Date: 20010829
Dockets: 2001-134-IT-I, 2001-136-IT-I,
2001-137-IT-I,
2001-139-IT-I, 2001-141-IT-I, 2001-155-IT-I,
2001-157-IT-I, 2001-164-IT-I, 2001-165-IT-I,
2001-166-IT-I, 2001-167-IT-I, 2001-176-IT-I,
2001-395-IT-I, 2001-396-IT-I, 2001-399-IT-I,
2001-401-IT-I, 2001-404-IT-I &
2001-409-IT-I
BETWEEN:
MICHELINE ETHIER, BRENT BENNETT, JANICE
BROWN,
KEITH CROFT, PHILLIPPE DUGUAY, KENNETH G.
SHANNON,
J. THOMAS ANDRESS, GAIL TRAYNOR, LLOYD
WILTON,
BRIAN G. WEST, GRANT SPOONER, DONALD H.
DEBOER,
GEORGE MORNINGSTAR, GARFIELD ROACHE, MICHAEL R.
BELAIR,
PATRICK FALLU, MARK BLONDIN and PAUL F.
COLLINS
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Mogan J.
[1]
The appeals of the 18 Appellants named herein were heard together
on common evidence at Sault Ste. Marie, Ontario on August 15,
2001. The Appellants are all employees of Cameco Corporation
("Cameco") and they reside within (or close to) the
Town of Blind River, Ontario, about 140 kilometres east of Sault
Ste. Marie. The issues in these appeals are concerned with the
extent to which the Appellants may be taxed with respect to their
acquisition and sale of shares of Cameco. At the commencement of
the hearing, the parties filed an Agreed Statement of Facts
signed by all 18 Appellants and counsel for the Respondent. The
Agreed Statement of Facts ("ASF") was entered as
Exhibit R-1. Because it is short, I will set it out in full:
AGREED STATEMENT OF FACTS
The parties agree to the following facts for the purposes of
this appeal:
1.
The Appellants were employees of Cameco on October 1, 1990.
2.
In 1990, Cameco offered a Share Savings Plan (the
"Plan") to all employees on staff as of October 1, 1990
(as per section 4.01 of the Plan). A true copy of the Plan is
attached hereto as Exhibit "A".
3.
A description of the Plan was also published. A true copy of the
description is attached hereto as Exhibit "B".
4.
The Plan has not been modified or amended in writing, orally or
otherwise.
5.
The Appellants and Cameco have adhered to the terms of the
Plan.
6.
The Plan entitled the employees to purchase Cameco Share Savings
bonds (the "Bonds").
7.
The bonds were all issued as of December 31, 1990 in accordance
with the Plan.
8.
Prior to becoming public sometime after December 31, 1990 and
prior to June 1, 1991, Cameco was a Canadian-Controlled Private
Corporation ("CCPC").
9.
The FMV of the shares at the time of public offering was $12.50
per share.
10.
In accordance with sections 9.01 and 9.06 of the Plan, the Bonds
were assorted with a right to be exchanged for a number of shares
equal to the value of the bonds exchanged at a price of 90% of
the initial public offering price, that is, $11.25 per share
(subject to the conditions of the Plan).
11.
In accordance with section 9.09 of the Plan, no fraction of
shares were emitted and the Appellants were reimbursed in money
and fractional interests.
12.
The Appellants acquired bonds, exchanged them for shares and sold
the shares at the time and prices described on Schedule
"1".
13.
On February 22, 1994 the common shares of Cameco had a FMV of
$26.
14.
At different dates, all the Appellants except Mr. Spooner made
the election of subsection 110.6(19) of the Income Tax Act
(the "Act").
15.
The elections of the Appellants Belair, Croft, Deboer, Ethier,
Fallu, and West were filed on or before May 1, 1995. All the
other elections were charged a penalty under subsection 110.6(26)
based on the elected capital gain filed.
16.
The Minister cancelled all of the penalties assessed on the basis
that the elections were invalid (with no admission on either side
concerning the issue of the validity of the elections).
[2]
The Cameco Share Savings Plan referred to as "Exhibit
A" in paragraph 2 of the ASF is Exhibit R-2 in these
appeals. Similarly, the description of the Plan referred to as
"Exhibit B" in paragraph 3 of the ASF is Exhibit R-3 in
these appeals. Schedule "1" referred to in paragraph 12
of the ASF is not reproduced in these reasons for judgment but it
is a schedule with 10 columns having the following headings:
1.
Appellant
2.
# Units of Bonds (1 unit = $3,000)
3.
