Jack Harvie Quinn v. Minister of National Revenue, [1972] CTC 2517, 72 DTC 1413

A J Frost (orally):—This is an income tax appeal from an assessment dated June 7, 1971 wherein interest in the amount of $110.44 earned on principal amounts deposited by the appellant with the Canada Permanent Trust Company in respect of a contract with the Canadian Scholarship Trust Fund (hereinafter referred to as “the Fund”) was included in the income of the taxpayer for the taxation year 1970 in accordance with paragraph 6(1 )(b) of the Income Tax Act.

Under the scholarship contract, the Fund agreed to provide tuition fees and other assistance if and when the youngest son of the appellant succeeds in entering the second year of a university course. If the appellant’s son fails to succeed in this respect, the appellant then becomes entitled to recover his principal deposits, but all interest accumulations become forfeited to the Fund to be used for the benefit of nominees of other subscribers. According to the evidence adduced, the appellant is at no time entitled to a greater amount than the aggregate of his premiums or contributions under the plan.

Counsel for the respondent in his argument contended that the interest earned on the deposits is the property of the appellant, and that the fact that future interest earnings were pledged by the appellant to the Fund does not alter their character as interest received or receivable by the appellant in the relevant taxation year.

The Board fails to see how amounts credited to an interest account kept in the name of a subscriber merely for identification purposes and over which he has little or no control, and which he cannot draw out of that account or utilize for his own purposes, can be construed as income in his hands under paragraph 6(1)(b) of the Income Tax Act as that money was not paid nor payable to him at any time in the future.

The above situation, however, would not necessarily preclude taxation if the taxpayer were indirectly transferring the property to his son within the meaning of the language used in subsection 16(1) of the Income Tax Act. The possibility of his receiving an interest payment could perhaps be envisaged if and when the appellant’s son at some future time receives a benefit as the nominee of the appellant-sub- scriber under the terms of the Fund. This question, however, could not possibly be placed in issue at this time, as it is premature. Therefore, in my opinion, the respondent was in error in including this interest in the appellant’s income and the appeal must be allowed.

Appeal allowed in full.

Appeal allowed.

JOHN G SHEPPARD, Appellant,

and MINISTER OF NATIONAL REVENUE, Respondent.

Tax Review Board (The Chairman, K A Flanigan, QC), June 13, 1972.

Income Tax Act, RSC 1952, c 148—85A(1)(a)—Stock option agreement—Benefit

The appellant, Vice-President of Dominion Foundries and Steel Limited, exercised an option to purchase 4,500 shares of the company at a total cost of $81,000. On the same day he sold the shares. The total net price, after the deduction of commissions and transfer tax, amounted to $105,155, leaving him with a net profit of $24,155.23.

The Minister contended that the commission fee of $1,112.27, plus a transfer tax of $45, should be added to arrive at the true benefit under section 85A.

HELD:

The Act was quite clear. The benefit received by the taxpayer was the difference between the price he paid for the shares and the selling price. There was nothing to permit the Board to interpret the section to mean that the taxable benefit was the net benefit received on the sale of the shares. Appeal dismissed.

J A Bradshaw for the Appellant.

L G Dollinger for the Respondent.

The Chairman (orally):—This is an appeal by John G Sheppard, the taxpayer, against a reassessment by the Minister for the taxation year 1969 in which the Minister has added back to the income of the taxpayer brokerage fees and transfer tax fees incurred by the taxpayer in the sale of certain shares. On the face of the pleadings and the evidence this would appear to be a very simple case, if such a term can ever be applied to the Income Tax Act. The facts are brief and are not in dispute.

Mr Sheppard is Executive Vice-President (Financial) of Dominion Foundries and Steel Limited and in 1969, the relevant year, was fully employed by that company. In 1964 the appellant was offered the opportunity to enter into a stock option agreement, as it is commonly referred to, between his employer, Dominion Foundries and Steel Limited, and himself, whereby he was to be entitled to purchase certain shares of the company at a value of $72 per share or, in the event that the shares were split, a corresponding amount. In the present case the shares were split four for one and so when he did exercise the stock option he paid $18 per share.

As I have said, the facts are quite simple. On or about December 30, 1965, as is evidenced by appellant’s Exhibit A2, he exercised the option to purchase 4,500 shares at a total cost of $81,000. Exhibit A3 is a copy of a letter dated December 30, 1969 from Dominion Foundries and Steel Limited to the registrar and transfer agents of the company, National Trust Company Limited, confirming that the appellant was entitled to the issuance of 4,500 shares. Again by Exhibit A4, which is dated January 5, 1970, National Trust Company Limited delivered the certificates.

What happened was that on the same day as the exercise of the option Mr Sheppard sold the shares at the best market value he could receive. The total net price for the shares at 23%, after the deduction of commissions and transfer tax, amounted to $105,155 which, when one deducts the cost of the shares at $81,000, left him, as he claimed, with a net profit of $24,155.23. Or, to put it in terms of the appellant’s argument, under the provisions of paragraph 85A(1)(a) there was a benefit in that amount.

The Minister’s argument is that to this sum of $24,155.23 must be added the commission or brokerage fee of Dominion Securities Corporation Limited, who handled the sale of the shares, of $1,112.27, plus a transfer tax of $45, to arrive at the true benefit under section 85A, which is the gross selling price.

As has often been said, no equity can be found within the confines of the Income Tax Act. The courts have long held that it must be strictly construed. I suppose one can justify this by saying that since it is an Act that must encompass so many aspects affecting the citizens of a large country it would be impossible to achieve perfection and avoid doing, what on several occasions this Board has found to be, injustice and inequity to the individual concerned.

I have indicated in my questions to the respondent’s counsel that my sympathy lies almost entirely with the appellant but, as I have told juries on many occasions, one must not be swayed by sympathy in arriving at a decision, one must base it on the facts of the case and the interpretation of the appropriate law. Someone has recently said that it is unfortunate that tax courts or quasi courts do not have the ability to make allowances for what must have been in the minds of the parliamentarians who drafted the legislation.

It seems to me that what was intended by paragraph 85A(1)(a) was that where a senior employee was awarded a stock option, either for his valued services in the past or anticipated in the future, or even to acquire his services, the Minister of National Revenue should be able to tax those benefits when received.

Several sections of the Act have been cited, for example section 5 which, generally speaking, is a definition of income; section 12 dealing with expenses; the sections dealing with gift tax and matters pertaining to the valuation of shares. But it seems to me that this whole case turns on the narrow point of what is meant by paragraph 85A(1)(a).

If I am to follow what is expected of this Board and interpret the Act rigidly I can come to no other conclusion, inequitable as I may feel it is, than that the benefit received by the taxpayer in this case is the difference between the $18 he paid for the shares and the selling price on December 30, 1969 of 235% or whatever it was. In other words, I do not think that by any stretch of the imagination can I interpret that section to mean that the benefit is the net benefit received on the sale of the shares. If this were a court of equity it could be so but, as I have already indicated, this is not the case.

The Act is quite clear. Paragraph 85A(1)(a) reads:

(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 corporaion 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;

(The italics are mine.) There is nothing in that wording that would allow me to insert the term “net value” which is in effect what I feel it should be and what the appellant has argued it should be. In the result the appeal must be dismissed.

Appeal dismissed.