A-91-88
J. Stuart Robertson (Appellant) (Plaintiff)
v.
The Queen (Respondent) (Defendant)
INDEXED AS: ROBERTSON V. CANADA (C.A.)
Court of Appeal, Heald, Marceau and Stone
JJ.A.—Calgary, November 14, 1989; Ottawa,
January 5, 1990.
Income tax — Income calculation — Taxable benefits —
Option to buy shares granted in 1974, exercised in 1980 at
$235,500 profit — Profits taxable only when accrued (1980).
In 1974, the taxpayer was employed as a ranch manager by a
Mr. Jack M. Pierce who was also president and a shareholder
of Ranger Oil (Canada) Limited. As an inducement to contin
ue in his employment, Pierce granted the taxpayer, by agree
ment signed in October 1974, an option to buy, over the next
five years, a substantial number of shares in Ranger Oil at
approximately their fair market value at the time (1974).
In 1980, the taxpayer exercised his option and bought 6,000
shares, making a profit of $235,500. The Minister of National
Revenue, invoking subsection 5(1) and paragraph 6(1)(a) of
the Income Tax Act, reassessed the taxpayer for his 1980
taxation year, adding the $235,500 as a taxable benefit. This
was an appeal from the Trial Division judgment dismissing the
taxpayer's appeal from that reassessment.
Held, the appeal should be dismissed.
The appellant conceded that he had received taxable ben
efits. The issue was whether they were taxable in 1980 or, as
argued by the taxpayer, in 1974, or in each of the five following
years pro tanto as the right to purchase shares accrued.
The question was whether the taxpayer "received or enjoyed"
the benefits within the meaning of paragraph 6(1)(a) of the
Act when he first became legally entitled to purchase the
shares. In the House of Lords decision of Abbott v. Philbin, the
majority held that the right to purchase property, conveyed by
an option, was in itself a valuable asset and was the only benefit
directly related to the employment. The views of the two
dissenting Lords in that case were, however, to be preferred.
Lord Keith: "the option is an offer to be accepted or not as and
when the appellant [employee] pleases, but until it is accepted,
the transaction is not complete, nor has any profit been real
ized". Lord Denning: "the offer itself [the option] would not be
a perquisite or profit; for it conferred only the expectation of
profit, not any profit itself'.
Obviously, double-tier taxation should not be imposed on
gains from a single transaction, nor should the same benefit be
taxed on two occasions. There are in fact two benefits. A first
benefit arises upon the employer binding himself, over a period
of time, to sell shares at a fixed price, regardless of the
appreciation in the market value of those shares, and a second
benefit arises if and when the employee makes use of the rights
flowing from the first one and exercises the option. However,
while the second benefit can be measured by the discrepancy
between the cost of exercising the option and the market value
of the shares at the time of the acquisition, the first benefit,
although a real one, eludes independent quantification. Only
the second benefit, the quantifiable one, falls within the scope
of paragraph 6(1)(a) of the Act.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Income Tax Act, S.C. 1970-71-72,e - . 63, ss. 5(1), 6(1)(a)
(as am. by S.C. 1980-81-82-83, c. 48, s. 1(1)), 7 (as
am. by S.C. 1977-78, c. 1, s. 3).
Income Tax Act, 1952, 15 & 16 Geo. 6 & Eliz. II, c. 10,
Sch. 9, r. 1.
CASES JUDICIALLY CONSIDERED
NOT FOLLOWED:
Abbott v. Philbin (Inspector of Taxes), [1960] 2 All E.R.
763 (H.L.).
DISTINGUISHED:
Tyrer v Smart (Inspector of Taxes), [ 1979] 1 All ER 321
(H.L.).
REFERRED TO:
R. v. Savage, [1983] 2 S.C.R. 428; 83 DTC 5409.
COUNSEL:
John B. Ballem, Q.C. and Orville A. Pyrez for
appellant (plaintiff).
Robert W. McMechan for respondent
(defendant).
SOLICITORS:
Ballem, McDill, Maclnnes & Eden, Calgary,
for appellant (plaintiff).
Deputy Attorney General of Canada for
respondent (defendant).