Date Bonds were exchanged for shares
4.
# of shares obtained
5.
Cost of the shares (bonds)
6.
FMV on the date of exchange per share
7.
Total FMV of the shares on the date of exchange
8.
Taxable benefit assessed
9.
Date of sale of the shares
10.
Proceeds of disposition
In the first column are the names of the 18 individuals whose
appeals I am deciding herein plus the name of a 19th individual
whose appeal was adjourned. The particular information pertaining
to each Appellant is set out in the remaining columns of Schedule
1. After entering the ASF as Exhibit R-1 and the other two
documents as Exhibits R-2 and R-3, the parties decided not to
call any witnesses and, accordingly, there was no oral
evidence.
[3]
Relying on statements in Exhibits R-2 and R-3, I propose to
expand on the facts set out in the ASF (Exhibit R-1). Employees
of Cameco on October 1, 1990 were given the opportunity to
purchase Cameco Share Savings Bonds. The Bonds were issued in
units of $3,000. An employee could purchase one or more units to
a maximum of three times annual earnings. The Bonds paid annual
interest at the rate of 11%. The purchase price of each Bond
($3,000) was loaned by Cameco to the employee. One-half of the
loan was repaid by the employee over 10 years by payroll
deductions. The employee's repayment amount was only $96 in
the first year but it increased by $12 each year for the
remaining nine years for a total of $1,500. As already stated,
Cameco matched each employee's repayment amount and so the
entire $3,000 loan (cost of a Cameco Share Savings Bond) would be
repaid over 10 years.
[4]
If Cameco became a public corporation before June 1, 1991, an
employee who had purchased a $3,000 Bond was granted the right to
exchange the Bond for shares in Cameco at a price per share equal
to 90% of the amount at which shares in Cameco were first offered
to the public. According to paragraph 9 of the ASF, shares were
first offered to the public at $12.50 per share. Therefore, an
employee who had purchased a $3,000 Bond had the right to
exchange that Bond for 266 shares (at a price of $11.25 per
share) plus $7.50 cash because Cameco would not issue a fraction
of a share. There was no exchange privilege prior to January 1,
1994. During 1994, an employee could exchange one-third of
his/her Bond for shares; during 1995, two-thirds of his/her Bond
for shares; and after 1995, all of his/her Bond for shares.
[5]
According to Schedule 1 to the ASF, none of the Appellants made
any exchange for shares in 1994 and only six exchanged for shares
in 1995. The rest of the Appellants made all their exchanges for
shares in 1996 and 1997. The fair market value ("FMV")
of the Cameco shares had gone up significantly from the original
public issue price of $12.50 in the spring of 1991. According to
Schedule 1, the FMV of Cameco shares in 1996 and 1997 was in the
range of $51.00 to $71.00. The Appellants all sold Cameco shares
at various times in 1996 and 1997 and realized significant
capital gains on such sales.
[6]
The Appellants reported their respective capital gains for income
tax purposes. Some Appellants filed an election for 1994
pursuant to subsection 110.6(19) of the Income Tax
Act with respect to their right to exchange (during 1994)
one-third of each Bond for shares. Some Appellants claimed a
capital gain deduction for 1994 with respect to their right to
exchange (during 1994) one-third of each Bond for shares. The
first important question in these appeals is whether each
Appellant, as an employee of Cameco, received an employment
benefit upon the exchange of a Bond for shares of Cameco. Set out
below are the relevant words in subsections 7(1) and 7(1.1) of
the Act.
7(1) Subject
to subsection (1.1), 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
(i)
the value of the shares at the time the employee acquired
them
exceeds
(ii)
the total of the amount paid or to be paid to the corporation by
the employee for the shares ...
shall be deemed to have been received by the employee by
reason of the employee's employment in the taxation year in
which the employee acquired the shares;
7(1.1) Where ... a
Canadian-controlled private corporation ... has agreed to
sell or issue a share of the capital stock of the corporation
... to an employee of the corporation ... and at the
time immediately after the agreement was made the employee was
dealing at arm's length with
(a)
the corporation,
(b)
...
(c)
...
in applying paragraph (1)(a) in respect of the
employee's acquisition of the share, the reference in that
paragraph to "the taxation year in which the employee
acquired the shares" shall be read as a reference to
"the taxation year in which the employee disposed of
... the shares".
