T-3440-76
Estate of George Farnsworth Phaneuf represented
by Wallace A. Bradley (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Thurlow A.C.J.—Ottawa, Novem-
ber 28, 29 and December 22, 1977.
Income tax — Income calculation — Bequest giving com
pany employees right to buy shares at par value — At time of
purchase, fair market value of shares $17.25 compared to par
value of $2 — Whether or not purchaser liable for tax on
value of benefit received by him in course of his employment
pursuant to s. 6(1)(a) — Income Tax Act, S.C. 1970-71-72, c.
63, ss. 5(1), 6(1)(a).
Plaintiff acquired shares in a Company, his employer, pursu
ant to a bequest of the Company's principal shareholder: this
bequest gave the right to the Company's employees to acquire a
number of shares at par value. The Company's Board of
Directors revised the list of employees entitled to purchase
shares and approved a formula for distribution based on service
to some extent. Purchasers bought subject to a shareholders'
agreement designed to keep control of the Company with the
employees. Plaintiff's shares, although purchased at a par value
of $2, had a fair market value at the time of $17.25. The issue
is whether or not Mr. Phaneuf, who died since the commence
ment of the appeal, is liable for income tax in respect of the
value of a benefit received by him on the purchase of the
shares.
Held, the appeal is allowed. The benefit was conferred on
Mr. Phaneuf as a person not as an employee, and as a personal
gift rather than as remuneration, and hence is not a taxable
benefit. There is nothing in the way in which the provision of
the will is expressed to characterize the benefit as a reward or
payment for services rendered. The provision is simply one of
bounty to the employees as persons. What the Board sanctioned
and approved for distribution of the right was not the employer-
employee relationship, even though the appointees had to fall
within the class of employees. The agreement was not one in
respect of their service to the Company as employees but in
respect of their shareholdings in the Company. The distribution
scheme, while based to some extent on service, is no more than
a formula for share distribution and in itself is ineffective to
give the character of remuneration to the right allocated to the
employees pursuant to it. That only the Company's employees
were eligible is a sine qua non. The employer was not the
source of that right, and it was not a benefit to which they were
entitled by their contracts of service, and for which service was
not required to be rendered to anyone by their service contracts.
Ransom v. Minister of National Revenue [1968] 1
Ex.C.R. 293, followed. Seymour v. Reed [1927] A.C. 554,
followed. Bridges v. Hewitt [1957] 2 All E.R. 281,
considered.
INCOME tax appeal.
COUNSEL:
Robert C. McLaughlin for plaintiff.
C. T. A. MacNab for defendant.
SOLICITORS:
Macdonald, Affleck, Ottawa, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
THURLOW A.C.J.: The principal issue in this
appeal is whether the late George Farnsworth
Phaneuf, who died on October 23, 1977, after the
commencement of this appeal, was liable for
income tax in respect of the value of a benefit
received on the purchase by him on or about June
5, 1973, of 152 shares of Charles Ogilvy Limited
at their par value. If so, further issues as to the
year in which the value is taxable and as to its
amount arise. The appeal is probably a test case as
a similar benefit was received at or about the same
time by some 240 other persons in like situations
from the same source and on like conditions.
The material on which the case is to be decided
consists of a statement of agreed facts, a series of
eight documents admitted by consent as exhibits
and some oral testimony given by Mr. R. H.
Hyndman, the president of Charles Ogilvy Lim
ited. The agreed statement is as follows, the refer
ences therein to the plaintiff being references to
Mr. Phaneuf:
1. The Plaintiff was at all material times an employee of
Charles Ogilvy Limited (hereinafter called "the Company").
2. Charles Ogilvy, the founder and then principal shareholder
of the Company, died March 26, 1950.
3. By his Will dated May 14, 1947, Mr. Ogilvy directed his
Executors to sell 1,800 of his common shares of the Company
to employees of the Company within one year after the death of
the survivor of him and his wife at their par value of $20.00 per
share.