The following are the reasons for judgment
rendered in English by
MARCEAU J.A.: This appeal relates to a tax
assessment under the Income Tax Act [S.C. 1970-
71-72, c. 63]. In reassessing the appellant for his
1980 taxation year, the Minister of National Reve
nue added to his income, as a taxable benefit, the
sum of $235,500. This sum corresponded to the
amount by which the fair market value of a public
company's shares, acquired by the appellant in
1980 pursuant to an option which had been grant
ed to him some years previously, exceeded the
purchase price paid by him. The appellant brought
an action in the Trial Division [[1988] 2 F.C. 144]
disputing the validity of this assessment. The
action was dismissed, so he reiterated his attack
before this Court. The issue, as will be seen, is only
about the year of assessment, but it is as difficult
as it is of consequence, and I could arrive at the
conclusion which I adopt in these reasons only
after much hesitation.
The facts may be summarized briefly. In 1974,
the appellant was employed as a ranch manager
supervising the ranching operations of a Mr. Jack
M. Pierce. Mr. Pierce was also the President and a
shareholder of an oil company, Ranger Oil
(Canada) Limited. As an inducement to the appel
lant to stay on as ranch manager, Pierce granted
the appellant, by agreement signed October 9,
1974, an option to purchase up to 2,500 common
shares he owned in Ranger Oil at $15 per share,
which price approximated their fair market value
at the time. The option was to become exercisable
at the rate of 500 shares per year, over the next
five years, subject to certain conditions, the main
condition being that the appellant continue his
employment.
Five years later the appellant was still Pierce's
ranch manager and he had not yet exercised the
greatest portion of the option. In the interim, there
had been a split of the common shares of Ranger
Oil, entitling him, under the agreement, to pur
chase 6,000 shares at a price of $3.75 per share.
On September 15, 1980, he called for the shares at
the aggregated price of $22,500. On that date, the
6,000 shares had a fair market value of $258,000.
There are provisions in the Income Tax Act
dealing specifically with agreements to issue shares
to employees. They are to be found in section 7 [as
am. by S.C. 1977-78, c. 1, s. 3] which reads in part
as follows:
7. (1) Subject to subsection (1.1), where a corporation has
agreed to sell or issue shares of the capital stock of the
corporation or of a corporation with which it does not deal at
arm's length to an employee of the corporation or of a corpora
tion 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 de
deemed to have been received by the employee by virtue of
his employment in the taxation year in which he acquired the
shares;
These special provisions, however, had no applica
tion to the case of the appellant, since his employer
was not a corporation, and the Minister could not
refer to them in support of his reassessment. The
Minister invoked the general provisions of subsec
tion 5(1) and paragraph 6(1) (a) of the Act, as it
read in 1980 [i.e. as am. by S.C. 1980-81-82-83, c.
48, s. 1(1)]:
5. (1) Subject to this Part, a taxpayer's income for a taxa
tion year from an office or employment is the salary, wages and
other remuneration, including gratuities, received by him in the
year.
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, except any benefit
(i) derived from his employer's contributions to or under a
registered pension fund or plan, group sickness or accident
insurance plan, private health services plan, supplementary
unemployment benefit plan, deferred profit sharing plan or
group term life insurance policy, or
(ii) under an employee benefit plan or employee trust,
that was received or enjoyed by him in the year in respect of,
in the course of, or by virtue of an office or employment;
Two propositions were naturally implicit in the
position taken by the Minister: first, that the stock
option agreement had conferred on the appellant
benefits constituting remuneration for his services
as ranch manager; second, that these taxable ben
efits had accrued to him in 1980 when he had
exercised the greatest part of his option and
acquired the 6,000 shares.
The appellant does not take issue with the first
proposition. He concedes that it can find support
in the broad meaning of the words used by the
legislation, especially the phrases "benefits of
whatever kind" and "in respect of, in the course of,
or by virtue of", which have always been seen by
the courts as giving the provisions a particularly
far-reaching scope (cf R. v. Savage, [1983] 2
S.C.R. 428). He does not dispute that he received,
through the agreement, benefits which were part
of his remuneration and were, as such, subject to
tax under subsection 5(1) and paragraph 6(1)(a)
of the Act. If there is an issue there, it is not before
the Court.
