was upheld on appeal to the Federal Court of Appeal sub nomen Her Majesty The Queen v Hagerman Huestis, [1975] CTC 560; 75 DTC 5393. The trial judge had held that there was an actual breach of contract and the Court of Appeal, in upholding his finding, found that, under the circumstances, it was unnecessary for that tribunal to decide whether or not there had been an anticipatory breach. The case was taken to the Supreme Court of Canada and the appeal was dismissed orally from the bench without reasons. At trial, Gibson, J stated at page 87 [5044] of the above-mentioned report:

In these cases there was a cancellation of the rights of the appellants under their respective option agreements to acquire shares in Bethex by reason of the winding up resolution of Bethex on the 23rd of January 1969. Such constituted a discharge of the option contracts.

What each of the appellants had left after this breach of the option contracts by Bethex was a new cause of action for such breaches.

The appellants were each entitled to the common law remedy of damages for such breach. None of them pursued such remedy. Instead their new causes of action for the breaches of the option contracts were discharged between the appellants and Bethex by the agreements on the 7th of February 1969 whereby the appellants were to receive and accept the said shares in Bethlehem. These agreements were executed. Each appellant subsequently received the said shares of Bethlehem.

On reading paragraph 7(1 )(b) one finds the following:

. . . if the employee has transferred or otherwise disposed of rights ... a benefit. . . shall be deemed to have been received . . .

Neither the Income Tax Act nor the Interpretation Act contain any definition of the expression “to dispose of” or of the word “disposition.” We find among the dictionary meanings of the expression “to dispose of” the following definitions:

1. Jowitt Dictionary of English law: Disposition comprehends every mode by which property can pass.

2. Oxford Illustrated Dictionary: To get off one’s hands.

3. The Concise English Dictionary: To part with, to alienate, to put in another’s hand or power; to get rid of.

4. The Living Webster Encyclopedic Dictionary: To part with; to alienate, to put into another’s hand or power; to get rid of.

5. Funk and Wagnell’s Standard Dictionary : To settle, to make over, to alienate.

It seems very clear to me that the words “otherwise disposed of,” on the basis of the common ordinary meaning attributed to that expression, must be taken to include the surrender of the share options for value. However, what is really important is that the same conclusion becomes even more evident when the expression is considered in the context of paragraph 7(1 )(b). The expression “to dispose of rights” necessarily means, at the very least, to divest oneself completely of those rights. When that expression “otherwise disposed of” is used as an alternative to “transferred” as it is in paragraph 7(1 )(b), it is difficult to conceive (since the share options have not been exercised) how share option rights, which are not transferred, can possibly be disposed of in a manner other than by surrender, if one is to obtain any pecuniary benefit from a complete divesting of ownership in the options. The expression “or otherwise disposed of rights” in paragraph 7(1 )(b) must be taken to include the surrender of those rights.

I therefore find that the amounts of $96,000 and $64,000 respectively, which represent the difference between the purchase price in the options and the amount realized on the surrendering of same, are taxable as benefits pursuant to section 7 of the Act.

The second issue before the Court only concerns the plaintiff Greiner. The latter received, at the time of termination of his employment and re-en- gagement by Morguard, the sum of $200,000. He claims that this constitutes either a tax-free capital receipt or, in the alternative, a capital gain resulting from the disposition of his contractual rights under an employment contract, in which event only one half of the amount would be taxable. The defendant argues that the payment of $200,000 took place while the taxpayer was an officer in the employment of MEPC within the meaning of paragraph 6(3)(a) of the Income Tax Act or as part and parcel of a bargain for his engagement by Morguard under the provisions of paragraph 6(3)(b) and the receipt therefore constituted in either case income for an office or employment within the meaning of subsection 5(1) of the Income Tax Act. Paragraph 6(3)(a) and subsection 5(1) have already been quoted. Paragraph 6(3)(b) reads as follows (re amounts to be included in income):

(3) An amount received by one person from another

(b) on account or in lieu of payment of, or in satisfaction of, an obligation arising out of an agreement made by the payer with the payee immediately

prior to, during or immediately after a period that the payee was an officer of, or in the employment of, the payer,

The plaintiff Greiner was the President as well as a director of MEPC Canada and, as such, had attended meetings of that company as well as one of the meetings of the parent company in the UK which led up to the transfer and amalgamation. He was also a director of MEPC Ltd of London and on MEPC America and MEPC Hawaii for which he received directors fees. He was also a director of several other MEPC subsidiaries for which he did not receive any fees.

His employment as President of MEPC Canada, which was in fact his regular employment, was made pursuant to a five-year employment contract dating from December 31, 1975 at an annual remuneration of $55,000, subject to annual review. He took part in a number of meetings, discussions and negotiations with one Walter Badun, the Chairman of Morguard, and others and also furnished them with financial and other information concerning the operations of MEPC Canada.

