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Citation: 2003TCC261
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Date:20030414
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Docket: 2002-4570(IT)I
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BETWEEN:
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DRAGOSLAV (DANNY) TRICKOVIC,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Lamarre, J.T.C.C.
[1] The appeal from an assessment made
by the Minister of National Revenue ("Minister") for
the appellant's 2000 taxation year is dismissed.
[2] In filing his income tax return
for that year, the appellant included in his income an employment
benefit of $19,679 resulting from the exercise of options to buy
shares in his employer. The appellant subsequently asked the
Minister not to include the said amount in his income for 2000
because he had not yet disposed of the shares he received on
exercising his options in that year. In reassessing the appellant
on November 12, 2002, the Minister, relying on paragraph
110(1)(d) of the Income Tax Act
("Act"), mistakenly allowed the appellant a
deduction in the amount of $5,906. However, the Minister refused
to defer to a later year, pursuant to subsection 7(8) of the
Act, the inclusion in income of the employment benefit in
the amount of $13,773 ($19,679 less $5,906).
[3] Section 7 of the Act
governs the taxation of employee stock options. The general rule
under paragraph 7(1)(a) provides that where a particular
qualifying person (the employer) has agreed to sell or issue its
securities (within the meaning of subsection 7(7) of the
Act) to an employee, the employee is taxed in the year in
which the employee exercises the option and acquires the
securities. In the year of acquisition, the employee is deemed to
have received a benefit from employment equal to the amount by
which the value of the securities at the time of the acquisition
exceeds the amount paid by the employee to acquire them (the
option price) and the amount, if any, paid to acquire the option.
The amount of the deemed employment benefit is added to the
adjusted cost base of the securities, when they are acquired (see
Canadian Tax Reporter, CCH Canadian Ltd, volume 1,
paragraph 2732 o), through the application of paragraph
53(1)(j) of the Act.
[4] The relevant part of paragraph
7(1)(a) of the Act reads as follows:
SECTION 7: Agreement to issue securities to
employees.
(1) Subject to subsections (1.1) and (8), where a particular
qualifying person has agreed to sell or issue securities of the
particular qualifying person (or of a qualifying person with
which it does not deal at arm's length) to an employee of the
particular qualifying person (or of a qualifying person with
which the particular qualifying person does not deal at arm's
length),
(a) if the employee has acquired securities under the
agreement, a benefit equal to the amount, if any, by which
(i) the value of the securities at the time the employee
acquired them
exceeds the total of
(ii) the amount paid or to be paid to the particular
qualifying person by the employee for the securities, and
(iii) the amount, if any, paid by the employee to acquire the
right to acquire the securities
is deemed to have been received, in the taxation year in which
the employee acquired the securities, by the employee because of
the employee's employment.
[5] A security is defined in
subsection 7(7) as follows:
47(7)3
(7) Definitions. The definitions in this subsection apply in
this section and in subsection 47(3), paragraphs 53(1)(j),
110(1)(d) and (d.01) and subsections 110(1.5),
(1.6) and (2.1).
"security" - "security" of a
qualifying person means
(a) if the person is a corporation, a share of the
capital stock of the corporation; and
(b) if the person is a mutual fund trust, a unit of the
trust.
[6] There are two exceptions whereby
the recognition of the deemed benefit is deferred until the
employee disposes of the securities that were acquired under the
option. The first exception applies when the taxpayer has
acquired shares from a Canadian-controlled private corporation
("CCPC") pursuant to subsection 7(1.1) of the
Act, which is not the case here. The second, announced in
the 2000 federal budget, applies where a particular corporation
agrees to sell or issue to an employee its publicly listed
shares. The deferral in this latter case only applies if the
conditions in subsection 7(8) are satisfied.
