A-660-79
Vincent N. Hurd (Appellant)
v.
The Queen (Respondent)
Court of Appeal, Urie and Ryan JJ. and Kerr
D.J.—Ottawa, January 23 and June 3, 1981.
Income tax — Income calculation — Non-residents
Appeal from decision of Trial Division which held that the
appellant had to include in his 1973 income an amount equal
to the increase in the value of shares purchased under an
employee share option plan — Appellant entered into a share
option agreement with his employer in 1967 while working and
residing in Canada — Option was exercised in 1973 when
appellant worked and resided in United States — Whether
benefit received by exercising option was a benefit from the
duties of employment performed in Canada — Whether appel
lant is entitled to apportion benefit — Whether benefit is
exempt under the Canada-United States Tax Convention —
Appeal dismissed — Income Tax Act, S.C. 1970-71-72, c. 63,
ss. 2(3), 6, 7(1),(4), 115 ( 1 )(a)(i),(v),( 2 )(c) , (e)(i) — Canada-Unit
ed States Tax Convention, S.C. 1943-44, c. 21, Art. VIII.
Appeal from a judgment of the Trial Division which held
that the appellant had to include in his 1973 income an amount
equal to the increase in the value of shares purchased under an
employee share option plan. The appellant worked and resided
in Canada from 1965 until March 31, 1971, when he returned
to the United States. He entered into a stock option agreement
with his employer in 1967, and exercised his option in 1973.
The appellant reported a portion of the amount by which the
value of the shares in 1973 exceeded the price paid for them as
Canadian income. The Trial Judge held that the appellant was
taxable on the benefit he received by exercising his option on
the basis of section 7 of the Income Tax Act. The first question
is whether the benefit the appellant received by exercising his
option was a benefit from the duties of his employment per
formed in Canada. The second question is whether the appel
lant is entitled to apportion the amount to be included in his
income. The last question is whether the amount is exempt
under the Canada-United States Tax Convention.
Held, the appeal is dismissed (Ryan J. dissenting). Section
115(1)(a)(i) is the only applicable provision. For the purposes
of that section regard must be had to section 7 in the computa
tion of income of a non-resident. Section 7(1) deems the gain
made on the acquisition of his shares to have been received in
the taxation year in which he acquired the shares and section
7(4) says that this continues to be so, notwithstanding that he
no longer is an employee of the company which granted the
option because section 7(1) continues to apply as though the
employment continued. Regard must be had to the option
agreement. The crucial matters are that the appellant at the
time that the option was granted was an employee of the
Company, that the stock option plan was set up to provide
incentives for employees to continue in the employ of the
Company, that the appellant would not have been granted the
option had he not been an employee of the Company in Canada
at the time the agreement was entered into and that he satisfied
one of the conditions imposed by the agreement by remaining
in the Company's employ continuously for more than one year
after the date of the agreement. The grant of the option arose
only because of the appellant's employment with the Company.
Performance of the duties of the employment in Canada during
the taxation year in which the benefit sought to be taxed is
received, is not essential. Therefore the fact that the appellant
was not a resident of Canada in 1973 when he acquired the
shares does not differentiate his position from that of a resident
of Canada. The appellant argues that only a part of his gain on
the acquisition of shares should be taxable by virtue of section
115(1) (a)(v), (2)(c) and (e)(i). Section 115(2)(c) and (e)(i) is
not applicable to the 1973 taxation year except for the sole
purpose of applying section 114.1 of the Act in respect of
individuals who ceased to be residents in Canada after Febru-
ary 19, 1973. Section 115(2)(c) as it read in 1972 does not
assist the appellant because that paragraph applies only to "an
individual on leave of absence from an office or employment in
Canada". Finally, the appellant submitted that the purchase of
shares was "an exchange of capital assets" and therefore that
the benefit was exempt from inclusion in his 1973 taxable
income by virtue of the Canada-United States Tax Convention.
That submission is not valid for the reasons set out by the Trial
Judge.
Per Ryan J. dissenting: The benefit is the difference between
the value of the shares when acquired and the price paid for
them. It was received as a consequence of the purchase of the
Company's shares at a favourable price. The option itself
consisted in a power vested in the appellant to accept the
Company's standing offer to sell shares at the price stipulated
in the agreement. It was this power that was exercised in 1973.
