T-1245-80
William Russell Steen (Plaintiff)
v.
The Queen (Defendant)
INDEXED AS: STEEN V. CANADA
Trial Division, Rouleau J.—Vancouver, April 22;
Ottawa, September 29, 1986.
Income tax — Income calculation — Income or capital gain
— Employee stock option plan — Option exercised when
market price substantially higher than option price — Wheth
er taxpayer received benefit within Act s. 7(1)(a) — When
shares "acquired" — Value of shares fair market value on
Stock Exchange on date of acquisition — Income Tax Act,
S.C. 1970-71-72, c. 63, s. 7(1)(a),(5) — Company Act,
R.S.B.C. 1979, c. 59, s. 41(2)(a) — Civil Code of Lower
Canada, art. 1025, 1026, 1027, 1472 — Income Tax Act,
R.S. C. 1952, c. 148, s. 85A.
The plaintiff is an employee of a "public" Canadian com
pany the common and preferred shares of which are traded on
the Vancouver, Montréal and Toronto Stock Exchanges.
Through its Board of Directors, the company established a
Share Option Incentive Plan granting certain key employees
the option of purchasing common shares without nominal or
par value of the authorized but unissued capital of the com
pany. Each option was to be exercisable not less than one year,
nor more than ten years after the date on which the option was
granted. The purchase price was to be the last sale price on the
Toronto Stock Exchange on the last date preceding the grant
ing of the option. The plaintiff was granted two options: in
December 1972, at $21.63 per share and in February 1973, at
$33 per share. In May 1973, the option price was reduced by
one-half following a two for one share split. He exercised his
options on May 3, 1976, February 10, 1977 and March 7, 1977,
paying in full for the shares on each occasion. On those dates,
the shares were trading at $24, $25.13 and $26, respectively, on
the Toronto Stock Exchange. The plaintiff filed his income tax
returns for 1976 and 1977, reporting as a capital gain in each
case the difference between the cost of the shares acquired and
the proceeds of disposition, less the expenses of disposition.
However, the Minister determined in a reassessment that under
paragraph 7(1)(a) of the Income Tax Act, the plaintiff was
deemed to have received, in 1976 and 1977, benefits equal to
the difference between the market price of the shares on the
dates the options were exercised and the Plan cost of the shares.
This is an appeal against the Minister's reassessment.
Held, the appeal should be dismissed.
The issue is whether the plaintiff received a benefit within
the meaning of paragraph 7(1)(a) of the Act.
Since that provision deems a benefit to be received when the
shares are "acquired", it must be determined if that acquisition
took place on the granting or on the exercise of the options. An
examination of the scheme of paragraph 7(I)(a) and of the
relevant case law reveals that a taxpayer is deemed to have
received a benefit, if any, at the moment he obtains legal
ownership or the incidence of legal ownership in and to the
shares subscribed. In this case, it is the moment when the
options were exercised: the shares were fully paid and issued on
those dates and the plaintiff acquired shareholder rights in
respect of the purchased shares on those dates.
The case law makes it clear that the "value" referred to in
paragraph 7(1)(a) is the fair market value of the shares.
The plaintiff is therefore deemed to have received a benefit,
equal to the difference between the fair market value of the
shares at the time he acquired legal ownership in them and the
price paid. The fair market value was the trading price of the
shares on the Toronto Stock Exchange on the date of
acquisition.
CASES JUDICIALLY CONSIDERED
APPLIED:
Anderson, RE y The Queen, [1975] CTC 85 (F.C.T.D.);
Gesser (N.) Estate v. M.N.R. (1984), 84 DTC 1570
(T.C.C.); Grant v. The Queen, [1974] 2 F.C. 31; 74 DTC
6252 (T.D.); Van Wielingen, G. A. v. M.N.R. (1976), 76
DTC 1182 (T.R.B.); Untermeyer (sic) Estate v. Atty.
Gen. for B.C., [1929] S.C.R. 84; Montreal Island Power
Co. v. Town of Laval des Rapides, [1935] S.C.R. 304;
Busby. (V.) v. The Queen, [1986] 1 C.T.C. 147
(F.C.T.D.); Henderson Estate v. M.N.R. (1975), 75 DTC
5332 (F.C.A.); Domglas Inc. et Jarislowski, Fraser &
Co., [1980] C.S. 925 (Que.); afrd (1982), 138 D.L.R.
