October 07, 2011

Marshall R. Bertram and Richard Simpson (Appellants) v. Her Majesty the Queen (Respondent)

93 DTC 1251
Tax Court of Canada
October 19, 1993

(Court File Nos. 91-1046(IT) and 91-1047(IT).)

Inclusions in income — Stock option benefits — Whether taxpayers ever really acquiring option shares in issue or deriving any actual benefit therefrom — Income Tax Act, S.C. 1970-71-72, c. 63, s. 7(1)(a).

The taxpayers were directors and shareholders of E Ltd. in addition to holding options to purchase further shares thereof. On September 5, 1985, a group led by D took over E Ltd. pursuant to negotiations with the taxpayers. Part of the takeover arrangement involved the transfer by each taxpayer to D, for no consideration, of his option to purchase additional shares of E Ltd. Accordingly, on September 5, 1985, each taxpayer exercised his option to acquire such additional shares at 16 cents per share and D paid E Ltd. the option price for both options. On September 9, 1985, E Ltd.’s directors passed a resolution to issue the shares to the taxpayers. Both taxpayers, however, endorsed their share certificates in D’s favour (without consideration) forthwith upon receipt. In assessing the taxpayers for their 1985 taxation years, the Minister included in their income, as a stock option benefit in respect of each share, the difference between the option price of 16 cents per share and the $1.60 per share determined by Revenue Canada to be the value per share at the time of the said transactions. The taxpayers appealed to the Tax Court of Canada.

Held: The taxpayers’ appeals were allowed. The deal with D had been made by the taxpayers prior to their exercising the options in issue. The result was that they never acquired the shares and did not receive any benefit from them. The Minister was ordered to reassess accordingly.