The benefit sought to be taxed was thus a benefit received by
the appellant by virtue of his exercise of a right that had
matured earlier: it became exercisable on completion of the
one-year period of employment. The benefit received cannot be
described as a benefit received in return for the performance in
Canada of the duties of the appellant's employment in Canada.
Because of the wording of section 115(1)(a)(i), section 7 does
not apply to the appellant, a non-resident.
Abbott v. Philbin [1961] A.C. 352, referred to.
APPEAL.
COUNSEL:
T. G. Heintzman, Q.C. and J. L. Finlay for
appellant.
I. S. MacGregor for respondent.
SOLICITORS:
McCarthy & McCarthy, Toronto, for appel
lant.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment
rendered in English by
URIE J.: I have had the advantage of reading
the reasons for judgment of Mr. Justice Ryan.
While I find them persuasive, after the most care
ful consideration I have concluded, with regret,
that I am unable to agree with them and, conse
quently, with his proposed disposition of the
appeal*.
There is no necessity for me to repeat the factu
al background leading to the appeal or the appli
cable provisions of the Income Tax Act, S.C.
1970-71-72, c. 63, all of which have been fully
canvassed by Mr. Justice Ryan. Suffice it to say
that I agree with him when he points out that the
critical question is whether the benefit the appel
lant received by exercising his option in 1973 was
a benefit from the duties of his employment with
the Company performed by him in Canada before
he left this country in 1971. I also agree with him
and with the learned Trial Judge that performance
of the duties of the employment in Canada during
the taxation year in which the benefit sought to be
taxed is received, is not essential. To suggest other
wise is to ignore the plain wording of subsection
2(3) which provides, in part, that where a person
not resident in Canada "was employed in Canada
... at any time in the year or a previous year, an
income tax shall be paid ... upon his taxable
income earned in Canada ...". [Emphasis added.]'
At that point regard must be had to subpara-
graph 115(1)(a)(i) 1 , conceded to be the only appli-
* [Trial judgment [1980] 2 F.C. 252.]
' Subparagraph 115(1)(a) (i):
115. (1) For the purposes of this Act, a non-resident person's
taxable income earned in Canada for a taxation year is the
amount of his income for the year that would be determined
under section 3 if
(a) he had no income other than
(i) incomes from the duties of offices and employments
performed by him in Canada,
cable provision in the circumstances of this case.
Counsel for each of the parties agreed that for the
assessment to be upheld on the basis of this para
graph alone it would have to be established that
the gain derived by the appellant from exercising
his stock option arose from the duties of offices
and employments in Canada. Counsel also agreed
that only if subsections 6(1), 7(1)(a) and 7(4) are
applicable would the appellant be caught in the
taxation net cast by subparagraph 115(1)(a)(i).
Appellant's counsel contended, of course, that
nothing in those provisions had the effect of deem
ing the appellant to have performed duties of an
office or employment in Canada in 1973. I do not
agree.
Subsection 7(1) applies to the situation where a
corporation has agreed to sell or issue shares to
one of its employees. If the employee chooses at
some later date to acquire the shares, as the
appellant did in the case at bar, any resulting
benefit by virtue of paragraph (a) shall be deemed
to have been received in the year of acquisition
"... by the employee by virtue of his employ
ment." That employment in this case must refer to
the employment in which the appellant was
engaged at the time the option was granted to him
in 1967.
Subsection 7(4) covers the situation where a
person to whom subsection (1) would apply has
ceased to be an employee of the company which
entered into the agreement. The subsection says
that subsection (1) shall continue to apply "as
though the person were still an employee and as
though the employment were still in existence."
Thus, if the appellant was granted the option to
purchase by virtue of his employment then, in my
opinion, he clearly falls within the ambit of subsec
tions 7(1) and (4). That is so because subsection
(1) deems the gain made on the acquisition of his
shares to have been received in the taxation year in
which he acquired the shares and subsection (4)
says that this continues to be so, notwithstanding
that he no longer is an employee of the Company
which granted the option because subsection (1)
minus the aggregate of such of the deductions from income
permitted for the purpose of computing taxable income as may
reasonably be considered wholly applicable and of such part of
any other of the said deductions as may reasonably be con
sidered applicable.
continues to apply as though the employment con
tinued. Since subparagraph 115(1)(a)(i) specifi
cally refers to section 3, which is a part of Division
B relating to the computation of income of a
taxpayer for a taxation year and since section 7 is
part of subdivision a of Division B, it is clear to me
that for purposes of subparagraph 115(1) (a)(i)
regard must be had to section 7 in the computation
of income of a non-resident. It seems, then, that
the sole question requiring resolution is whether
the benefit received was a benefit arising from the
duties of his employment with the Company per
formed by him in Canada before he left this
country in 1971.