[7]
As I understand subsection 7(1), an employee is deemed to have
received a benefit in the year in which he or she acquired the
shares. Subsection 7(1) is "subject to subsection
(1.1)" which is parallel in structure to subsection (1) but
applies only to employees of a Canadian-controlled private
corporation ("CCPC"). As I understand subsection
7(1.1), an employee of a CCPC is deemed to have received the same
kind of benefit as an employee of some other corporation under
subsection (1) but there is a difference in timing. The benefit
to an employee of a CCPC is not brought into income until
"the taxation year in which the employee disposed of the
shares".
[8]
According to paragraphs 7 and 8 of the ASF, the Appellants all
acquired their Cameco Share Savings Bonds prior to January 1,
1991 when Cameco was a CCPC. According to paragraph 12 of the
ASF, the Appellants exchanged their Bonds for shares and sold the
shares in 1996 or 1997. In the assessments under appeal, the
Minister of National Revenue included in computing the income of
the Appellants certain benefits under subsection 7(1.1) because
the Minister regarded each Appellant as an employee of a CCPC,
and the amount of the benefit in dispute in each appeal was
included in computing income only in a year when an Appellant
sold Cameco shares.
[9]
Subsection 7(1) applies to all Appellants because their corporate
employer (Cameco) had agreed to sell shares of its capital stock
to them. The amount of the benefit which each Appellant is
"deemed to have received" is determined by the formula
in paragraph 7(1)(a) as the amount by which (i) the value
of the shares at the time of acquisition, exceeds (ii) the cost
of the shares to the employee. It is clear from the terms of the
Plan that the cost of each share was $11.25 to each Appellant who
exchanged a Bond (or part of a Bond) for Cameco shares. Because
Cameco became a public company sometime in the spring or summer
of 1991, the value of the Cameco shares "at the time of
acquisition" was determined by the price of the shares on
the open market. The price of Cameco shares in 1996 and 1997 was
in the range of $51.00 to $71.00. All of the Appellants exchanged
Bonds for Cameco shares in that period. Therefore, under
subsection 7(1), each Appellant was deemed to have received
an employment benefit equal to the amount by which (i) the value
of the shares at the time of acquisition (exchange), exceeded
(ii) the cost of the shares to the Appellant. An example from
Schedule 1 to the ASF will illustrate the measure of the benefit.
One of the Appellants (Brent Bennett) exchanged one $3,000 Bond
on June 30, 1996 and received 266 Cameco shares at an aggregate
cost of $2,992.50 (266 times $11.25). On that day (June 30,
1996), the market price of Cameco shares was $63.80. Mr.
Bennett's benefit under subsection 7(1) is determined as
follows:
Value at acquisition (266 x
$63.80)
$16,970.80
Less: Cost (266 x
$11.25)
2,992.50
Benefit per subsection
7(1)
$13,978.30
[10] Having
concluded that subsection 7(1) applies to all Appellants, I find
that each Appellant is deemed to have received a benefit on the
exchange of a Bond for Cameco shares. The amount of the benefit
is determined by the formula in paragraph 7(1)(a); and the
operation of that formula is illustrated by the example of Brent
Bennett in paragraph 9 above. According to Schedule 1 to the ASF,
each Appellant sold his or her Cameco shares within a few days
after acquiring such shares in exchange for a Bond (or part of a
Bond). Upon the sale of such shares, each Appellant knew that he
or she had realized a significant gain, and each Appellant
reported the gain as a capital gain for income tax purposes.
[11] Because
each Appellant sold his or her Cameco shares within a few days
after acquiring such shares, the FMV of the shares on the day of
sale was not in any case much different from the FMV of the
shares on the day of acquisition (just a few days previously).
Accordingly, the amount of the deemed benefit under subsection
7(1) was not much different from the amount of the capital gain
reported by each Appellant. All or a significant part of the
capital gain reported by each Appellant would disappear through
the operation of paragraph 53(1)(j) of the Act
which states:
53(1) In computing the
adjusted cost base to a taxpayer of property at any time, there
shall be added to the cost to the taxpayer of the property such
of the following amounts in respect of the property as are
applicable:
...
(j)
if the property is a share and, in respect of its acquisition by
the taxpayer, a benefit was deemed by section 7 to have been
received in any taxation year ... by the taxpayer, ...
the amount of the benefit so deemed to have been received;
[12] Paragraph
53(1)(j) requires the cost of the shares to be increased
by "the amount of the benefit so deemed to have been
received". Using Brent Bennett's transaction (paragraph
9 above) as an illustration of how paragraph 53(1)(j)
operates, if Mr. Bennett had sold all 266 shares at the same
market price ($63.80) as prevailed on the date of his acquisition
(exchange), his capital gain (applying paragraph 53(1)(j))
would be nil as shown below:
Proceeds of Sale (266 times
$63.80)
$16,970.80
Less: Cost ($2,992.50) plus benefit
($13,978.30)
$16,970.80
Capital
Gain
-0-
[13] In my
view, the above computation produces an equitable result because,
if part of the gain is taxed as income under section 7, then the
amount taxed as income should be added to the cost in order to
reduce any resulting gain by the same amount. It would be
possible for Mr. Bennett to realize a capital gain or loss on the
subsequent disposition of the 266 shares depending on whether his
net proceeds of disposition were greater or less than $16,970.80.