(3d) 521 (Que. C.A.).
COUNSEL:
Brian J. Wallace for plaintiff.
Deen C. Olsen and Beverly Hobby for
defendant.
SOLICITORS:
Lawson, Lundell, Lawson & McIntosh, Van-
couver, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
ROULEAU J.: This is an appeal by the plaintiff
against an income tax reassessment dated May 15,
1979 and confirmed on December 10, 1979 with
respect to the 1976 and 1977 taxation years where
in the Minister of National Revenue added to the
plaintiff's income the amounts of $24,060 and
$8,905, respectively, as deemed benefits arising
out of the exercise of an employee stock option
plan, all this pursuant to paragraph 7(1)(a) of the
Income Tax Act [R.S.C. 1952, c. 148 (as am. by
S.C. 1970-71-72, c. 63, s. 1)] (the "Act").
The plaintiff is an employee of British Columbia
Forest Products Limited ("BCFP"), a Canadian
corporation whose common and preferred shares
are traded on the Vancouver, Montreal and
Toronto Stock Exchanges.
On December 15, 1959 the Board of Directors
of BCFP resolved to establish a non-transferable
Share Option Incentive Plan (the "Plan") under
which certain key employees of BCFP would be
granted options to purchase from time to time
common shares without nominal or par value of
the authorized but unissued capital of the com
pany. Each option granted was to be exercisable
not less than one year, nor more than ten years,
after the date on which the option was granted.
Finally, the provisions of the resolution stipulated
the following:
9. (c) An option may be exercised at the
applicable times and in the applicable
amounts by giving to the Company
written notice of exercise signed by the
optionee specifying the number of
shares to be purchased and accom
panied by full payment for the shares
to be purchased in cash or by cheque
certified by a Canadian chartered
bank.
12. No optionee shall have any rights as a
shareholder in respect of the shares
covered by his option unless and until
the issue of shares to him thereunder
after its exercise.
By an amendment dated September 28, 1961
the Board resolved that shares were to be pur
chased at a price not less than the last sale price
for a board lot as reported on the Toronto Stock
Exchange at its close on the business day next
preceding the date on which the option was grant
ed. If there had been no such sale on that date
then the purchase price was to be not less than the
sale price on the last date preceding the granting
of the option on which such a sale was reported.
Pursuant to the Plan and by an agreement dated
December 15, 1972, in consideration of $1 the
plaintiff was granted an option to purchase
common shares of BCFP at a price of $21.63 per
share. This price was determined in accordance
with the established formula. According to the
agreement BCFP reserved for allotment 2,700
common shares without par value of the Compa-
ny's treasury stock. The option would be exercis-
able in installments of 270 shares per annum over
the period 1973 to 1982, inclusive.
On February 23, 1973 and again for a consider
ation of $1 the plaintiff was granted an option to
purchase 600 additional common shares at a price
of $33 per share. Again, the price was determined
in accordance with the Plan formula and available
for allotment in installments of 60 shares per
annum over the period 1974 to 1983, inclusive.
By a notice dated May 14, 1973, the plaintiff
was informed that the common shares of BCFP
were split on a two for one basis effective April 19,
1973. Accordingly, he was advised that the 2 for 1
division reduced the option price per share to
$10.815 and doubled the number of shares to
5,400; they could be purchased in installments of
540 shares per annum over the period 1973 to
1982 inclusive. He was also informed that, pursu
ant to the second agreement dated February 23,
1973, the stock split reduced the option price per
share to $16.50 and increased the number of
shares allocated under option to I,200—the shares
were now purchasable in installments of 120
shares per annum over the period 1974 to 1983
inclusive.
Pursuant to the agreements the plaintiff notified
the secretary of BCFP on May 3, 1976, February
10, 1977 and March 7, 1977 of his wish to exercise
his options for the purchase of BCFP common
shares. In compliance with the December 1959
resolution plaintiff enclosed a certified cheque
with each notice covering the full payment of the
shares to be purchased.