To determine this question regard must be had
to the option agreement and the circumstances
which led to its execution. In that respect, it should
be noted that the first recital in the agreement
dated as of October 4, 1967, between the appellant
and his then employer, The British American Oil
Company Limited, states that the Company had
established "an Incentive Stock Option Plan under
which certain officers and employees of the Com
pany ... may be granted options to purchase
common shares ... of the Company." A second
recital refers to the approval by the Executive
Committee of the Board of Directors of the Com
pany of an option to the appellant on the terms set
forth in the agreement. The relevant terms of the
agreement, for purposes of this appeal, were
referred to in the reasons for judgment of my
brother Ryan J. so that it is unnecessary for me to
repeat them.
The crucial matters, then, to be noted are:
(a) that the appellant at the time that the
option was granted was an employee of the
Company;
(b) that it is apparent that the Incentive Stock
Option Plan was, as the name implies, set up to
provide, inter alfa, incentives for employees to
continue in the employ of the Company;
(c) that the appellant would not have been
granted the option had he not been an employee
of the Company in Canada at the time the
agreement was entered into; and
(d) that he satisfied one of the conditions
imposed by the agreement by remaining in the
Company's employ continuously for more than
one year after the date of the agreement.
Bearing all those factors in mind it is abundant
ly clear to me that the grant of the option arose
only because of the appellant's employment with
the Company. It is equally clear that if he had
been a Canadian resident when he acquired the
shares the benefit derived therefrom would have
been taxable in his hands in the year of acquisition
by virtue of subsection 7(1), paragraph (a). More
over, in such a case the benefit would still have
been taxable in his hands even if he had left the
employ of the Company as a result of the opera
tion of subsection 7(4) because it continues the
application of subsection 7(1) as though the appel
lant were still an employee and as though the
employment were still in existence.
I have earlier pointed out that for the reasons
there given, I agree with the learned Trial Judge
that performance of the duties of the employment
in Canada during the taxation year in which the
benefit sought to be taxed is received, is not essen
tial. Therefore, I must conclude that the fact that
the appellant was not a resident of Canada in 1973
when he acquired the shares does not differentiate
his position from that of a resident of Canada who
acquired the shares in similar circumstances. For
this reason I am of the opinion that the appellant
must fail on this branch of his appeal.
Appellant's second argument was based on his
contention that even if his gain on the acquisition
of the shares was taxable, only a part thereof fell
into that category. As has been pointed out by Mr.
Justice Ryan, appellant in his 1973 tax return
reported as income the sum of $43,606.13 result
ing from his exercise of the stock option. The
method used by the appellant in calculating this
amount was also correctly stated by him. Accord
ing to appellant's counsel, the appellant was en
titled to calculate his taxable income in his return
in this fashion by virtue of the combined effect of
subparagraph 115(1) (a)(v) 2 , and paragraphs
115(2)(c) and (e)(0 3 of the Act. In my opinion,
2 115(1)(a)(v):
115. (1) For the purposes of this Act, a non-resident person's
taxable income earned in Canada for a taxation year is the
amount of his income for the year that would be determined
under section 3 if
(a) he had no income other than
(v) in the case of a non-resident person described in
subsection (2), the aggregate determined under paragraph
(2)(e) in respect of him,
3 115(2)(c) and (e)(i):
115... .
subparagraph 115(1) (a) (v) has no application to
the appellant because he does not fall within the
class of person envisaged by subsection 115(2).
Paragraph 115(2)(c), when read together with
subparagraph 115(2)(e)(i), indicates to me that
the appellant was not covered thereby because he
was not in receipt of remuneration from an office
or employment in 1973 as that term is understood
given its ordinary meaning. To whomever those
subsections have application they do not apply to a
person in the position of the appellant. The benefit
which he received is not remuneration of the kind
envisaged by those paragraphs. Moreover, those
two subparagraphs are not applicable to the 1973
taxation year except for the sole purpose of apply
ing section 114.1 of the Act in respect of individu
als who ceased to be residents in Canada after
February 19, 1973. (See S.C. 1973-74, c. 14,
subsection 37(6).) If it is alleged that resort should
be had to paragraph 115(2)(c) as it read in 1972,
it does not assist the appellant because that para
graph applies only to "an individual on leave of
absence from an office or employment in Canada."