It is the second proposition which, in the view of
the appellant, would be unsound. It is not in 1980
that the benefits were taxable, he says, it is either
in 1974, the year the agreement was signed, or in
each of the five following years pro tanto as the
right to purchase shares accrued.' His submission
is that when a stock option is given to an employee,
and the specific provisions of section 7 of the Act
do not apply, a benefit from employment is
"received or enjoyed" within the meaning of para
graph 6(1)(a) of the Act when the employee first
becomes legally entitled to purchase shares, and
not in any subsequent taxation year during which
the shares would be actually purchased by him.
And the reason for that would be the one given by
the majority judgment of the House of Lords in
Abbott v. Philbin (Inspector of Taxes), [1960] 2
All E.R. 763 (H.L.), namely that the right to
purchase the property, conveyed by the option, is
' Before the Trial Judge, he appellant appears to have
insisted on the year of the agreement whereas before this Court
he chose to refer to the five subsequent years. His argument,
however, remained the same all along.
in itself a valuable asset and is the only benefit
related directly to the employment.
The Trial Judge rejected the appellant's argu
ment. He agreed with the Minister that any taxa
tion prior to the acquisition of the shares would
have breached the basic rule that employment
income be taxed in the year of receipt. Besides, he
added [at page 152], until the shares were actually
acquired, the appellant's "right was always condi
tional upon the continuation of his employment",
and that made taxation at any earlier date pre
cluded by the "principle of income recognition that
an amount must not be taxed as income until
uncertainty about the taxpayer's entitlement to it
has been removed". As to the reference to the
majority judgment in Abbott v. Philbin, the Trial
Judge wrote as follows [at page 154] :
I do not consider Abbott v. Philbin to be authority for the
proposition that in Canada such benefits would be taxable in
the year the option was awarded and not in the year in which
the option has been exercised. This 1960 House of Lords
decision is based upon the wording of an English Statute which
is different from the language of paragraph 6(1)(a) of the
Canadian Income Tax Act. Secondly, such an interpretation is
incompatible with the interpretation of the words "in respect
of' by the Supreme Court of Canada in its 1983 Savage
decision which gives them "the widest possible scope". Thirdly,
the English decision is subject to two dissenting judgments,
including Lord Denning's and his famous pronouncement (at
page 777) that "a bird in the hand is taxable, but a bird in the
bush is not". Fourthly, the House of Lords in a more recent
decision (1978) Tyrer v. Smart (Inspector at Taxes) held that
the gain which accrued to a taxpayer between the date of his
application for shares and his acquisition of the shares was
attributable to his employment and not to "numerous factors
which have no relation to the office of the employee, or to his
employment in it" as said by Viscount Simonds in Abbott v.
Philbin.
I have reservations about the reasons given by
the Trial Judge in support of his conclusion. First,
albeit the option conferred on the appellant by the
agreement was subject to certain conditions
(namely: that the appellant continue in his
employment and that the transfer of the shares not
violate any regulations of any securities commis
sions, stock exchanges, or other regulatory authori
ties), these conditions never operated to prevent
the appellant from acquiring, on the day the agree-
ment was signed and at the end of each of the five
following years thereafter, rights that were legally
enforceable. There was no uncertainty about the
existence of such rights. Second, the time at which
an elected benefit will be seen to arise for tax
purposes is not as directly and necessarily associat
ed with the payment of money or money's worth as
it is for revenue. The accounting distinction be
tween the cash method and the accrual method is
easy to apply in the area of monetary remunera
tion, but when non-pecuniary benefits are con
cerned, the distinction can become inapplicable.
Third, it is true that the language of the British
Income Tax Act [1952, 15 & 16 Geo. 6 & 1 Eliz.
II, c. 10, Sch. 9, r. 1] is different from that of the
Canadian Income Tax Act. Indeed, the English
provision corresponding to paragraph 6(1)(a) of
our Act reads as follows:
1. Tax under Schedule E shall be annually charged on every
person having or exercising an office or employment mentioned
in Schedule E, or to whom any annuity, pension or stipend
chargeable under that Schedule is payable, in respect of all
salaries, fees, wages, perquisites or profits whatsoever there
from for the year of assessment, after deducting the amount of
duties or other sums payable or chargeable on the same by
virtue of any Act of Parliament, where the same have been
really and bona fide paid and borne by the party to be charged.