The plaintiff's exercise of the 1972 and 1973
options may be summarized as follows:
3 May 1976
1,620 shares at $10.815 Expenditure: $17,520.30
360 shares at $16.50 Expenditure: $ 5,940.00
Total Shares (1976): 1,980 shares
Total Expenditure (1976): $23,460.30
10 February 1977
500 shares at $10.815 Expenditure: $ 5,407.50
7 March 1977
40 shares at $10.815 Expenditure: $ 432.60
120 shares at $16.50 Expenditure: $ 1,980.00
Total Shares (1977): 660 shares
Total Expenditure (1977): $7,820.10
It should be noted that the last sale price of BCFP
common shares on the Toronto Stock Exchange on
May 3, 1976 was $24 per share. Similarly BCFP
common shares were trading at $25.13 per share
and $26 per share on February 10, 1977 and
March 7, 1977, respectively.
On May 3, 1976, February 10, 1977 and March
7, 1977 the Secretary to the Chairman of BCFP
notified the Montreal, Vancouver and Toronto
Stock Exchanges of plaintiffs exercise of his
options and of BCFP's corresponding issuance of
shares to the plaintiff from treasury (Exhibit "A"
Tab 17).
On May 6, 1976, February 10, 1977 and on
March 7, 1977 plaintiff sold the BCFP shares
acquired pursuant to the exercise of the Plan
agreements as follows:
6 May 1976
1,900 shares at $24.00 Proceeds: $45,600
80 shares at $23.75 Proceeds: $ 1,900
Total Proceeds (1976): $47,500
10 February 1977
200 shares at $25.50 Proceeds: $ 5,100
300 shares at $25.625 Proceeds: $ 7,687.50
7 March 1977
150 shares at $25.50 Proceeds: $ 3,825.00
Total Proceeds (1977): $16,612.50
Plaintiff filed his income tax returns for the years
1976 and 1977 reporting as a capital gain in each
case the difference between the cost of the shares
acquired and the proceeds of disposition less the
expenses of disposition. Plaintiffs calculations are
reproduced as follows:
No. of Proceeds of Adjusted Expenses of Capital
Shares Disposition Cost Base Disposition Gain
1976 1980 $47,500.00 $23,460.30 $690.27 $23,349.43
1977 650 $16,612.50 $ 7,655.10 $328.73 $ 8,628.67
However, the Minister of National Revenue
(the "Minister") determined that plaintiffs exer
cise of the Plan agreements fell within the parame
ters of paragraph 7(1)(a) of the Act and that
plaintiff was deemed to have received a benefit of
$24,060 (being the difference between the market
price on May 3, 1976 and the Plan cost of the
1,980 shares ($47,520—$23,460)) and $8,905
($16,725—$7,820) in the 1976 and 1977 taxation
years, respectively.
Defendant submits that the Minister properly
applied paragraph 7(1)(a) of the Act to the case at
bar. The defendant's position is that the paragraph
applies where an employee acquires shares pursu
ant to a share option incentive plan at a price
substantially less than the fair market value of
those shares at the time of their acquisition.
Defendant contends that plaintiff acquired the
shares when the stock was trading at a fixed price
and thus had a fair market value substantially
higher than the cost incurred by the plaintiff.
Plaintiff submits that the exercise of the Plan
agreements did not create a taxable benefit within
the meaning of paragraph 7(1)(a) of the Act.
Initially, he argued that the Minister erred in
using the Toronto Stock Exchange trading quota
tions on the dates of acquisition in order to fix the
value of the BCFP shares in determining whether
plaintiff had received a benefit within the meaning
of paragraph 7(1)(a) of the Act. He submits that
nothing in section 7 of the Act requires that the
value of the shares acquired be assessed at market
value or fair market value.
Plaintiff contends that, pursuant to Part 3 of the
Articles of BCFP and paragraph 42(2)(a) of the
British Columbia Company Act,' R.S.B.C. 1979,
c. 59, the price per share of BCFP common was
determinable by the Board of Directors in their
absolute discretion. The price set by the Board and
paid by the plaintiff was, in the circumstances of
this particular case, equal to the value of the
shares at the time that they were acquired; that
the predetermined price paid for these shares was
equal to their value and paragraph 7(1)(a) was
rendered inapplicable.