The appellant clearly did not fall into that
category.
Appellant's final submission was that if the
benefit was found to be properly included in his
1973 taxable income, it is exempt from such inclu
sion by virtue of Article VIII of the Canada-Unit-
(Continued from previous page)
(c) an individual who had, in any previous year, ceased to be
resident in Canada and who was, in the taxation year, in
receipt of remuneration in respect of an office or employment
that was paid to him directly or indirectly by a person
resident in Canada,
the following rules apply:
(e) for the purposes of subparagraph (1)(a)(v), the aggregate
determined under this paragraph in respect of the non-resi
dent person is the aggregate of
(i) any remuneration in respect of an office or employment
that was paid to him directly or indirectly by a person
resident in Canada and was received by the non-resident
person in the year, except to the extent that such remuner
ation is attributable to the duties of an office or employ
ment performed by him in a country other than Canada
and
(A) is subject to an income or profits tax imposed by the
government of that country, or
(B) is paid in respect of a business carried on in that
country by the payer or a foreign affiliate of the payer,
ed States Tax Convention [S.C. 1943-44, c. 21]
which reads as follows:
ARTICLE VIII
Gains derived in one of the contracting States from the sale
or exchange of capital assets by a resident or a corporation or
other entity of the other contracting State shall be exempt from
taxation in the former State, provided such resident or corpora
tion or other entity has no permanent establishment in the
former State.
The learned Trial Judge dealt with this submis
sion in the following manner [at page 258]:
Plaintiff submits that the purchase of shares exercised under
the option was "an exchange of capital assets". He claims that
at common law the stock option agreement was a capital asset
which he exchanged in 1973 for shares in Gulf Canada
Limited.
That submission is not valid. Plaintiff's transaction was
neither a sale nor an exchange of capital assets. He acquired
shares at a price previously set under an option and thus
benefited from their increased value, a benefit taxable under
the Act as having been made by virtue of his employment in
Canada. The mere fact that he only exercised his option after
he had left Canada does not transform the taxable benefit into
something else.
I agree with that conclusion so that this ground
of attack also fails.
For all of the foregoing reasons, I would dismiss
the appeal with costs.
* * *
KERR D.J.: I agree.
* * *
The following are the reasons for judgment
rendered in English by
RYAN J. (dissenting): This is an appeal from a
judgment of the Trial Division, dated October 18,
1979, which dismissed an appeal from a decision
of the Tax Review Board confirming an assess
ment by the Minister of National Revenue which
included the sum of $77,812.50 in the appellant's
income for his 1973 taxation year.
The issue in this appeal is whether the appellant,
a non-resident of Canada during the taxation year
in question, was taxable on a benefit received by
means of the exercise by him in that year of a
stock option he had received from his employer in
a previous year while he was residing and working
in Canada. The answer depends on the interpreta
tion of certain provisions of the Income Tax Act 4
relating to the taxation of non-residents.
A non-resident is subject to income tax in the
circumstances specified in subsection 2(3) of the
Income Tax Act. Paragraph (a) is the relevant
paragraph. It reads:
2....
(3) Where a person who is not taxable under subsection (1)
for a taxation year
(a) was employed in Canada,
at any time in the year or a previous year, an income tax shall
be paid as hereinafter required upon his taxable income earned
in Canada for the year determined in accordance with Division
D.
The income tax imposed on a non-resident who
falls within paragraph 2(3)(a) is a tax imposed
under Part I of the Act. The tax is imposed on a
non-resident who performs or has performed in
Canada the duties of an office or employment' and
receives income for his performance. The para
graph, as I understand it, does not purport to tax a
non-resident on a benefit received merely by virtue
of his employment 6 in Canada, that is to say,
merely by virtue of his occupying or having
occupied a position in Canada in the service of
another. And the tax to be imposed is, and is only,
a tax "... upon his taxable income earned in
Canada for the , year determined in accordance
with Division D."
In this case, the relevant provision of Division D
is subparagraph 1 15 (1) (a) (i), which reads:
° References in these reasons to the Income Tax Act are to
the Act as applicable in the 1973 taxation year unless otherwise
indicated.