[7] Subsection 7(8) reads as
follows:
47(8)3
(8) Deferral in respect of non-CCPC employee options. Where a
particular qualifying person (other than a Canadian-controlled
private corporation) has agreed to sell or issue securities of
the particular qualifying person (or of a qualifying person with
which it does not deal at arm's length) to a taxpayer who is
an employee of the particular qualifying person (or of a
qualifying person with which the particular qualifying person
does not deal at arm's length), in applying paragraph
(1)(a) in respect of the taxpayer's acquisition of a
security under the agreement, the reference in that paragraph to
"the taxation year in which the employee acquired the
securities" shall be read as a reference to "the
taxation year in which the employee disposed of or exchanged the
securities" if
(a) the acquisition is a qualifying acquisition;
and
(b) the taxpayer elects, in accordance with subsection
(10), to have this subsection apply in respect of the
acquisition.
[8] A qualifying acquisition is
defined in subsection 7(9), of which the relevant part reads as
follows:
47(9)3
(9) Meaning of "qualifying acquisition". For the
purpose of subsection (8), a taxpayer's acquisition of a
security under an agreement made by a particular qualifying
person is a qualifying acquisition if
(a) the acquisition occurs after February 27, 2000;
(b) the taxpayer would, if this Act were read without
reference to subsection (8), be entitled to deduct an amount
under paragraph 110(1)(d) in respect of the acquisition in
computing income for the taxation year in which the security is
acquired;
History: S. 7(9) was added by S.C. 2001, c. 17, s.
2(9), applicable to the 2000 and subsequent taxation years.
[9] A taxpayer is entitled to a
deduction under paragraph 110(1)(d) if certain conditions
are met. The relevant part of paragraph 110(1)(d) reads as
follows:
SECTON 110: Deductions permitted.
(1) For the purpose of computing the taxable income of a
taxpayer for a taxation year, there may be deducted such of the
following amounts as are applicable:
4110(1)(d)3
(d) Employee options - an amount equal to 1/2 of the
amount of the benefit deemed by subsection 7(1) to have been
received by the taxpayer in the year in respect of a security
that a particular qualifying person has agreed after February 15,
1984 to sell or issue under an agreement, or in respect of the
transfer or other disposition of rights under the agreement,
if
. . .
(ii) where rights under the agreement were not acquired by the
taxpayer as a result of a disposition of rights to which
subsection 7(1.4) applied,
(A) the amount payable by the taxpayer to acquire the security
under the agreement is not less than the amount by which
(I) the fair market value of the security at the time the
agreement was made
exceeds
(II) the amount, if any, paid by the taxpayer to acquire the
right to acquire the security,
History: S. 110(1)(d), the portion before
subparagraph (i) was amended by S.C. 2001, c. 17, s. 84(1),
applicable to the 2000 and subsequent taxation years except that,
for the 2000 taxation year, the reference to the fraction
"1/2" in the portion of paragraph 110(1)(d) of
the Act before subparagraph 110(1)(d)(i) shall be read as
a reference to the fraction "1/4", if the transaction,
event or circumstance as a result of which a benefit is deemed by
subsection 7(1) of the Act to have been received by a taxpayer
occurred before February 28, 2000, and the fraction 1/3, if the
transaction, event or circumstance as a result of which a benefit
is deemed by subsection 7(1), to have been received by a taxpayer
occurred after February 27, 2000 and before October 18, 2000.
[10] Thus, if the option relates to the
acquisition of shares of a corporation that are listed on a
prescribed stock exchange, i.e. of a corporation that is not a
CCPC (as is the case here), the deferral of the deemed benefit
will be possible only if the acquisition occurred after February
27, 2000 and if the taxpayer would (if the Act were read
without reference to subsection 7(8)) be entitled to deduct an
amount under paragraph 110(1)(d) of the Act in
respect of that acquisition in computing the taxpayer's
income for the taxation year in which the securities were
acquired. Such a deduction would be permitted only if, among
other conditions, the amount payable for the securities under the
option (the option price) was not less than the fair market value
of the securities at the time the option was granted. (See
Technical Note accompanying the Notice of Ways and Means Motion -
Migration Rules, Trust Proposals, Resource Expenditures and
Technical Amendments - June 5, 2000.)