4. The widow of the late Mr. Ogilvy died November 10, 1972.
5. The common shares of the Company had been splrt ten for
one between the date Mr. Ogilvy made his Will and the date of
Mrs. Ogilvy's death. After making allowances for direct
bequests contained in Mr. Ogilvy's Will, only 1713 (17,130) of
the stipulated 1800 (18,000) common shares of the Company
were available for sale to the employees.
6. On April 27, 1973, the Supreme Court of Ontario ordered
that the 17,130 common shares of the Company were available
for sale to the employees in accordance with the terms of Mr.
Ogilvy's Will at a price of $2.00 per share.
7. On May 2, 1973, the Board of Directors of the Company
met and revised the list of employees entitled to purchase
shares because of the death and resignation of entitled
employees since the list was first settled at a meeting of the
Board of Directors on March 6, 1973.
8. It had been the practice since 1964 that all employees who
purchased shares of the Company did so subject to the provi
sions of a Shareholders Agreement.
9. On March 1, 1973, Mr. R. H. Hyndman, on behalf of Mr.
W. J. Tate and himself, acting as Trustees, tendered the sum of
$34,260.00 to the Executor of Mr. Ogilvy's estate, being the
purchase price of 17,130 common shares at a price of Two
($2.00) Dollars per share. The said sum of $34,260.00 was
borrowed by the Trustees from their bank.
10. The 17,130 common shares of the Company were trans
ferred by the Executors of the Estate of the late Charles Ogilvy
to Messrs. Hyndman and Tate as Trustees.
11. On May 15, 1973, the entitled employees were invited, in
writing, by Mr. Hyndman to purchase the number of shares
allotted to them.
12. On June 5, 1973, the Plaintiff purchased 152 shares at a
price of $2.00 per share by cheque payable to Messrs. Hynd-
man and Tate.
13. The fair market value of the common shares of the Com
pany on the date of purchase was $17.25 per share.
14. The fair market value of the common shares of the Com
pany on the date of Mr. Ogilvy's death was $30.00 per share;
however, after his death the common shares were split five for
one.
15. By Notice of Reassessment dated May 20, 1975, the
Minister of National Revenue reassessed the Plaintiff for his
1973 taxation year by adding to his declared income an amount
of $2,318.00 and indicated in the accompanying form T7W-C
that the Plaintiff's income had been adjusted to include the
taxable benefit received in the purchase of 152 common shares
of the Company for $2.00 per share when their actual worth
was $17.25 per share.
16. On or about August 7, 1975, the Plaintiff duly served and
filed a Notice of Objection to the said Assessment.
17. In a notification by the Minister of National Revenue
dated June 11, 1976, the aforementioned assessment was con
firmed indicating that the sum of $2,318.00 was a benefit
received by the Plaintiff by virtue of his office or employment
resulting from the acquisition of shares of the Company at less
than their fair market value and that the amount was properly
included in computing the Plaintiffs income in accordance with
the provisions of section 6(1)(a) of the Income Tax Act.
All of which facts are admitted and agreed to by the parties
and their counsel.
The late Mr. Ogilvy left no children. He and his
first wife had owned all the shares of Charles
Ogilvy Limited and, in 1940, he had given some 48
percent (%) of the shares to employees. His wife
died in 1946. In 1950, when his will was made, he
was contemplating a second marriage and this is so
expressed in it. It provided first for a number of
specific bequests to individuals and for the pay
ment to his widow of the income on the residue of
his estate for her life. It went on to provide that
thereafter his residence was to be conveyed to
Charles Ogilvy Limited to be operated as a rest
and convalescent home for employees of the Com
pany. He expressed a desire that the business of
the Company be carried on for fifteen years after
the death of his widow or after his death, if he
survived her, and he gave to certain nieces and
nephews the dividends on 1800 shares of the Com
pany to be set aside during such fifteen-year
period, or until the shares were purchased by
employees under the provision referred to in para
graph 3 of the statement of agreed facts, and to
pay the proceeds of their sale to the such nieces
and nephews. The provision for the employees read
as follows:
I AUTHORIZE AND DIRECT my said Executors and Trustees
to enter into an agreement with the employees of Charles
Ogilvy Limited (the term "employees" to include any Directors
of Charles Ogilvy Limited who may not be on the regular
payroll of the Company), who may, with the sanction and
approval of the Directors of the said Company for the time
being, desire to enter into such agreement, for the sale to such
employees of the said eighteen hundred (1800) shares herein-
before directed to be set aside for the benefit of my nephews
and nieces hereinbefore named and the widows of my said
deceased nephews, Gavan Russell and James G. Ogilvy, at the
price or sum of Twenty ($20.00) dollars per share, being the
par value thereof; provided that no employee of the Company
may become a purchaser of the said stock or any part thereof
except with the sanction and approval of the Board of Directors
of the said Company for the time being, and provided further,
that no employee may become a purchaser of any greater
number of said shares than the number which may be desig
nated by the said Board of Directors. The said agreement, in
addition to such provisions as the said employees may desire to
make as among themselves, shall contain the following terms
and provisions ....