In making this submission plaintiff states that,
at the time of their acquisition, the BCFP shares
existed in Treasury and were not part of the
trading block of shares in the company; plaintiff
was the only person who could acquire these par
ticular shares.
' The relevant provisions of Part 3 of BCFP's Articles read as
follows:
3.1 Subject to these Articles and the Memorandum, the
shares shall be under the control of the Directors who may,
subject to the rights of the holders of the shares of the
Company for the time being outstanding, issue, allot, sell or
otherwise dispose of, and/or grant options on or otherwise deal
in, shares authorized but not outstanding, and outstanding
shares held by the Company, at such times, to such persons
(including Directors), in such manner, upon such terms and
conditions, and at such price or for such consideration, as they,
in their absolute discretion, may determine.
Paragraph 42(2)(a) of the Company Act (B.C.) reads as
follows:
42....
(2) No shares without par value shall be allotted or issued at
a price or for a consideration less than,
(a) where the memorandum or articles authorize the direc
tors to determine the price or consideration, the price or
consideration determined by them;
Plaintiff also contends that the facts in the case
at bar are consistent with administrative practice
as set forth in paragraph 1 of Interpretation Bulle
tin IT-113. 2 According to this provision of the
Bulletin, paragraph 7(1)(a) of the Act is triggered
when an "employee is entitled to acquire shares
... at less than fair market value"; at the time the
plaintiff became entitled to acquire the shares
under the Plan agreements they were not less than
fair market value and therefore fell outside the
charging provisions of paragraph 7(1)(a) of the
Act.
The issue to be decided in this case is whether
plaintiff received a benefit within the meaning of
paragraph 7(1)(a) of the Act when he exercised
his option to purchase treasury stock of a "public"
company in a taxation year in which the market
price for those shares was substantially higher
than the option price, notwithstanding the fact
that the Board of Directors of the company had set
the option price in reference to fair market value
at the time the option was granted.
The resolution of this issue will depend upon a
determination as to when the benefit arose; that is,
on what date were the shares "acquired" as that
term is contemplated by paragraph 7(1)(a) of the
Act. The two alternatives in this case are the dates
on which the plaintiff was granted the options to
purchase BCFP shares and the dates on which the
plaintiff exercised his options for the purchase of
the BCFP common shares. In addition, a determi
nation must be made as to the value of these
shares at the time they were acquired. This will
Z Paragraph 1 of IT-113 reads as follows:
1. Section 7 applies in respect of 1972 and subsequent
taxation years to determine whether an employee has
received a taxable benefit and the year in which the benefit
should be taxed in cases where the employee has entered into
an agreement with the corporation that employs him, a
corporation with which the employing corporation does not
deal at arm's length, or a trustee acting under the direction
of either corporation whereby the employee is entitled to
acquire shares in either corporation at less than fair market
value. Section 7 remains applicable where a person who was
an employee at the time he obtained a right to acquire shares
ceases to be an employee before the value of the benefit is
determined by his exercising or transferring the right.
[Emphasis added.]
depend upon the interpretation accorded to the
word "value" as it appears in paragraph 7(1)(a) of
the Act.
Prior to the March 31, 1977 amendments to the
Act, the English and French texts of paragraph
7(1)(a) read as follows:
7. (I) 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 corporation with which it does not deal at
arm's length,
(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;
7. (I) Lorsqu'une corporation a convenu de vendre ou d'at-
tribuer un certain nombre d'actions de son capital-actions, ou
des actions d'une corporation avec laquelle elle a un lien de
dépendance, à un de ses employés ou à un employé d'une
corporation avec laquelle elle a un lien de dépendance,
a) si l'employé a acquis des actions en vertu de la conven
tion, un avantage, égal à la fraction de la valeur des actions
qui, au moment oft il les a acquises, était en sus de la somme
qu'il a payée ou devra payer pour ces actions à la corpora
tion, est réputé avoir été reçu par l'employé en raison de son
emploi dans l'année d'imposition où il a acquis les actions;
Thus, when a corporation with whom an
individual is employed has agreed to issue shares
of its capital stock to that employee, paragraph
7(1)(a) will deem that employee as having
received a benefit, if any, in the taxation year in
which he acquired the corporation's shares. In fact
the phrase "a benefit equal to the amount by
which the value of the shares at the time he
acquired them" and, more explicitly, its French
counterpart "un avantage, égal à la fraction de la
valeur des actions qui, au moment où il les a
acquises" convey the direction that the benefit is
to be assessed at that instance in time in which the
shares are acquired. Contrary to plaintiff's anal
ysis of paragraph 1 of IT-113, the triggering event
in paragraph 7(1)(a) of the Act is the acquisition
of shares at a price less than their value as deter
mined as of the date of their acquisition.