It should be noted particularly (as I will come
back to that later) that the use of the phrase "for
the year of assessment" may be of significance
when it comes to the problem of relating the
profits to be taxed to the services rendered by the
taxpayer as an employee. I doubt, however, that
the difference of language would, in itself, justify
an immediate repudiation of the reasoning fol
lowed by the majority in Abbott v. Philbin. As to
the Tyrer y Smart (Inspector of Taxes) case,
[ 1979] 1 All ER 321 (H.L.), while its disposition
may be difficult to reconcile with the views of the
majority in Abbott v. Philbin, it cannot be seen as
having overruled the earlier decision, because it
did not address the same issue. The proceedings,
started before the High Court by way of stated
case, posed two questions: a) whether the benefit
which had accrued to the taxpayer from a prefer
ential right to apply for shares of his employer-
company constituted an emolument from office or
employment, and b) if so, whether the value of
that benefit had been accurately assessed. The
lower courts answered the first question in the
negative, so that the second, which could have
required the consideration of the Abbott v. Philbin
judgment, did not arise. When the House of Lords
reversed the lower courts on the first question, the
second had to be settled, but it was answered in a
rather perfunctory manner:
On the question of the value of the emolument, as the
commissioners heard evidence as to the value of the shares on
the day that they were issued, which was the day before the
market opened and was agreed to be the date on which the
value of the emolument was to be assessed, their finding was
clearly one of fact and I can see no grounds at all for interfer
ing. [Emphasis added.] (per Lord Diplock, at p. 326)
The Abbott v. Philbin judgment was in no way put
in question.
Thus, I must say, with respect, that the reason
ing of the Trial Judge does not appear convincing
to me. And yet I have finally come to the view that
his conclusion must nevertheless be upheld.
As the Trial Judge quite appropriately
remarked, the reasoning of the majority in Abbott
v. Philbin is strongly contested by the dissenting
speeches of Lord Keith and Lord Denning. For
Lord Keith [at page 776], "The option is an offer,
to be accepted or not as and when the appellant
[employee] pleases, but, until it is accepted, the
transaction is not complete, nor has any profit
been realised." For Lord Denning [at page 777],
"The offer itself [the option] would not be a
perquisite or profit; for it conferred only the expec
tation of profit, not any profit itself." My views are
no different and, with respect, I adopt their rea
sons. I will nevertheless try to express my thinking
in my own words.
The question debated is whether the benefit of
an option to purchase shares at a fixed price
(assuming that it is a taxable benefit) should be
measured and seen to have accrued at the time of
its conferral, or at the time of its exercise. In the
Abbott v. Philbin case, the judgment of the
majority, as I understand it, hinges on two proposi-
tions, a basic one and an alternative one. If, say
the three learned law lords, a benefit can be said to
have been granter) at one time, more precisely
when the option was given, it is not possible to
speak of another benefit being granted later at
another time. In any event, adds Lord Reid, even if
we can speak of a benefit realized by the exercise
of the option, it would not be possible to relate it
directly to the employee's office. 2
My reaction to the main proposition is this.
Obviously, double-tier taxation should not be
imposed on gains from a single transaction, nor
should the same benefit be taxed on two occasions.
We certainly cannot have two benefits of a same
type, both taxable under paragraph 6(1)(a) of the
Act. But, that being said, let me ask why the
arrangement should necessarily be seen as convey
ing only a single benefit. It can hardly be contest
ed, it seems to me, that a first benefit arises upon
the employer binding himself, over a period of
time, to sell shares at a fixed price, regardless of
2 Per Viscount Simonds, at p. 767 of the report:
My Lords, as I have said, the argument for the Crown
appeared to demand for its success that the grantee of the
option did not acquire a perquisite at the date of the grant.
There could not be one perquisite at the date of the grant and
a second perquisite when the shares were taken up. There
fore, the Crown's case, in my opinion, fails at the initial step.