5 "Employed" is defined in subsection 248(1) of the Income
Tax Act in this way:
"employed" means performing the duties of an office or
employment;
6 "Employment" is defined in subsection 248(1) as follows:
"employment" means the position of an individual in the
service of some other person (including Her Majesty or a
foreign state or sovereign) and "servant" or "employee"
means a person holding such a position.
115. (1) For the purposes of this Act, a non-resident person's
taxable income earned in Canada for a taxation year is the
amount of his income for the year that would be determined
under section 3 if
(a) he had no income other than
(i) incomes from the duties of offices and employments
performed by him in Canada,
minus the aggregate of such of the• deductions from income
permitted for the purpose of computing taxable income as may
reasonably be considered wholly applicable and of such part of
any other of the said deductions as may reasonably be con
sidered applicable.
The precise question in this appeal is then
whether the benefit which the appellant received in
1973 by exercising his stock option was income
from the duties of his employment performed by
him in Canada. If so, in respect of it, his taxable
income earned in Canada for the 1973 taxation
year would be the amount of his income for the
1973 year that would be determined under section
3 of the Act minus permissible deductions. If his
benefit from the exercise of the stock option was
not income from the duties of his employment
performed by him in Canada, then, as a non-resi
dent, he would not be taxable.
The facts were set out in an agreed statement of
facts. I will summarize those which appear par
ticularly relevant.
The appellant was a resident of Canada from
September 1965 to March 31, 1971. Since April 1,
1971, he has been resident in the United States.
He has always been a citizen of the United States.
From September 1965 to March 31, 1971, the
appellant was an employee of The British Ameri-
can Oil Company Limited ("the Company"). The
terms of his employment do not appear in the
statement of facts.
An option agreement was entered into between
the Company and the appellant. It was dated as of
October 4, 1967. The agreement recites that the
Company had established an "Incentive Stock
Option Plan" under which certain officers and
employees of the Company and its subsidiary and
affiliated companies might be granted options to
purchase common shares of the capital stock of the
Company. It also recites that the Executive Com
mittee of the Board had approved the granting to
the optionee (the appellant) of the option set out in
the agreement. The option was granted "... in
consideration of the optionee fulfilling the condi
tions ..." set forth in the agreement. The option
was "... an option to purchase 2,500 common
shares of the capital stock of the Company upon
the following terms and conditions ...". Following
are the first four of eleven terms and conditions:
1. The purchase price per share payable in full by the Optionee
to the Company at the time of the exercise of the option is $37
3/8.
2. Except as provided in paragraphs 5 and 6 this option shall
only become exercisable by the Optionee after one year's
continuous employment immediately following the date hereof
either with the Company or with a subsidiary or affiliated
company or consecutively with any two or more of them?
3. The transfer of the Optionee between the Company and a
subsidiary or affiliated company or between any two or more of
them shall not void this option which shall continue in good
standing subject to the other provisions hereof.
4. This option shall be exercisable by the Optionee, except as
herein otherwise provided, in whole at any time or in part from
time to time within ten years after the date hereof, but not
thereafter.
7 Clauses 5, 6 and 7 of the agreement read:
5. In the case of termination of employment of the Optionee
by reason of early retirement or normal retirement in accord
ance with the retirement policy of the Company, subsidiary
or affiliated company with which the Optionee is then
employed, the provisions of paragraph 2 shall not apply and
this option shall, notwithstanding the expiry date expressed
herein, and except as herein otherwise provided, only be
exercisable prior to the expiry date expressed herein or
within six months after the date of the retirement of the
Optionee, whichever is the shorter period.
6. In the case of the death of the Optionee the provisions of
paragraph 2 shall not apply and this option shall be exercis-
able by his personal representatives, but notwithstanding the
expiry date expressed herein, this option shall only be exer-
cisable prior to the expiry date expressed herein or within
twelve months after the death of the Optionee, whichever is
the shorter period.
7. In the case of termination of employment of the Optionee
for any reason other than death, early retirement or normal
retirement in accordance with the retirement policy of the
Company, subsidiary or affiliated company with which the
Optionee is then employed, and after this option shall have
become exercisable, then notwithstanding the expiry date
expressed herein, this option shall only be exercisable prior to
the expiry date expressed herein or within three months after
termination of employment, whichever is the shorter period.