The meaning of the word "acquired" in para
graph 7(1)(a) of the Act has been the subject of
judicial comment. In the case of Anderson, RE v
The Queen, [1975] CTC 85 (F.C.T.D.) Mr. Jus
tice Gibson, in obiter, commented on those situa-
tions that would trigger the operation of section
85A of the Income Tax Act [R.S.C. 1952, c. 148]
(section 7 of the Income Tax Act, S.C. 1970-71-
72, c. 63, as amended). He noted the following (at
page 87):
Section 85A of the Income Tax Act deals specifically with
benefits to employees of a company who acquire options,
contracts or other agreements to purchase shares or to have
issued to them shares of companies. Paragraph 85A(1)(a)
[7(1)(a)] refers to the situation where the employee has exer
cised his option to purchase shares from a corporation. Para
graphs 85A(1)(b),(c) and (d) refer to situations where the
employee transfers or otherwise disposes of his option to pur
chase shares to a third person or persons who subsequently
acquires such employee's rights under a contract option.
[Emphasis added.]
Thus it would appear that according to Gibson
J. an employee acquires shares pursuant to a stock
option agreement at the time he exercises his
option to purchase shares from his corporate
employer.
A similar conclusion was reached by Cardin
T.C.J. in Gesser (N.) Estate v. M.N.R. (1984), 84
DTC 1570 (T.C.C.). In that case, the taxpayer's
estate unsuccessfully argued that the taxpayer had
acquired shares under an agreement of purchase
and sale in 1970 within the meaning of Articles
1025, 1026, 1027 and 1472 of the Civil Code of
Lower Canada. The Court held that as the taxpay
er was not obligated under the agreement of pur
chase and sale to pay for any shares, the agree
ment was in substance a stock option. Further, the
Court held that the taxpayer did not acquire and
become the legal owner of the shares offered under
the 1970 stock option agreement until that option
was exercised in 1972.
The relationship between acquisition of shares
and the establishment of legal title in and to those
shares was examined in Grant v. The Queen,
[1974] 2 F.C. 31; 74 DTC 6252 (T.D.). In that
case plaintiff, pursuant to a share option purchase
plan, purchased on credit on July 25, 1968 shares
of his corporate employer at their then market
value. Plaintiff repaid the debt one year later when
the market price of the shares had doubled. It was
only at that point that the plaintiff's share certifi
cates were issued. Mr. Justice Bastin held that the
plaintiff had acquired shares in the corporation on
July 25, 1968. In reaching this conclusion, Bastin
D. J. reasoned that the plaintiff's subscription for
the shares on that date, and the Board of Direc
tors' acceptance of that subscription on that same
date, as evidenced by its confirmation of the share
option plan, constituted a binding enforceable
agreement for the sale of the shares in question.
Thus the key factor that Mr. Justice Bastin
considered in ascertaining the date of acquisition
was not the date on which the shares were fully
paid nor the date on which the share certificates
were issued but the date on which the taxpayer
established a binding proprietary right in the legal
ownership of the shares.
Similarly in Van Wielingen, G. A. v. M.N.R.
(1976), 76 DTC 1182 (T.R.B.), the taxpayer was
given an option in January 1970 pursuant to a
Shareholder Resolution dated December 30, 1969
to subscribe for shares of a company at the then
fair market value. Notwithstanding the fact that
the plaintiff subscribed for the shares on January
1, 1970, he did not pay the purchase price until
December 31, 1970 when the fair market value of
the shares had appreciated considerably. A key
provision of the December 1969 resolution was
that shares would be issued only when they
became fully paid and that only upon such issu
ance would the subscriber have any rights of a
shareholder in respect of those shares. Mr. Taylor,
C. A., held on the basis of the particular provision
that, as the taxpayer did not have any rights as a
shareholder in the subscribed shares until Decem-
ber 31, 1970, he acquired those shares only at that
date.