In any event, because he is assessed under subsection 7(1.1), the
benefit is not taxed until the year in which he sells the
shares.
[14] Section
110.6 was introduced into the Act around 1988 to permit an
individual to claim a "capital gains exemption" within
certain limits with respect to the disposition of capital
property. The federal budget in February 1994 proposed to
eliminate the capital gains exemption for property disposed of
after February 22, 1994 but a special provision (subsection (19))
was added which allowed an individual to make an election with
respect to capital gains accrued to February 22, 1994 on property
which would be sold at a later date. I am required to consider
subsection 110.6(19) because some of the Appellants purported to
make an election under that subsection with respect to a capital
gain which they regarded as having been accrued to February 22,
1994. It is complicated legislation but, in my opinion, only the
following portion of subsection 110.6(19) is relevant:
110.6(19)
Subject to subsection (20), where an individual ... (the
"elector"), elects in prescribed form to have the
provisions of this subsection apply in respect of
(a)
a capital property ... owned at the end of February 22, 1994
by the elector, the property shall be deemed, except for the
purposes of sections 7 and 35 and subparagraph
110(1)(d.1)(ii),
(i)
to have been disposed of by the elector at that time for proceeds
of disposition equal to the greater of
(A) the
amount determined by the formula
A - B
where
A is the amount designated in respect of the property in the
election, and
B is the amount, if any, that would, if the disposition were a
disposition for the purpose of section 7 or 35, be included under
that section as a result of the disposition in computing the
income of the elector, and
(B)
the adjusted cost base to the elector of the property immediately
before the disposition, and
(ii)
to have been reacquired by the elector immediately after that
time at a cost equal to
(A)
...
(B)
where an amount would, if the disposition referred to in
subparagraph (i) were a disposition for the purpose of section 7
or 35, be included under that section as a result of the
disposition in computing the income of the elector, the lesser
of
(I)
the elector's proceeds of disposition of the property
determined under subparagraph (i), and
(II)
the amount determined by the formula
A - B
where
A is the amount, if any, by which the fair market value of the
property at that time exceeds the amount that would, if the
disposition referred to in subparagraph (i) were a disposition
for the purpose of section 7 or 35, be included under that
section as a result of the disposition in computing the income of
the elector, and
B is the amount that would be determined by the formula in
subclause (C)(II) in respect of the property if clause (C)
applied to the property, and
(C)
...
[15]
Subsection 110.6(19) applies to capital property "owned at
the end of February 22, 1994 by the elector". The only
relevant property which any of the Appellants owned on February
22, 1994 was a Bond issued by Cameco. Under the provisions of the
Cameco Share Savings Plan (Exhibit R-2), there were limitations
on when a Bond could be exchanged for shares. I will attempt to
summarize what I regard as the relevant provisions of that
Plan.
Article
9.03
Exchange rights could be exercised on the last day of March,
June, September or December of any year but not prior to
1994.
Article
9.04
Only one-third of the original amount of a Bond could be
exchanged for shares in 1994. Only two-thirds of the original
amount of a Bond could be exchanged for shares in 1995.
Article
10.02
No rights under the Plan are transferable or assignable. All
rights under the Plan shall be exercised only by the
"Participant" (an employee of Cameco who has purchased
a Bond).
Under Article 9.03, no employee of Cameco could exchange a
Bond (or part of a Bond) for shares prior to 1994. Even in 1994,
no exchange could occur before the last day of March. Therefore,
on February 22, 1994 (the relevant date for an election under
subsection 110.6(19)), the Appellants all owned Cameco Bonds but
they could not have exchanged any part of those Bonds for shares
on or prior to that date.
[16] Under
Article 9.04, any one of the Appellants could have exchanged
one-third of the original amount of his or her Bonds for shares
on March 31, 1994 but Schedule 1 to the ASF indicates that no
Appellant exchanged any part of his or her Bonds for shares prior
to December 31, 1995. Paragraph 13 of the ASF states that the
common shares of Cameco had a FMV of $26.00 on February 22, 1994.