The option was not assignable. And clause 10 of
the agreement gave the Company power to rescind
the option if the optionee were to engage in any
activity in competition with or otherwise prejudi
cial to the Company or to a subsidiary or affiliated
company. Immediately above the signatures of the
parties, the option agreement stated: "IN WITNESS
WHEREOF the Company has hereunto affixed its
corporate seal attested by the hands of its duly
authorized officers and the Optionee has hereunto
set his hand and seal." The option, executed under
seal, was not revocable by the Company during the
term of the agreement so long at least as the
appellant observed the conditions.
Clause 9 of the agreement provided in part that
if the capital stock of the Company were subdivid
ed into a greater number of shares, the number of
shares the optionee was entitled to purchase should
be increased proportionately and the purchase
price adjusted accordingly. Before the exercise of
the option by the appellant, each of the common
shares of the Company had been split into two
shares so that the appellant had become entitled to
buy 5,000 shares at $18.69 per share.
On or about April 1, 1971, the appellant moved
to the United States. He commenced to be
employed by Gulf Oil Exploration, which was an
"affiliated company" within the meaning of the
option agreement. The agreed statement of facts
states: "The plaintiff [the appellant] in fact per
formed no duties of employment in Canada after
March 31, 1971." It does not, in terms, assert that
he in fact performed duties of employment in
Canada before that date, but that is a reasonable
implication and, I take it, is not contested. And
paragraph 9 of the agreed statement does, as noted
below, refer to the period during which the appel
lant was employed in Canada.
On September 26, 1973, the appellant exercised
his option under the agreement. He purchased
5,000 common shares in the Company at a price of
$18.69 per share and at a total price of
$93,467.50. The amount by which the value on
September 26, 1973 of the 5,000 common shares
exceeded the price paid by the appellant was
$77,812.50.
The appellant filed a Canadian income tax
return for 1973. He reported as income from his
employment in Canada, resulting from his exercise
of the stock option, the sum of $43,606.13. This
sum was computed by him, according to the
agreed statement of facts, by apportioning the
$77,812.50 according to a fraction: the numerator
of the fraction was the number of days between
the date on which the option was granted and the
date the option was exercised, during which the
appellant "was employed in Canada"; and the
denominator was the total number of days between
the two dates. The details of the calculations
appear in paragraph 9 of the agreed statement of
facts.
In the circumstances of this case, it may not be
necessary to decide whether the appellant would
have any right to apportionment. That question
will arise only if it is decided that the amount
sought to be taxed is taxable in whole or in part.
By notice of assessment dated July 3, 1974, the
Minister included the full amount of $77,812.50 in
the appellant's income for the taxation year. The
appellant filed a notice of objection, but the assess
ment was confirmed. On March 20, 1978, the Tax
Review Board dismissed the appellant's appeal to
it.
It was submitted to us, and I understand it was
argued below, that before either subparagraph
115(1)(a)(i) or paragraph 2(3)(a) of the Income
Tax Act could become operative, it was necessary
that the taxpayer should have performed the duties
of his employment in Canada during the taxation
year in which the income sought to be taxed was
received.
The learned Trial Judge was of the view that
performance of duties of the employment in
Canada during the taxation year in which the
benefit sought to be taxed is received, is not essen
tial. He said that subsection 2(3) of the Act
applies to a non-resident who was employed in
Canada at any time in the taxation year ".. . or a
previous year."
I agree. The income of an employee is taxable
only when received, and is taxable in and for the
year of its receipt. As I read subsection 2(3), a
non-resident who receives income in return for
duties of his employment performed in Canada is
taxable in the year of receipt whether the duties
were performed in the taxation year or in a previ
ous year.
The Trial Judge found that the appellant was
taxable on the benefit he received in 1973 by
exercising his stock option. He made this finding
on the basis of section 7 of the Income Tax Act.
Section 6 of the Act provides in part:
6. (1) There shall be included in computing the income of a
taxpayer for a taxation year as income from an office or
employment such of the following amounts as are applicable:
(a) the value of board, lodging and other benefits of any kind
whatever ... received or enjoyed by him in the year in
respect of, in the course of, or by virtue of an office or
employment;
Section 7, paragraph (1)(a) and subsections (3)
and (4) provide in part:
7. (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 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;
(3) Where a corporation has agreed to sell or issue shares of
the capital stock of the corporation ... to an employee of the
corporation ...
(a) no benefit shall be deemed to have been received or
enjoyed by the employee under or by virtue of the agreement
for the purpose of this Part except as provided by this
section, ...