During the negotiations the plaintiff Greiner advised Mr Badun that he expected his employment contracts to be paid out in full if the deal was consummated. Mr Badun replied that the obligation was recognized and that the plaintiff would be dealt with fairly. Although the plaintiff Greiner had no experience in pension funds it was proposed that he be hired by Morguard should the deal be consummated, in view of his executive ability and experience and his intimate knowledge of the affairs and the assets of MEPC Canada.

On August 11, 1977, due to the imminent closing of the deal between Morguard and MEPC Canada, Greiner met with Badun and the two of them reached an agreement as to the compensation to be paid the taxpayer, as an employee of Morguard, and also as to the amount of $200,000 which was to be paid to him outright. The agreement reached at that time was later confirmed by a letter from Badun as Chairman of Morguard to the plaintiff Greiner. That letter reads as follows:

I would like to confirm our conversation of August 11, 1977 for your employment with us subject to the completion by ourselves and Pensionfund Properties Limited of the purchase of MEPC Canadian Properties Limited on the following terms and conditions.

1. Your present contract with MEPC Canadian Properties Limited will be cancelled on the day that the first preference shares are called;

2. On this day you will receive a one time payment of $200,000:

3. On or before this date, you will pay back in total the outstanding balance on your personal house loan;

4. On this day, you will purchase your personal car at book cost;

5. Your salary and benefit package for a one year term starting on the day that

the first preference shares are called will be on the basis of $75,000 per year;

6. You agree to stay with us a minimum of one year unless we agree otherwise. If we do agree that you leave before the one year is up then the minimum total monthly pay which is part of your annual pay shall add up to $43,750:

7. If at the end of the initial 12 month period, we agree that you will continue

employment, we will set a level of remuneration accordingly at that time;

8. If at the end of the 12 month period, you wish to leave, we will not have any

further obligations as far as termination pay other than that noted above.

The job that you will have with us is that of President of Morguard Properties Limited and will carry the additional title of Chief Operating Officer. In the initial instance, this will mean you will be completely responsible for all the operating of all the surviving MEPC Canadian Properties Limited operations as well as gradually integrate into them our present Morguard Properties Limited holdings.

I believe the above outlines in general the discussion that we had. If you wish this expanded into more detail or legalized, please give mea call and we will discuss it.

The amalgamation agreement was actually executed on August 26, 1977 and the amalgamation was completed on September 30, 1977.

The cheque in payment of the $200,000 was issued by Morguard and the plaintiff Greiner commenced his employment as President of Morguard and as its chief operating officer.

There was evidence that the payment of $200,000 was not contingent upon Greiner becoming an employee of Morguard. I find, however, from the reading of Exhibit 39 and from the other evidence adduced, that the payment was part and parcel of the entire agreement between the plaintiff Greiner and Morguard. The latter agreed to pay the former but in the facts it is admitted by the defendant that the $200,000 was actually paid by MEPC Canada. Thus, the cheque given by Morguard was probably from moneys Supplied to it by the MEPC Canada.

Greiner stated that he calculated the $200,000 by considering his annual salary of $55,000 plus the director’s fees which he could expect to receive from MEPC Canada and the other companies and the fringe benefits for his employment, the total of which he estimated to be worth $75,000 per year. As there remained some 39 months in his employment contract as Presi

There was also evidence tendered on behalf of the plaintiff Greiner that the $200,000 or, rather, the total amount of $243,750 should he and Mor- guard mutually agree to terminate his employment with Morguard within a few months, was agreed to be paid because that was the estimated amount which he would be entitled to receive at law as damages had his engagement with MEPC Canada simply been terminated without his consent. I cannot accept that evidence nor can I regard, as I was invited to do, the total amount of payment as representing compensation in lieu of damages.

In the first place, the plaintiff Greiner would have had no recourse for the loss of his compensation as a director of MEPC Canada and of the other MEPC companies; neither the position of director nor director’s fees were provided for in the contract and, in any event, a corporation cannot at law undertake to engage a person as a director since that position is elective and always remains in the hands and control of the shareholders and not of the company itself. In the second place, no fringe benefits were provided for in the contract but merely the reimbursement of bona fide expenses. The contract only provides for payment of a salary of $55,000 per year. If this amount were paid in full in advance for the remainder of the term of 39 months, the total amount payable would be approximately $178,600. Finally, the taxpayer was being offered as part and parcel of the settlement, a new one year contract with Morguard for $75,000 per annum. Under such circumstances, damages even in the amount of $100,000, had the contract in fact been broken or were there a threatened breach, would, in my view, be considered very high if not excessive.

Although the $200,000 by arrangement between Morguard, the Pension Fund Corporation and MEPC Canada might well have been ultimately borne by the latter this was but part and parcel of the whole deal covering the purchase of shares, the amalgamation and the supplying of services by Greiner as an active administrator. The engagement of Greiner, as an officer of Morguard, the obtaining of his consent to surrender of the stock options (without which the transactions could not take place), the securing of his cooperation and his intimate knowledge as chief executive officer of MEPC Canada, of the assets and operations of that corporation would ensure an orderly transition and his engagement for that reason as chief executive officer of Morguard were all linked together and, in my view, were not severable.