Then followed provision for a scheme for contri
butions by employees to a fund over the fifteen-
year period to be accumulated to pay for the
shares. As matters turned out, the shares were
purchased for cash and these provisions did not
come into effect. The will then continued:
THE Privilege hereby conferred upon the said employees of
Charles Ogilvy Limited of purchasing the said eighteen hun
dred (1800) shares, being a portion of my holdings in the
capital stock of the said Company, shall be exercised by them,
and the said agreement shall be entered into within one year
following the death of my said wife or within one year following
my death in the event of my wife predeceasing me, and if the
said privilege is not exercised and the said agreement is not
entered into within the said period of time, then my said
Executors and Trustees may revoke the said privilege, and
subject to the other terms and provisions of this my Will, may
dispose of the said stock in such manner as they may deem
advisable in the best interests of my estate as if the said
privilege had not been conferred upon the said employees of
Charles Ogilvy Limited.
IT is my desire that William Russell Burnett, of the City of
Ottawa, Solicitor, hereinafter named as one of my Executors
and Trustees, shall after my death and during the said period of
fifteen years after the death of my said wife, be a Director of
Charles Ogilvy Limited and take an active interest in the said
business, and that he shall at all times be consulted as to the
affairs thereof in order that the policies of fair dealing towards
the public and towards my employees laid down by me with
respect to the said business shall be carried into effect.
The residue of the estate was then given to
charitable institutions.
I turn now to the practice referred to in para
graph 8 of the statement of agreed facts.
Since 1964, there has been in existence an
agreement between the employee shareholders of
the Company and R. H. Hyndman and William J.
Tate as trustees which provides for valuing the
shares of the Company and establishing a price for
them at the beginning of each year and restricts
the shareholders who are parties to the agreement,
in disposing of their shares, to selling them to the
trustees and at the prevailing price established for
the year. The trustees buy the shares at that price
and dispose of them at the same price to employees
of the Company. The agreement provides for a
point system for allocation to employees of the
right to purchase such shares from the trustees
which is based on the length of service of such
employees and their salaries and bonuses, with a
further weighting formula based on seniority in the
Company. The purpose of this agreement is to
keep the control of the Company in the hands of
its employees and any employee purchasing shares
allocated to him pursuant to its provisions is
required to subscribe and become a party to it.
As the trustees under this agreement, Mr.
Hyndman and Mr. Tate were in no sense trustees
of the rights of employees under Mr. Ogilvy's will,
but when the Board of Directors of the Company
carried out the function committed to it by the
will, it approved the purchase of the 1713 shares
from the executor by Messrs. Hyndman and Tate
as trustees and allocated them to employees on the
basis of the system of the agreement so far as it
was based on points for length of service and
salary and bonus. The Board also made the alloca
tion of the right to purchase subject to the
employee subscribing and becoming party to the
agreement with respect to the shares so purchased.
As set out in the statement of agreed facts, Mr.
Phaneuf was allotted the right to purchase 152
shares and he did so and thereby realized the
benefit in question in this appeal.
The relevant provisions of the Income Tax Act
are subsections 5(1) and 6(1). They provide:
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 the benefit he derives 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) received or enjoyed by him in the year in
respect of, in the course of or by virtue of an office or
employment;
The arguments submitted by both parties
ranged over many aspects and details of the matter
and many cases were referred to and discussed, but
basically, as I understood them, the position of the
plaintiff was that the benefit received by Mr.