[11] Here the facts are not disputed. They
are summarized as follows in paragraph 6 of the Reply to the
Notice of Appeal:
a) During the taxation year 2000, the
Appellant was an employee of JDS Uniphase Inc., Ottawa,
(hereinafter the "employer").
b) Pursuant to the 1999 Canadian Employees
Stock Purchase Plan, the employer provided the Appellant,
with the opportunity to purchase its shares during the September
1, 1999 to August 31, 2001 offering period at 85% of the fair
market value at the granting date.
c) The granting date for the option to
purchase shares was September 1, 1999 and the fair market value
of the shares at this date was $27.53 US per share.
d) The Appellant paid NIL for the right to acquire
the shares.
e) The Appellant exercised his first option
on January 31, 2000 purchasing 68 shares of the employer at an
option price corresponding to 85% of the fair market value at the
granting date or $23.40US per share. The fair market value of the
shares at the exercise date of January 31, 2000 was $101.97US per
share.
f) The Appellant exercised a second option
on July 31, 2000 purchasing 84 shares of the employer at an
option price corresponding to 85% of the fair market value at the
granting date or $23.40US per share. The fair market value of the
shares at the exercise date of July 31, 2000 was $118.13US per
share.
g) The total value of the employment benefit
flowing from the purchase of the shares, $19,679.09 CDN, was
included by the employer in the Appellant's T4 slip, under
box 40 which refers to "other taxable allowances and
benefits".
h) In filing his Income Tax Return for the
2000 taxation year, the Appellant did not claim any deferral or
deduction in relation to the value of the benefit included in his
income.
i) The employer's shares are
traded publicly on the New York Stock Exchange.
j) In filing the T4 slip and including the
benefit in box 40 rather than in box 53, the employer informed
the Minister that no deferral was claimed regarding the inclusion
of the stock option benefit in the Appellant's income.
k) The Minister allowed a deduction in the amount
of $5,906 in computing the taxable income of the appellant for
the taxation year in litigation.
[12] The appellant acquired shares of
a corporation that was not a CCPC for a price that was less than
the fair market value of those securities at the time the option
was granted.
[13] Consequently, the appellant was
not entitled to deduct an amount under paragraph 110(1)(d)
of the Act, and therefore the acquisition of the shares
did not fit within the definition of "qualifying
acquisition" in subsection 7(9) of the Act. It is to
be noted also that some of the shares were acquired before
February 28, 2000 and accordingly, for that reason as well,
did not constitute a qualifying acquisition within the meaning of
paragraph 7(9)(a) of the Act.
[14] The fact that the transaction in
issue was not a qualifying acquisition precluded the appellant
from deferring the inclusion in income of the deemed benefit to
the year of the disposition of the shares. The deemed benefit had
to be included in his income for the year in which he exercised
the option.
[15] That the appellant was granted a
deduction under paragraph 110(1)(d) by mistake does
not change the fact that he was not entitled to such a deduction
and therefore not entitled to defer the inclusion of the deemed
benefit to the year of the disposition of the shares under
subsection 7(8) of the Act.
[16] The appellant argued that this
treatment is unfair because he had to include a benefit in his
income in 2000 although he still owns the shares and their value
has now dropped below the option price. This might be the case
but this alone cannot override the clear wording of the
Act. I would also add that the taxpayer, in acquiring the
shares at the option price, obtained a benefit that another
person would not have got if that other person had bought the
same shares at their fair market value. In fact, that other
person buying the same shares at the same time at a higher price
would inevitably have suffered a greater loss than a taxpayer who
had purchased the shares through an Employee Stock Purchase Plan
at a lower price (even though the benefit received by that
taxpayer is taxable in the year of the acquisition of the shares)
had the value of the shares dropped thereafter. In that sense,
the taxpayer herein definitely received a benefit from his
employer in the year of his acquisition of the shares.