The penultimate paragraph of Exhibit 39, reproduced, supra, clearly indicates that in the initial instance, in addition to other duties with Morguard, he would remain completely responsible for all of the continuing MEPC operations. I do not accept the suggestion that the plaintiff Greiner was obliged or forced to surrender his stock options and accept the terms offered by MEPC Canada regarding the options. There was absolutely no legal obligation on him to do so. It is obvious, of course, that, had he failed to do so, the amalgamation could not have taken place. In addition the value of the shares, which had raised considerably on the market when the proposed amalgamation became known, would have fallen again and what was, without a doubt, an extremely lucrative arrangement for the taxpayer would not have been realized.

I find that the payment of the $200,000 was intimately and essentially linked with his engagement contract with Morguard as its president and chief operating officer.

This finding is borne out by the opening paragraph of the employment contract with Morguard (Exhibit 39) which I quote again:

I would like to confirm our conversation of August 11, 1977 for your employment with us subject to the completion by ourselves and Pensionfund Properties Limited of the purchase of MEPC Canadian Properties Limited on the following terms and conditions.

[The Italics are mine.]

We then find in paragraph 2 the payment of $200,000 as the second term or condition. It is also of some relevance that the balance of $43,750 is also referred to in paragraph 6 of Exhibit 39 and is intimately tied with his salary of $75,000 as an employee of Morguard. I find in these circumstances that there obviously never was a breach or even a threatened breach of the plaintiff’s employment contract by MEPC Canada but rather a very friendly and attractive agreement between the plaintiff Greiner and his prospective employer Morguard acting on its own behalf and in the interest of MEPC Canada and the new purchasers.

Counsel for the plaintiffs quoted and relied upon the following cases: Her Majesty The Queen v Robert B Atkins, [1975] CTC 377; 75 DTC 5263; [1976] CTC 497; 76 DTC 6258, this was clearly a question of damages for wrongful dismissal where after threatened litigation the employer paid $18,000 to the employee as damages; Henley v Murray (Inspector of Taxes), [1960] 1 All ER 908; Chibbett (H.M. Inspector of Taxes) v Joseph Robinson and Sons; The Commissioners of Inland Revenue v Joseph Robinson and Sons, 9 TC 48, these last two cases deal with the determination of employment, compensation for loss of office or for the cessation of further annual profits and not with an engagement contract. It is very interesting, however, to note that in the recent case (1980) of Jack Cewe Ltd v Gary William Jorgenson, [1980] CTC 314; 80 DTC 6233, Pigeon, J, in delivering reasons with which the six other members of the Supreme Court of Canada concurred, had this to say about damages in respect of a breach of contract of employment at 315 [6234] of the above-mentioned report:

I have grave doubt as to the validity of this reasoning. Damages payable in respect of the breach of a contract of employment are certainly due only by virtue of this contract. I fail to see how they can be said not to be paid as a benefit under the contract. They clearly have no other source.

My brother Cattanach, J had come to the same conclusion some six years previously in the case of Thomas G Quance v Her Majesty The Queen, [1974] CTC 225; 74 DTC 6210, he states in concluding his reasons at 229 [6213]:

I fail to follow the logic of the contention that an obligation arising out of a contract of employment which is deemed to be income by the Income Tax Act is metamorphosed into a capital receipt because that obligation was the subject of a successful law suit resulting in a judgment for the amount of the obligation involved. In my view the nature and quality of the receipt remains unchanged but the simple and complete answer to his contention on behalf of the plaintiff is that the plaintiff did not sue.

The $200,000 in issue is therefore taxable under the provisions of paragraph 6(3)(b) as a payment arising out of an agreement made by the payor Morguard, with the payee Greiner, immediately prior to a period that the payee became an officer or in the employment of the payee Morguard. Even if the moneys were furnished to Morguard by MEPC Canada the former was still the payor under the employment contract. Conversely, even if the arguments were accepted that the entire $200,000 was compensation paid by MEPC Canada for the remainder of the employment contract and did not arise out of the agreement with Morguard, the payment would still be tax- able under paragraph 6(3)(a) as an amount received from MEPC Canada during the period when the payee was both an officer of and in the employment of the payor MEPC Canada. The three cases relied upon by the plaintiff, if there are still good law (having regard to the Supreme Court of Canada decision in the Jack Cewe Ltd v G W Jorgenson, supra), would not be applicable, as the amount represents much more than the amount of damages that he could ever expect to receive at law and is in essence not a settlement of a right of damages but rather the result of a mutually satisfactory agreement arrived at between several parties.

For the above reasons, the two actions will be dismissed with costs.