I assume that the Appellants wanted this statement included in
the ASF to support any elections which were made under subsection
110.6(19). The agreed FMV of the Cameco common shares on February
22, 1994 has very limited use in determining the FMV of a Bond on
February 22, 1994 because (i) no part of a Bond could be
exchanged for Cameco shares until March 31, 1994 (a period of 37
days) and, even then, only one-third of any Bond could be
exchanged for shares; (ii) the remaining two-thirds of a Bond
could not be exchanged for shares until March 31, 1995 (a period
of 13 months); and (iii) the right to exchange a Bond for shares
was not transferable or assignable.
[17] The right
to exchange all or part of a Bond for shares expired on the
maturity date of the Bonds (December 31, 2000) or earlier if the
Cameco employee holding the Bond retired or died (Article 9.02).
In all the circumstances of the Cameco Share Savings Plan,
including the rights to exchange Bonds for shares in Article IX,
I cannot regard Bonds held by the Appellants on February 22,
1994 as having the same character as Cameco shares which were
later acquired (by exercise of the exchange rights) in 1996 and
1997. In other words, the Cameco shares sold by the Appellants in
1996 and 1997 were not "capital property owned at the end of
February 22, 1994" by the Appellants within the meaning of
paragraph 110.6(19)(a).
[18] In my
opinion, none of the Appellants was entitled to make an election
under subsection 110.6(19) of the Act with respect to the
Cameco shares which were sold in 1996 or 1997. And if any of the
Appellants was purporting to make such an election with respect
to the Bonds owned at the end of February 22, 1994, there is no
evidence in these appeals concerning the FMV of such Bonds on
that date. I conclude that subsection 110.6(19) does not apply to
any of these 18 appeals.
[19] I regret
that I do not have in evidence any of the assessments or
reassessments which are under appeal herein because I cannot
determine whether the Minister has assessed the benefit under
section 7 in accordance with the amounts in Schedule 1 to the
ASF. Also, I cannot determine whether the Minister has applied
paragraph 53(1)(j), and whether the various Appellants
have been assessed on the basis of capital gains or losses
(probably small) on the actual sale of the shares. Having regard
only to the issues as pleaded, the appeal of each Appellant is
dismissed.
Signed at Ottawa, Canada, this 29th day of August, 2001.
"M.A. Mogan"
J.T.C.C.
COURT FILE
NO.:
2001-134(IT)I, 2001-136(IT)I, 2001-137(IT)I,
2001-139(IT)I, 2001-141(IT)I, 2001-155(IT)I,
2001-157(IT)I, 2001-164(IT)I, 2001-165(IT)I,
2001-166(IT)I, 2001-167(IT)I, 2001-176(IT)I,
2001-395(IT)I, 2001-396(IT)I, 2001-399(IT)I,
2001-401(IT)I, 2001-404(IT)I & 2001-409(IT)I
STYLE OF
CAUSE:
MICHELINE ETHIER, BRENT BENNETT, JANICE BROWN, KEITH CROFT,
PHILLIPPE DUGUAY, KENNETH G. SHANNON, J. THOMAS ANDRESS, GAIL
TRAYNOR, LLOYD WILTON, BRIAN G. WEST, GRANT SPOONER, DONALD H.
DEBOER, GEORGE MORNINGSTAR, GARFIELD ROACHE, MICHAEL R. BELAIR,
PATRICK FALLU, MARK BLONDIN and PAUL F. COLLINS and HER MAJESTY
THE QUEEN
PLACE OF
HEARING:
Sault Ste. Marie, Ontario
DATE OF
HEARING:
August 15, 2001
REASONS FOR JUDGMENT BY: The
Honourable Judge M.A. Mogan
DATE OF
JUDGMENT:
August 29, 2001
APPEARANCES:
Agent for the Appellant: Brian Hagger
Counsel for the
Respondent:
Charles M. Camirand and Jade Boucher
COUNSEL OF RECORD:
For the
Appellant:
Name:
N/A
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-134(IT)I
BETWEEN:
MICHELINE ETHIER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on August 15, 2001, at Sault Ste.
Marie, Ontario, by
the Honourable Judge M.A. Mogan
Appearances
Agent for the
Appellant:
Brian Hagger
Counsel for the Respondent: Charles M.
Camirand and Jade Boucher
JUDGMENT
The
appeals from assessments of tax made under the Income Tax
Act for the 1994 and 1996 taxation years are dismissed.
Signed at Ottawa, Canada, this 29th day of August, 2001.
J.T.C.C.
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