T-4268-73
Donald G. Grant (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Bastin D.J.—Halifax, April 9 and
17, 1974.
Income tax—Plaintiff purchasing shares of corporate
employer under agreement with employer—Assessment for
benefit conferred—Increase in value of shares between agree
ment to purchase and completion of purchase—Date of
agreement decisive—Income Tax Act, s. 85A(1)(a), now s.
7(1).
In 1968, by resolution of its executive committee, a trust
company made available to senior employees, for purchase
by instalments, shares of the company at the current market
price of $35. The plaintiff then made application for the
purchase of shares in accordance with the plan, which was
at once approved by the Board of Directors. In 1969, within
the time allotted by the plan, the plaintiff completed his
payments and received a share certificate for the shares
purchased by him. By this time, the shares had risen in value
to $70. The Minister's assessment of the benefit received by
the employee, under section 85A(1)(a) of the Income Tax
Act, was based on the increased value, on the ground that
the employee's application was an offer not accepted by the
company until it issued to him the certificate for the shares.
Held, the appeal is allowed and the matter is referred back
to the Minister for re-assessment. When the Board of Direc
tors of the company received from the employee an applica
tion for shares under the plan and confirmed the plan on
July 25, 1968, it was on that date that the plaintiff
"acquired" his shares within the meaning of section
85A(1)(a). It was the market value on that date which had to
be considered. Since the shares were then worth no more
than the price of $35 to be paid by the employee, the
company conferred no "benefit" on him by selling him the
shares.
INCOME tax appeal.
COUNSEL:
K. E. Eaton and P. MacKeigan for
plaintiff.
J. A. Weinstein for defendant.
SOLICITORS:
Daley, Black and Co., Halifax, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
delivered orally in English by
BASTIN D.J.: This is an action by a taxpayer
to set aside a re-assessment of his income tax
for the year 1969, which increased his tax by
$8,247.71 with interest of $1,505.20 based on
the assumption that he should be deemed to
have received in that taxation year a taxable
benefit under section 85A(1)(a) equal to the
amount by which the value of certain shares he
purchased from the Nova Scotia Trust Com
pany on that date exceeded the amount paid to
the Company therefor by him.
Section 85A(1)(a) reads as follows:
85A. (1) Where a corporation has agreed to sell or issue
shares of the corporation or of a corporation with which it
does not deal at arm's length to an employee of the corpora
tion or of a corporation with which it does not deal at arm's
length,
(a) if the employee has acquired shares under the agree
ment, 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;
I consider that the word "acquire" as used in
section 85A(1)(a) of the Income Tax Act has its
ordinary meaning of to gain or to get and this
would occur when something was purchased
whether for cash or on credit. The issue in this
case is on what date did a binding agreement for
the sale of the shares in question to the plaintiff
come into existence.
The contention of the defendant is that the
written application for shares dated July 24,
1968, was an offer which was not accepted by
the company until it issued the stock certificate
for the shares to the plaintiff on July 24, 1969. I
do not agree.
The plaintiff was the President and General
Manager of The Nova Scotia Trust Company.
He testified that in July, 1968 the directors of
the Company decided to sell shares in the Com
pany to senior employees on credit to strength
en the relationship between such employees and
the Company to prevent them from being lured
away by other companies. A similar plan had
been tried in 1963 when 3,000 shares had been
offered but only 2,296 had been sold. The
Executive Committee, consisting of the plaintiff
and five other directors, passed a resolution on
July 11, 1968 to effectuate the plan. The form
of the resolution was the joint composition of
the plaintiff and several other directors and was
in the following terms:
Resolution passed at a meeting of the Executive Committee
of The Nova Scotia Trust Company on Thursday, July 11,
1968:
The Executive Committee approved a plan to be submit
ted to the next meeting of the Board of Directors whereby
704 shares of unsubscribed Company stock out of an origi
nal allotment of 3,000 made in 1963 be made available to
employees of the Company with a minimum of 15 years'
service augmented by a further allotment of 563 shares for a
total of 1,267 shares. This will result in a total Issued
Capital Stock of 76,500 shares.
A resolution terminating the original plan as passed by the
Executive Committee on January 7, 1966 was on motion
rescinded.
Subscriptions are to be based on the following condi-
tions:-
1. Shares will be made available to those with 15 or more
years of service at the price of $35 per share which is
approximately the current market price.