In conclusion, after an examination of the
scheme of paragraph 7(1)(a) of the Act and of the
relevant jurisprudence, I am satisfied that a tax
payer is deemed to have received a benefit, if any,
at the moment he obtains legal ownership or the
incidence of legal ownership in and to the shares
subscribed.
Applying this principle to these facts it is clear
that plaintiff acquired shares of BCFP on May 3,
1976, February 10, 1977 and March 7, 1977. The
available evidence indicates: (i) that the shares
obtained were fully paid on those dates; (ii) that
the shares purchased were issued on those dates;
and (iii) that, pursuant to the terms of the Decem-
ber 1959 resolution, the plaintiff on those dates
acquired rights as a shareholder in respect of the
purchased shares upon the exercise of the option.
Although I have briefly reviewed the legal prin
ciples which have developed from judicial con
sideration of when shares are actually deemed to
have been acquired pursuant to paragraph 7(1)(a)
of the Act, I also wish to note that counsel for the
plaintiff conceded in the course of the hearing
before me that the shares were acquired at the
time the plaintiff exercised his option to purchase
them. The plaintiff's principal argument is that at
the time the plaintiff exercised his option to pur
chase, the shares existed in the Treasury of the
company and the Directors of the company had set
a price for them. It is the plaintiffs position that it
is that price, rather than the fair market value of
the shares which represents the "value" of the
shares.
Paragraph 7(1)(a) of the Act provides a for
mula for the calculation of the deemed benefit
arising from the acquisition of shares pursuant to
the exercise of a share option purchase plan. For
convenience, that formula reads as follows:
... 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 ....
The problem which has most often arisen in rela
tion to this legislative provision involves the inter
pretation of the word "value". As a general rule,
the value of listed securities has generally been
held to be the stock market price of the day. This
is because "value" as it is used in paragraph
7(1)(a) is normally considered to import the con
cept of fair market value—that which a willing
buyer would pay a willing seller in an open market.
The plaintiff argued before me that because the
word "value" is used in paragraph 7(1)(a) rather
than the term "fair market value", which is used
in several other provisions of the Act, some differ
ence in meaning was intended by the legislators.
However, for most purposes concerning provisions
of the Act the term value has been held to mean
"market value" or "fair market value". In Unter-
meyer (sic) Estate v. Atty. Gen. for B.C., [1929]
S.C.R. 84 the issue before the Court was the value
to be attributed to certain shares held by the
appellant at the time of his death for succession
duty purposes. Speaking for the Court, Mignault
J. stated at page 91:
We were favoured by counsel with several suggested defini
tions of the words "fair market value." The dominant word
here is evidently "value," in determining which the price that
can be secured on the market—if there be a market for the
property (and there is a market for shares listed on the stock
exchange)—is the best guide. It may, perhaps, be open to
question whether the expression "fair" adds anything to the
meaning of the words "market value," except possibly to this
extent that the market price must have some consistency and
not be the effect of a transient boom or a sudden panic on the
market. The value with which we are concerned here is the
value at Untermyer's death, that is to say, the then value of
every advantage which is property possessed, for these advan
tages, as they stood, would naturally have an effect on the
market price. Many factors undoubtedly influence the market
price of shares in financial or commercial companies, not the
least potent of which is what may be called the investment
value created by the fact—or the prospect as it then exists—of
large returns by way of dividends, and the likelihood of their
continuance or increase, or again by the feeling of security
induced by the financial strength or the prudent management
of a company. The sum of all these advantages controls the
market price, which, if it be not spasmodic or ephemeral, is the
best test of the fair market value of property of this description.
I therefore think that the market price, in a case like that
under consideration, where it is shown to have been consistent,
determines the fair market value of the shares. [Emphasis
added.]