[17] As regards the timing of the
taxation of a benefit derived from the acquisition of shares, the
different treatment provided for, depending on whether they are
shares of a CCPC or publicly listed shares, is something that was
deliberately legislated. As a matter of fact, the following De
Boo Budget Date Comment (in D.M. Sherman, ed., Income Tax Act
Department of Finance Technical Notes, 14th ed. (Toronto:
Thomson Carswell, 2002) on the 1977 Notice of Ways and Means
Motion for the implementation of favourable measures for CCPCs
under paragraph 110(1)(d) of the Act is quite
explicit as to the intention of the legislator:
1977 NWMM: That where an individual is granted an
option to acquire shares of a Canadian-controlled private
corporation, one-half the difference between the eventual sale
proceeds of the shares acquired and the price paid to acquire the
shares be included in his income when the shares are sold
provided that at the time the option was granted the individual
was an employee of the corporation or of a Canadian-controlled
private corporation related to it and that he dealt at arm's
length with the person or persons who controlled the corporation
or corporations, as the case may be.
1977 De Boo Budget Date Comment: This proposal is
intended to put smaller and particularly newer companies which
often do not have the financial resources to match higher
salaries offered by larger enterprises on a more competitive
footing by effecting a change in the treatment of stock options
granted by such companies. At present when a taxpayer exercises a
stock option granted by his employer, the difference between the
fair market value of the shares acquired and the price payable or
paid under the option is deemed received by the employee by
virtue of his employment in the taxation year in which he
acquires the shares.
Pursuant to the proposed amendment, where an
individual is granted an option to acquire shares of a
Canadian-controlled private corporation after March 31, 1977 no
amount will be included in the individual's income at the
time he exercises the option. On an eventual sale, the difference
between the option price paid and the proceeds of disposition in
such sale will be taxed as a capital gain. It should be noted
that the special treatment described above will be limited to
cases where the individual receiving the stock dividend is an
employee of the Canadian-controlled private corporation whose
shares are the subject of the option or a related
Canadian-controlled private corporation and such individual deals
at arm's length with the person or persons who control the
corporation or corporations concerned.
[18] According to The Budget Plan
2000, tabled in the House of Commons on February 28, 2000,
new subsection 7(8) of the Act has extended, with some
modifications and limitations, the deferral currently available
for CCPC options to options granted by corporations that are not
CCPCs. In Annex 7 of The Budget Plan 2000, Tax Measures:
Supplementary Information and Notices of Ways and Means Motions,
the change is explained as follows at
pages 230-31:
To
assist corporations in attracting and retaining high-calibre
workers and make our tax treatment of employee stock options more
competitive with the United States, the budget proposes to allow
employees to defer the income inclusion from exercising employee
stock options for publicly listed shares until the disposition of
the shares, subject to an annual $100,000 limit (see below).
Employees disposing of such shares will be eligible to claim the
stock option deduction in the year the benefit is included in
income. The new rules will also apply to employee options to
acquire units of a mutual fund trust. The proposed rules are
generally similar to those for Incentive Stock Options in the
United States.
Employee stock options granted by CCPCs are not affected by the
proposed measure.
. . .
Eligible Options
An eligible option is one under which:
g the share to be acquired is an ordinary common
share;
g the share is of a class of shares traded on a
prescribed Canadian or foreign stock exchange; and
g the total of all amounts payable to acquire the
share, including the exercise price and any amount payable to
acquire the option, is not less than the fair market value of the
share at the time the option is granted.
The
proposal applies to eligible options exercised after February 27,
2000, irrespective of when the option was granted or became
vested.
[19] It is not in the power of this
Court to change the terms of the Act and to presume that
the intention in drafting the provisions in question was
something other than what is clearly stated.
[20] In Shell Canada Ltd. v.
Canada, [1999] 3 S.C.R. 622, McLachlin J. stated at paragraph
43:
. . . The Act is a complex statute through which Parliament
seeks to balance a myriad of principles. This Court has
consistently held that courts must therefore be cautious before
finding within the clear provisions of the Act an unexpressed
legislative intention: CanderelLtd. v. Canada,
[1998] 1 S.C.R. 147, at para. 41, per Iacobucci J.;
Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1
S.C.R. 411, at para. 112, per Iacobucci J.;
Antosko,supra, at p. 328, per Iacobucci J.
Finding unexpressed legislative intentions under the guise of
purposive interpretation runs the risk of upsetting the balance
Parliament has attempted to strike in the Act.
[21] For these reasons, I have to
dismiss the appeal.
Signed at Ottawa, Canada, this 14th day of April 2003.
J.T.C.C.
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