Paragraph 7(3)(a)

An individual who donated some of his employee stock options on the shares of a public company to arm's length registered charities, claimed the $3M fair market value of the donated options for charitable tax credit purposes, but did not include any portion of the donated options in his income under TA s. 50 (the equivalent of ITA s. 7(1)(b)). This reporting was confirmed in the Court of Quebec on the basis inter alia that TA s. 54 (the equivalent of ITA s. 7(3)(a) established that the stock option rules (contained in TA s. 49 et seq.) constituted a “complete code” so that TA s. 422 (equivalent to ITA s. 69(1)(b)) did not apply to deem the “value of the consideration for the disposition” received by him to be equal to the options’ fair market value of $3M, rather than the nil proceeds in fact received.

In disagreeing with this interpretation and before allowing the ARQ’s appeal, Cournoyer JCA stated (at paras. 64, 70, TaxInterpretations translation):

TA section 54 only has the effect of giving precedence to the application of sections 49 et seq. over any other section providing for a taxability rule. It does not prevent the ARQ from using the presumptions provided for in the T.A. to calculate the taxable income of the taxpayer. …

While section 54 ensures that stock option benefits are subject to sections 49 et seq. of the T.A. and excludes them from the scope of sections 36 and 37 [equivalent to ITA ss. 5, 6], it is not, in the absence of clear legislative indications to that effect, a code so complete and airtight that the application of section 422 is excluded.

He also found to be “unconvincing” (para. 72) a further argument that s. 422 did not feed into s. 50 because it did not explicitly deem the FMV proceeds for the gift to be “consideration” received by the employee for the option disposition, as required by s. 50.

An individual (Des Groseillers) who donated some of his employee stock options on the shares of the qualifying person (“BMTC”) to arm's length registered charities was assessed by the ARQ on the basis that the Quebec equivalent of s. 69(1)(b) (Taxation Act, s. 422) deemed the “value of the consideration for the disposition” received by him to be equal to the options’ fair market value of $3M, thereby resulting in the receipt of deemed employment income in that amount by him pursuant to the Quebec equivalent of s. 7(1)(b) (TA, s. 50).

Bourgeois, JCQ reversed the assessment. To him, a crucial factor was that the stock option plan specified that a permitted donee of the options was not entitled to physically exercise the options, and instead was only permitted to realize on them pursuant to a clause in the plan permitting the option holder to require the corporation to pay the in-the-money value of the options to their holder. Accordingly, Des Groseillers had effectively only donated a right to receive cash, rather than an agreement to issue shares as contemplated by the s. 7(1)(b) equivalent (s. 50), so that s. 50 did not apply. In other words, “the intention of the parties was never to assign the options on shares … but rather to transfer the sums to the foundations” (para. 68).

He further found, in the alternative, that even if the s. 7(1)(b) equivalent applied, it only applied on the basis of the nil consideration actually received by Des Groseillers rather than being expanded by the s. 69(1)(b) equivalent to deem the consideration to be $3M. In this regard, he agreed (at para. 72) with the submission of Des Groseillers that “Section VI constitutes a complete code which by itself contains an exhaustive treatment of the rules for computing income on the issuance of securities of an employer,” and after quoting TA s. 54 (the equivalent of ITA s. 7(3)(a)) stated (at para. 73):

Thus … TA article 422 cannot be engaged in order to fill in the rules for computing income provided in Section VI.

Since the ARQ assessments and pleadings had not relied, in the alternative, on TA ss. 36 and 111 (equivalent to ITA ss. 6(1)(a) and 15(1)), and the ARQ’s assessments based on a mooted expansive effect of s. 422 on s. 50 had been demolished, Des Groseillers’ appeal was allowed.

The taxpayer, who was the CEO of a Canadian corporation ("RCI") whose voting and non-voting shares both traded on the TSX, did not deal at arm's length with RCI as he held over 90% of its voting shares. RCI issued stock options to the taxpayer in 1997 pursuant to the RCI employee stock option plan, and in 2007 attached a share appreciation right ("SAR") to all previously granted options, permitting the holder to cash surrender options for their in-the-money value. The taxpayer exercised the SAR in 2007, and reported a capital gain.

Hogan J found that s. 7(3)(a) applied to preclude a benefit under s. 6 (as assessed by the Minister), stating (at paras. 38-39):

[T]his provision [s. 7] is meant to provide a complete code for the taxing of benefits arising under or because of a stock option agreement. … If the carve‑out in section 7(3)(a) is interpreted in a narrow fashion, as the Respondent argued it should be – that is it only applies if the benefit is subject to tax under subsection 7(1) of the Act – it would mean that a non-arm's length transfer could become immediately taxable notwithstanding the fact that section 7 specifically provided that this should not be the case.

In the result, the taxpayer received the benefit as a capital gain (see summary under s. 39(1)).

In successive years, the taxpayer cash-surrendered employee stock options to the corporation ("Forages Garant") which had granted the options. Paris J found that the taxpayer was related to his wife from whom he was legally separated but not divorced. Accordingly, he was a member of a related group which controlled Forages Garant, which meant that his stock option surrender benefits were not taxable under s. 7(1)(b).

In rejecting a Crown submission that the option surrender benefits were taxable under s. 6(1)(a), Paris J stated (at para 77, TaxInterpretations translation) that "the principle of generalibus specialia derogant applies and subsection 7(3) deflects the application of the general provision," that the provisions of s. 7(3)(a) "are clear and unequivocal" (para. 79) and that "it is evident that the [subsequent] addition of paragraph 7(1)(b.1) effected a change to section 7 and not a clarification" (para. 85). Accordingly, the benefits were not taxable.

Shares issued to the taxpayer were found to be in satisfaction of consulting fees owed to him that had been written off by the corporation in question on its books, rather than being received by him by virtue of his employment with the corporation, based on a finding that the consulting fees would not have been written off had the shares not been issued to him, and given that the records of the corporation did not show him to have become an employee of the corporation until subsequently (although he was a director). Accordingly, the value of the shares received by him was includible in his income under s. 9, or under s. 5(1) by virtue of the application of s. 6(3)(b), and the benefits of the application of s. 7(1.1) were not available to him.

Before concluding that s. 7(1.1) governed the issuance of shares to the taxpayer, Margeson TCJ. found that they were issued to the taxpayer in respect of his former employment with the issuer and that there was no requirement under s. 7 that the taxpayer be an employee of the company at the time of the granting of a stock option or at the time of its exercise.

Although there was no formal agreement for the issuance of the shares, there is nothing in the word "agreed" that suggested that "a formal contract in the sense of an offer and acceptance" is required (p. 1108).