(4) For greater certainty it is hereby declared that, where a
person to whom any provision of subsection (1) would other
wise apply has ceased to be an employee before all things have
happened that would make that provision applicable, subsection
(1) shall continue to apply as though the person were still an
employee and as though the employment were still in existence.
I agree that the appellant would be taxable if
section 7 applied to him. The benefit he received
by exercising the option would be deemed to have
been received by him by virtue of his employment
in the taxation year in which he acquired the
shares. Any problem that might have been present
ed by his having ceased to be an employee of the
Company would be resolved by subsection 7(4), by
virtue of which subsection (1) would continue to
apply to him as though he were still an employee
and as though his employment were still in exist
ence. I take it that "employment" here would refer
to his employment with the Company; and
"employment", as used in the subsection, should,
of course, be interpreted in the light of the defini
tion of "employment" in subsection 248(1) of the
Act. This would mean (and would mean no more
than) that subsection (1) would continue to apply
as though he were still in the service of the Com
pany. I would observe that, contrary to a submis
sion by counsel for the respondent, I would not
interpret subsection 7(4) as having the effect of
deeming that the appellant performed any of the
duties of his employment in Canada in 1973. It is
significant, having in mind the definition of
"employed" in subsection 248(1), that subsection
7(4) uses the words "as though the employment
were still in existence" and not the words "as
though he were still employed".
My problem with section 7 is in getting through
to it. Subparagraph 115(1) (a) (i), when considered
together with paragraph 2(3)(a), has the effect, as
I read it, of providing that the appellant's taxable
income, earned in Canada, for his 1973 taxation
year was the amount of his income for the year
that would be determined under section 3 of the
Act if, but only if, he had no income other than
income from the duties of his employment per
formed in Canada in 1973 or in a previous year.
The critical question thus becomes whether the
benefit the appellant received by exercising his
option in 1973 was a benefit from duties of his
employment with the Company performed by him
in Canada before he left Canada in 1971 8 .
Obviously the benefit sought to be taxed is not
the option agreement made between the appellant
and the Company in 1967. The benefit is the
difference between the value of the shares when
acquired and the price paid for them. Was this a
benefit from the duties of the appellant's employ
8 If the answer to this question is in the negative, it is not
necessary to decide whether, had the answer been in the
affirmative, the benefit would have been "income" as that term
is used in subparagraph 115(1) (a)(i).
ment performed by him in Canada?
The benefit was received as a consequence of the
purchase of the Company's shares at a favourable
price. The shares were purchased by the appellant
by exercising the option provided by the option
agreement. The option itself consisted in a power
vested in the appellant to accept the Company's
standing offer to sell shares at the price stipulated
in the agreement. It was this power that was
exercised in 1973.
The benefit sought to be taxed was thus a
benefit received by the appellant by virtue of his
exercise of a right that had matured earlier: it
became exercisable on completion of the one-year
period of employment specified in clause 2 of the
option agreement. The benefit received cannot, in
my opinion, properly be described as a benefit
received in return for the performance in Canada
of the duties of the appellant's employment in
Canada. I find some support for this conclusion in
a passage from the speech of Lord Radcliffe in
Abbott v. Philbin 9 . That was a case in which an
employee who had obtained a stock option in 1954
exercised it in 1956; the option was not transfer
able and was to last for ten years if the optionee
remained in his employer's service for that
period 10 . The passage I wish to quote appears at
page 379:
The claim to tax the advantage obtained in the year 1955-56
is not claimed by the Revenue if the right view is that the
option itself was taxable in 1954-55. Even if there were no
taxable subject in the earlier years I should regard the 1955-56
claim as failing on its own terms. The advantage which arose
by the exercise of the option, say £166, was not a perquisite or
profit from the office during the year of assessment: it was an
advantage which accrued to the appellant as the holder of a
legal right which he had obtained in an earlier year, and which
he exercised as option holder against the company.
If section 7 of the Act applied, the deeming
provisions of the section would, of course, have
cleared the way to taxing the appellant's benefit
realized from exercise of the option. But, because
of the wording of subparagraph 115(1)(a)(i) of the
9 [1961] A.C. 352.
10 Id., particularly per Lord Reid at page 369.
Act, it does not in my opinion apply to the appel
lant, a non-resident, in the circumstances of this
case.
I would allow the appeal with costs here and
below and I would vacate the Minister's assess
ment for the 1973 taxation year.
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.