Phaneuf in being given the privilege or right or
opportunity to purchase the shares at so low a
price was a gift or bequest to him personally under
the will of Mr. Ogilvy, while that of the defendant
was that the right accrued to Mr. Phaneuf in his
capacity as an employee and is therefore a benefit
of the kind rendered taxable by paragraph 6(1)(a)
as income from employment.
In Ransom v. M.N.R.', which arose under cor
responding provisions of the Income Tax Act ap
plicable prior to 1972, Noël J. (as he then was),
after referring to the difference between Schedule
E Rule 1 of the English statute, on which there is a
considerable body of jurisprudence, and the provi
sions of the Income Tax Act 2, observed at page
307:
I now come to section 5(1)(a) and (b) of the Act which, as
already mentioned, is couched in language which appears to be
wider than the English taxation rule on which the taxpayers in
Hochstrasser v. Mayes and Jennings v. Kinder (supra) were
held not to be taxable. The Canadian taxation section indeed
uses such embracing words that at first glance it appears
extremely difficult to see how anything can slip through this
wide and closely interlaced legislative net.
In order, however, to properly evaluate its intent it is, I
believe, necessary to bear in mind firstly, that section 5 of the
Act is concerned solely with the taxation of income identified
by its relationship to a certain entity, namely, an office or
employment and in order to be taxable as income from an
office or employment, money received by an employee must not
merely constitute income as distinct from capital, but it must
arise from his office or employment. Similar comments were
made in Hochstrasser v. Mayes with reference to the English
legislation by Viscount Simonds at p. 705 and by Lord Rad-
cliffe, at p. 707. Secondly, the question whether a payment
arises from an office or employment depends on its causative
relationship to an office or employment, in other words, wheth
er the services in the employment are the effective cause of the
payment. I should add here that the question of what was the
effective cause of the payment is to be found in the legal source
of the payment, and here this source was the agreement which
resulted from the open offér of the employer to compensate its
employee for his loss and the acceptance by him of such offer.
The cause of the payment is not the services rendered, although
such services are the occasion of the payment, but the fact that
because of the manner in which the services must be rendered
or will be rendered, he will incur or have to incur a loss which
other employees paying taxes do not have to suffer.
I agree with this and, in my view, it applies as
well to the present provisions introduced by the
' [1968] 1 Ex.C.R. 293.
2 R.S.C. 1952, c. 148.
1970-71-72 Act 3 . I would add that the nature of
the subject matters of paragraphs (b) to (f) inclu
sive of subsection 6(1) appears to me to further
support the view that, to fall within the very broad
wording of what is now paragraph 6(1)(a), the
amount must be of an income as distinct from a
capital nature, and must arise from the office or
employment in the sense that the services rendered
in the employment must be the effective cause of
the payment.
It is often difficult to determine in a particular
case whether a payment or benefit arose from
employment in the material sense. For this pur
pose, the relationship of the employment and the
services rendered in it to the payment or benefit
are always important since they are always part of
the context in which the problem arises. But, while
in some cases it is easy to see that they are the
effective cause of the payment so that it may be
affirmed that it arose from the office or employ
ment, in others they are but sine qua non's. Tips
received by waiters, hotel porters or taxi drivers
are ready examples of payments other than salary
or wages that arise from employment, that are
related to services rendered in the course of the
employment and that are of a recurring nature in
the course of that employment. However, while
non-recurring gifts that are related in some way to
employment or services, whether received from the
employer or from some other person, can also arise
from the employment, they raise a much closer
question.