2. Payment will be made over a period of three years from
the subscription date with an immediate down payment of
10% of the purchase price and the balance at the rate of
30% a year but payments may be accelerated.
3. A share certificate will not be issued until the shares
subscribed are paid for in full and, if paid before the
three-year period will not be sold or transferred on the
books of the Company under three years from the subscrip
tion date, the only exception to this being the sale or
exchange of shares based upon any merger or amalgamation
approved by the shareholders.
4. In the event of the death of a subscriber before his or her
certificate is issued, a certificate shall be issued to the
subscriber's estate for the number of shares paid for in full
at the date of death of the subscriber.
5. No dividend will be paid until the subscribed shares are
paid for in full.
Following the passing of this resolution the
plaintiff prepared a form of application for
shares, approached five employees who had
been in the Company for over 15 years and had
each of them complete a form indicating the
number of shares each wished to buy. As the
five employees agreed to purchase a total of
520 shares, the plaintiff signed an application to
buy 847 shares, being the remainder of the
1,267 shares which were to be made available.
The same form was used in each case. The
plaintiff's form of application was as follows:
The Executive Committee
To: Board of Directors
The Nova Scotia Trust Company
I hereby apply for 847 shares of the Capital Stock of The
Nova Scotia Trust Company. I agree to pay $35.00 per
share and to adhere to the following conditions:
1. That payment will be made over a period of three years
from the subscription date with an immediate down payment
of 10% of the purchase price and the balance at the rate of
30% a year but payments may be accelerated.
2. That I will not sell, assign or transfer my right to any part
of my subscription until a share certificate is issued to me
on my subscription being paid in full and in no case before
May 15, 1971.
3. That I shall not be entitled to any dividend on my
subscribed shares until paid for in full.
DATED at Halifax, N.S., this 24th day of July, 1968.
Donald G. Grant
At a meeting of the Board of Directors held
on July 25, 1968, plaintiff presented the six
applications for shares. One of the directors
mentioned that another employee, L. C. Mac-
Kinnon, was qualified through 15 or more years
of service to participate in the plan. As MacKin-
non was then on vacation, plaintiff undertook to
hold for him out of the 847 shares he had
applied for whatever number of shares MacKin-
non might wish to purchase. On his return from
vacation MacKinnon agreed to take 12 shares.
Plaintiff testified that the shares of the Com
pany were widely distributed among 500 share
holders. They were not listed and had sold over
the counter at $45.00 a share prior to the
amendment to the Bank Act, eliminating the
ceiling on bank interest of 6% and permitting
chartered banks to invest in mortgages. When
this change in the law occurred their market
price fell to $35.00 a share. Plaintiff admitted
that he had only paid $1,000.00 into the deposit
account. On July 24, 1969 he had his bank pay
the full amount of the price of the shares. By
then their market value had risen to $70.00 a
share as a result of a take-over bid by another
trust company, The Central Trust Company,
which in the spring of 1969 published an offer
in the newspapers to buy a specific number of
the shares of The Nova Scotia Trust Company
at a price of $70.00 a share. There is no evi
dence that plaintiff on July 25, 1968, the date he
applied for the shares, had any knowledge that
this development would occur.
An employee of the Company, Mr. L. C.
Cameron, who acted as secretary at the meeting
of the Board of Directors on July 25, 1968,
made a list of the employees participating in the
scheme and on this list placed the deposit
account number to be used for the payment for
the shares. No such number was inserted for
Mr. MacKinnon. The list in its final form is as
follows:
Employees' Stock Savings Deposit Account
847 835 D. G. Grant 20-0358
12 . L. C. MacKinnon
100 R. B. Blight 20-0359
100 A. MacBean 20-0360
20 R. M. Gordon Winnifred Gordon 20-0361
100 E. K. Davison 20-0362
100 J. M. Camerson 20-0363
The directors passed the following resolution:
Resolution passed at a meeting of the Board of Directors of
The Nova Scotia Trust Company on July 25, 1968:
The Executive Committee approved a plan to be submit
ted to the next meeting of the Board of Directors whereby
704 shares of unsubscribed Company stock out of an origi
nal allotment of 3,000 made in 1963 be made available to
employees of the Company with a minimum of 15 years'
service augmented by a further allotment of 563 shares for a
total of 1,267 shares. This will result in a total issued Capital
Stock of 76,500 shares.