In Montreal Island Power Co. v. Town of Laval
des Rapides, [1935] S.C.R. 304, in analyzing the
propriety of an assessment of the actual value of a
parcel of submerged land for taxation purposes,
Duff C.J.C. noted the following at page 305:
The meaning of "actual value," when used in a legal instru
ment, subject, of course, to any controlling context, is indicated
by the following passage from the judgment of Lord MacLaren
in Lord Advocate v. Earl of Home (1891) 28 Sc. L.R. 289, at
293:
Now, the word "value" may have different meanings, like
many other words in common use, according as it is used in
pure literature, or in a business communication or in conver
sation. But I think that "value" when it occurs in a contract
has a perfectly definite and known meaning unless there be
something in the contract itself to suggest a meaning differ
ent from the ordinary meaning. It means exchangeable value
— the price which the subject will bring when exposed to the
test of competition.
When used for the purpose of defining the valuation of
property for taxation purposes, the courts have, in this country,
and, generally speaking, on this continent, accepted this view of
the term "value." [Emphasis added.]
In Busby (V.) v. The Queen, [1986] 1 C.T.C.
147 (F.C.T.D.) Mr. Justice McNair, in comment
ing in obiter on paragraph 7(1)(a) and subsection
7(5) of the Act (the latter being a provision which
limits the applicability of paragraph 7(1)(a) to
situations where the benefit is conferred by virtue
of the employment), made the following observa
tion (at page 151):
In my opinion, the purpose of these provisions is to tax as
income any benefit derived by an employee by virtue of a stock
option plan or similar agreement that enables the employee to
purchase or acquire shares of an employer corporation or of a
corporation with which it does not deal at arm's length at a
price less than the market value of the shares, whereby the
difference between that and the amount paid therefor is
deemed to have been received as income; provided that it was
received in respect of, in the course of, or by virtue of the
employment. If the benefit is attributable to something other
than employment then it is not taxable under this section.
[Emphasis added.]
Similar comment as to the meaning of the word
"value" within the context of paragraph 7(1)(a) of
the Act has been advanced by several income
taxation authorities (see generally Ward, D. A.,
ed., Ward's Tax Law and Planning Vol. 1, 1983,
pages 3-54 et seq.; Stikeman, H.H., ed., Canada
Tax Service Vol. 1, pages 7-11 to 7-28).
Given that a taxpayer is deemed to have
received a benefit, equal to the difference between
the fair market value of shares at that point in
time when he acquires legal ownership in those
shares and the price paid, I am of the opinion that
plaintiff's argument must fail.
The uncontradicted evidence of Mr. Aldridge,
C.G.A., C.B.V., as to the fair market value of
BCFP common shares on the Toronto Stock
Exchange as of May 3, 1976, February 10, 1977
and March 7, 1977, was that such shares traded at
the price of $24 per share, $25.13 per share and
$26 per share. That such price quotations are a
reflection of the fair market value of those shares
is supported by the observations of Mr. Justice
Ryan in Henderson Estate v. M.N.R. (1975), 75
DTC 5332 (F.C.A.) wherein he noted (at page
5337) the following:
Given a consistent market in the sense of a market that is not
"the effect of a transient boom or a sudden panic" or that is
"not spasmodic or ephemeral", to adopt the terms used by
Mignault, J. in the Untermyer case, the stock market is the best
evidence of fair market value.
Indeed the plaintiff sold these shares on the
market on May 6, 1976, February 10, 1977 and
March 7, 1977 at substantially the same prices.
Furthermore there is no clog on the disposal of
plaintiff's shares that would justify a discount
from the market price quotation nor is it necessary
to take into account plaintiff's minority position in
BCFP in view of the fact that stock market prices
of shares in a company listed on a public stock
exchange, widely distributed and regularly traded
in, as is the case at bar, will reflect a minority
discount given that the stock exchange is a market
of minority interest (Domglas Inc. et Jarislowski,
Fraser & Co., [1980] C.S. 925 (Que.); aff d
(1982), 138 D.L.R. (3d) 521 (Que. C.A.)).
In conclusion, therefore, there is no evidence to
warrant a variation in the Minister's assessment.
Accordingly, the plaintiff's appeal is dismissed
with costs.
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