In Seymour v. Reed 4 , Viscount Cave L.C.
expressed the question arising in cases of this kind
under the English statute as follows:
The question, therefore, is whether the sum of 939!. 16s. fell
within the description, contained in r. 1 of Sch. E, of "salaries,
fees, wages, perquisites or profits whatsoever therefrom" (i.e.,
from an office or employment of profit) "for the year of
assessment," so as to be liable to income tax under that
Schedule. These words and the corresponding expressions con
tained in the earlier statutes (which were not materially differ
ent) have been the subject of judicial interpretation in cases
which have been cited to your Lordships; and it must now (I
think) be taken as settled that they include all payments made
to the holder of an office or employment as such, that is to say,
by way of remuneration for his services, even though such
payments may be voluntary, but that they do not include a
3 S.C. 1970-71-72, c. 63.
4 [1927] A.C. 554 at page 559.
mere gift or present (such as a testimonial) which is made to
him on personal grounds and not by way of payment for his
services. The question to be answered is, as Rowlatt J. put it:
"Is it in the end a personal gift or is it remuneration?" If the
latter, it is subject to the tax; if the former, it is not.
The same distinction was adopted by the
Supreme Court in Goldman v. M.N.R. 5 , a case
that turned on the wording of the Income War
Tax Act 6 . See per Kellock J. at page 215, and per
Rand J. at page 219.
While the language of the statutes differ, the
test expressed by Viscount Cave L.C. (supra)
appears to me to express, as well as it can be
expressed, the essence of what falls within the
taxing provision of the Income Tax Act. Is the
payment made "by way of remuneration for his
services" or is it "made to him on personal grounds
and not by way of payment for his services"? It
may be made to an employee but is it made to him
as employee or simply as a person. Another way of
stating it is to say is it received in his capacity as
employee, but that appears to me to be the same
test. To be received in the capacity of employee it
must, as I see it, partake of the character of
remuneration for services. That is the effect that,
as it seems to me, the words "in respect of, in the
course of or by virtue of an office or employment"
in paragraph 6(1)(a) have.
Turning first to its origin, the source of the
benefit here in question was a testamentary gift
made by Mr. Ogilvy, in effect, to such employees
and on such terms and in such quantity as the
Board of Directors of the Company might sanction
and approve. In exercising its function to sanction
and approve, the Board, as it seems to me, was not
carrying out its authority as the Board of Directors
of the Company but was acting solely as a body
designated for the purpose by the will and pursu
ant to its authority, and the gift to Mr. Phaneuf
though sanctioned and approved by the Board
remained the gift of the testator. Moreover, there
is nothing in the way in which the provision of the
will is expressed, or in the will as a whole, which,
in my view, would serve to characterize the benefit
5 [1953] 1 S.C.R. 211.
6 R.S.C. 1927, c. 97.
as being a reward or payment for services ren
dered. On the contrary, the impression which I
derive both from the gifts made by Mr. Ogilvy in
1940 to employees of his Company and from the
whole tenor of the will is that this provision was
simply one of his bounty to his employees as
persons and not in any sense as remuneration for
their services as employees. In this connection
Jenkins L.J., in his dissenting judgment in Bridges
v. Hewitt 7 , observed at pages 291-292:
If, in response to the taxpayers' representations, Mr. Frank
Hornby had in his lifetime transferred to each of them eight
thousand shares in the company, it may be that such shares
could in all the circumstances of the case, and on the principles
laid down by the authorities to which I have referred, properly
have been held to have been given by Mr. Frank Hornby and
received by the taxpayers as a present made in token of their
long and successful business association with him, and not as
remuneration. If Mr. Frank Hornby had given the taxpayers
substantial holdings of shares in the company by his will, as in
effect he had promised to do, it seems clear that such shares
would have come to the taxpayers purely by an act of testamen
tary bounty on the part of Mr. Frank Hornby wholly removed
from the sphere of remuneration.
The lack of any wording in the will to couple the
gift with services performed or to be performed for
the Company in the present case may be compared
with the wording of the deed in Patrick v.
Burrows 8 where the purpose to be achieved in
making the appointment was expressed in the
instrument creating the gift to be
the intention being that the said shares shall be available for
distribution amongst any of the said employees of the Com
pany to whom the Directors may from time to time deem it
expedient to give an interest or an increased interest as
shareholders in the Company in consideration of past or
future services and with a view to promote the prosperity of
the Company.
So there was here, as I see it, nothing about the
will to characterize the benefit as remuneration for
services.
Next, while it may conceivably have been open
to the Board of Directors, had they seen fit to do
so, in exercising the power given to them by the
will, to give their sanction and approval in the case
of some or all of the employees on terms that
would have had the effect of characterizing the
benefit as remuneration for services rendered or to
be rendered to the Company, I do not think what
[1957] 2 All E.R. 281.