Subscriptions are to be based on the following
conditions:-
1. Shares will be made available to those with 15 or more
years of service at the price of $35 per share which is
approximately the current market price.
2. Payment will be made over a period of three years from
the subscription date with an immediate down payment of
10% of the purchase price and the balance at the rate of
30% a year but payments may be accelerated.
3. A share certificate will not be issued until the shares
subscribed are paid for in full and, if paid before the
three-year period will not be sold or transferred on the
books of the Company under three years from the subscrip
tion date, the only exception to this being the sale or
exchange of shares based upon any merger or amalgamation
approved by the shareholders.
4. In the event of the death of a subscriber before his or her
certificate is issued, a certificate shall be issued to the
subscriber's estate for the number of shares paid for in full
at the date of death of the subscriber.
5. No dividend will be paid until the subscribed shares are
paid for in full.
Upon motion of Mr. Robertson, seconded by Mr. Piercey
and unanimously carried, the plan was approved as
presented.
There are no rigid formalities required to
create a contract. If the parties intend to enter
into a binding agreement and arrive at a consen
sus ad idem, the Court will give effect to it. The
whole transaction, both words and conduct of
the parties, will be looked at and it is immaterial
when the various steps leading to a consensus
took place if from all the facts it can be deter
mined that a contract was intended. The Com
pany decided to make available 1,267 shares to
its senior employees and then carried out its
plan in two stages. The terms of the plan were
set out in the resolution of the Executive Com
mittee passed on July 11, 1968. At its meeting
on July 25, 1968, the Board of Directors
received the employees' applications for shares
made pursuant to the plan and confirmed their
sale. It was on that date that plaintiff acquired
835 shares and it was the market value of the
shares on that date which is to be considered.
Counsel for the defendant argued that for a
contract to be made by the tender of the
application for shares and the passing by the
Board of Directors of the resolution, both docu
ments must be in exactly the same terms. Con
dition 3 of the resolution reads as follows:
3. A share certificate will not be issued until the shares
subscribed are paid for in full and, if paid before the
three-year period will not be sold or transferred on the
books of the Company under three years from the subscrip
tion date, the only exception to this being the sale or
exchange of shares based upon any merger or amalgamation
approved by the shareholders.
The application contains the following
paragraph:
2. That I will not sell, assign or transfer my right to any part
of my subscription until a share certificate is issued to me
on my subscription being paid in full and in no case before
May 15, 1971.
The resolution contains as condition 4 the
following:
4. In the event of the death of a subscriber before his or her
certificate is issued, a certificate shall be issued to the
subscriber's estate for the number of shares paid for in full
at the date of death of the subscriber.
The application for shares made no reference
to this condition.
The answer to this argument is that the
applications for shares were made in pursuance
of and subject to the conditions of the two
resolutions authorizing this employee stock sav
ings plan. The two conditions were therefore
implied in the form of application. It is a reason
able inference that plaintiff inserted clause 2 in
the form of application to emphasize that the
plan was intended to give the employees a per
manent interest in the Company and not to
encourage short-term speculation. In my opinion
the use of May 15, 1971, instead of the exact
wording of the resolution, was a purposeless
variation by the plaintiff when drawing the
document which is of no legal significance. This
difference has no effect on the consensus which
created a binding agreement to sell the shares.
There can be no question but that the direc
tors of the Company, and the employees who
participated in this plan for acquiring shares,
intended that their submission of written
applications for a specified number of shares
and the acceptance by the directors of these
applications, and the passing of the resolution
approving of the plan to sell 1,267 shares to
such employees would constitute a binding
agreement enforceable by either party. The
plaintiff acquired the right to 847 shares on July
25, 1968, and became trustee for MacKinnon
for 12 of them, subject to MacKinnon paying
the price of the shares. The Company held his
application which contained an enforceable
promise to pay for the shares. If the shares had
fallen in value, plaintiff could not have repudiat
ed his promise and the Company had no right to
cancel its agreement because the shares had
appreciated in value. In accordance with the
intention of the Company and the employees,
the latter acquired the shares they had applied
for when the director passed the resolution con
firming the plan on July 25, 1968.
Since on that date the shares were worth no
more than the price to be paid by them, the
Company conferred no benefits on them by
selling the shares.
I give judgment for the plaintiff with costs to
be taxed. Plaintiff's assessment for the year in
question is referred back to the Minister for
re-assessment not inconsistent with the reasons.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.