Per Lord Reid, at pp. 770-771 of the report:
Then there appears to me to be another difficulty in the
way of the Crown. Rule 1 taxes a person exercising an office
or employment of profit "in respect of all salaries, fees,
wages, perquisites or profits whatsoever therefrom for the
year of assessment". It does not say salaries or perquisites
received during the year of assessment. It may be difficult to
relate a perquisite strictly to a particlar year. But if a reward
is given in the form of an option and the option is itself the
perquisite, it would generally be sufficiently related to the
year in which it is given to be properly regarded as a
perquisite for that year. If, on the other hand, the option is
not the perquisite—if there is no perquisite until the option is
exercised and shares are issued, it may be many years later—
in what sense would the shares be a perquisite for the year
when they were issued. There would be no relation whatever
between the service during that year and the giving of the
option many years earlier or the exercise of the option during
the later year. I do not wish to express any concluded opinion
on this point, but it does seem to lend support to the
conclusion which I have reached on other grounds.
the appreciation in the market value of such
shares, and a second benefit arises if and when the
employee makes use of the rights flowing from the
first one and exercises the option. The fact is
however that while the second benefit can be
measured by the discrepancy between the cost of
exercising the option and the market value of the
shares at the time of the acquisition, the first
benefit, although a real one, eludes independent
quantification. It might be suggested that the
option, although formally non-assignable, could
nonetheless be "turned to pecuniary account" via
an arrangement between the employee and a will
ing third party (see the reasons of Lord Reid at
page 770). But such an arrangement would not, in
itself, accelerate the conferral of the second ben
efit, any more than borrowing against the award of
a bonus could accelerate the time of its assessment
from one year to another. More importantly, the
measure of the benefit derived from the third-par
ty arrangement should not be taken, or rather
mistaken, for the correct measure of the employ
ment benefit itself, which can only be made at the
time of receipt of the second benefit.
As to the alternative proposition of Lord Reid, I
will simply remark that its strength is linked to the
special wording of the English statute and more
particularly to the use of the word "for" therein,
which, as noted previously, is of consequence when
it comes to relating the profits to be taxed with the
services rendered as employee. The language of the
Canadian Act does not readily allow for the same
reasoning. In any event, outside any difficulty of
text, I fail to see how one can get around the fact
that if the purchase of shares for an amount less
than their value is possible, it is only because of
the existence of a promise made by the employer
to reward the services of his employee. The exer
cise of the option is inseparable from the signing of
the agreement and the employer-employee rela
tionship. We cannot look at the taxpayer who
exercises the option as if he had owned the shares
all along; the power to acquire the shares should
not be confused with ownership of the shares itself.
Finally, was it not here a condition of the agree
ment that the option be exercised before or within
a few days after the end of employment: the
relation with the services rendered as employee is
there too made manifest.
Thus, in my view, there are two economic ben
efits, both arising from employment, but only the
second is quantifiable as only that one is realized
by a flow of money or money's worth from the
employer to the employee. Nothing flows from the
employer on the granting of the option: while the
employer retains the shares, votes them, collects
dividends for his own account and may dispose of
them, the employee only acquires a possibility to
eventually obtain a proprietary interest in those
shares and realize a profit therefrom. In my view,
individual taxation on employment-source income
is based on the flow of money or money's worth
from the employer to the employee. Only the
second benefit, the quantifiable one, falls within
the scope of paragraph 6(1)(a) of the Act.
The employee who is granted an option to buy
shares is in the same situation as the employee who
is given the opportunity to purchase his employer's
manufactured goods at variance with their fair
market value or the possibility to borrow money
from his employer at a lower rate of interest.
There is no fixed quantifiable benefit which flows
to the first employee until he buys the shares just
as there is no quantifiable benefit to the second
employee until he purchases the goods or borrows
the money. In all three cases, what the employee
has is an offer (an offer which may be made
irrevocable at will and will then usually be called
"option", but remains nevertheless a simple offer),
and in none of them does a quantifiable benefit
arise until the offer is acted upon. It is only if and
when the offer is so acted upon that a benefit may
be received by the employee and become taxable
as income from employment, regardless of whether
the employment relationship is still in existence.
These are the reasons why I agree with the Trial
Judge that the reassessment of the appellant by
the Minister is to be upheld.
I would dismiss the appeal with costs.
HEALD J.A.: I concur.
STONE J.A.: I agree.
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.