8 (1954) 35 T.C. 138 at page 142.
the Board did had any such effect. It appears to
me that what the Board sanctioned and approved
as a basis for distribution of the right was not the
employer-employee relationship at all, even though
the appointees had to fall within the class of
employees, but an agreement among shareholders,
to which the Company was not a party. The
agreement was not one in respect of their services
to the Company as employees but in respect of
their shareholdings in the Company and had been
made for the purpose of ensuring continuing
employee control of the Company. This rather
than a basis of rewarding service to the Company
was what the Board adopted as the basis for
distribution. The Board's action was as if it had
said: "we approve the allocation of the right to
persons who are parties to the agreement or who
under like provisions may become parties provided
that they become parties in respect of the shares to
be purchased". Further, while the scheme itself for
distribution was based to some extent on service,
since, in the agreement, years of service and salary
and bonus earned were taken into account, I think
that in the circumstances that is no more than the
formula by reference to which distribution was
made and that, in itself, it is ineffective to give the
character of remuneration to the right allocated to
the employees chosen pursuant to it. See The
Glenboig Union Fireclay Co., Ltd. v. The Com
missioners of Inland Revenue 9 and The Queen v.
Atkins'''. Moreover, while the Board may have
hoped or even thought that the employees to whom
the right to buy shares was allotted would be
encouraged thereby to stay in the Company's
employ, that is a long way from making it a
requirement.
Finally, from the point of view of employees, the
right to purchase shares at par was not something
they were entitled to under their contract of
employment nor was there any service they were
required by their contract to render for it either to
the employer or anyone else. Nor was the employ
er the source of it. The only fact that, from their
point of view, appears to support the defendant's
position is that only employees of Charles Ogilvy
Limited were eligible as recipients, but that, in my
opinion, is a mere sine qua non. It is a feature of
the situation which tends to confuse but does not
9 (1922) 12 T.C. 427.
w[1976' C.T.C. 497, 76 DTC 6258.
help to solve the problem. For, the provision
having been restricted by the will to such
employees, no one could benefit from it, either as a
gift or as remuneration, if he were not an
employee. Compare Bridges v. Hewitt (supra) per
Morris L.J. at page 297:
But the question which arises is whether he received them as
remuneration or as a personal gift. In one sense Mr. Bearsley
received the shares by reason of his office. Had he not held the
office he would not have had them. But that merely shows that
he would not have had the shares (either as remuneration or as
a gift) if he had not given many years of service to the company
down to Dec. 30, 1949.
I should add at this point that I do not see in the
judgment in Laidler v. Perry" anything that
would avail to change the view I reach on the facts
of this case since in that case the vouchers of £10
each received by the employees at Christmas were
given to them by the employer and the essential
question for decision was whether in the particular
case the finding of the Commissioners that the
vouchers were made available in return for services
rather than as gifts was supportable in law.
On the other hand, the view I take appears to
derive support from the view expressed by Morris
L.J. in Bridges v. Hewitt (supra) when he said at
page 299:
Where some payment, and particularly some non-recurring
payment, is received from someone other than an employer, it
will probably only have the attributes of remuneration in those
classes of cases where it is reasonable to expect that remunera
tion would come from some other source than from the pocket
of an employer.
On the whole I am of the view that the benefit
here in question was conferred on Mr. Phaneuf as
a person rather than as employee, as a personal
gift rather than as remuneration, and that it was
not a benefit in respect of which the recipient was
liable for income tax.
In view of this conclusion, it is unnecessary to
further state or consider the other issues to which
reference was made at the outset of these reasons.
At one point in the argument, counsel for the
defendant also sought to justify the assessment
under subsection 7(6) of the Act but, in my view,
" [1966] A.C. 16.
that provision has no application in the present
situation and the point was not pressed.
The appeal accordingly succeeds and it will be
allowed with costs. The reassessment will be
referred back to the Minister for reassessment on
the basis that Mr. Phaneuf was not liable for
income tax in respect of the benefit in question.
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.