Rip,
T.C.J.:—
The
appellant,
Joseph
R.
Dundas,
appeals
an
income
tax
assessment
for
1983
in
which
the
respondent,
the
Minister
of
National
Revenue,
added
to
his
income
the
sum
of
$596,590
(sometimes
hereafter
referred
to
as
"total
release
payment")
received
by
him
from
Canadian
Reserve
Oil
and
Gas
Ltd.
("Canadian
Reserve"),
his
employer.
The
appellant
says
the
money
was
received
by
him
as
damages
due
to
a
breach
of
a
stock
option
agreement
by
Canadian
Reserve
and
is
not
to
be
included
in
his
income.
The
respondent
says
the
sum
received
was
properly
included
in
the
appellant's
income
for
1983
since
he
had
transferred
or
otherwise
disposed
of
his
rights
under
stock
option
agreements
to
a
person
with
whom
he
was
dealing
at
arm's
length
pursuant
to
paragraph
7(1)(b)
of
the
Income
Tax
Act
("Act")
and
the
consideration
received
is
deemed
to
be
received
by
the
appellant
by
virtue
of
his
employment.
The
respondent,
in
assessing,
also
relied
upon
sections
3,
5
and
6
of
the
Act
in
including
in
the
appellant's
income
for
1983
the
amount
of
purported
damages
received
by
him
in
the
year.
Statement
of
Facts
The
parties
proceed
by
way
of
an
agreed
statement
of
facts
and
viva
voce
evidence
of
Mr.
Dundas.
The
agreed
statement
of
facts
(without
exhibits)
follows:
1.
The
Appellant
was
at
all
material
times
hereto
a
resident
of
Canada
for
the
purposes
of
the
Income
Tax
Act
(Canada)
(the
'Act").
2.
Mr.
Dundas
joined
Canadian
Reserve
Oil
and
Gas
Ltd.
(‘Canadian
Reserve')
in
1972
as
Special
Projects
Supervisor.
At
that
time,
Canadian
Reserve
was
a
public
company
whose
shares
were
listed
on
various
stock
exchanges,
including
the
Toronto
Stock
Exchange.
The
majority
of
the
shares
of
Canadian
Reserve
(approximately
86%)
was
held
at
that
time
by
Reserve
Oil
&
Gas
Company,
a
corporation
incorporated
under
the
laws
of
the
State
of
California.
3.
Options
to
purchase
Canadian
Reserve
shares
were
granted
to
senior
officers
and
other
employees
of
Canadian
Reserve
on
an
individual
basis
(each
holder
of
an
option
is
herein
referred
to
as
an
"Optionholder").
Canadian
Reserve
entered
into
the
following
option
agreements
with
Mr.
Dundas
in
his
capacity
as
an
employee
of
Canadian
Reserve:
|
Date
of
|
Number
of
Shares
to
Which
|
Option
Price
|
|
Option
Agreement
|
Options
Applied
|
Per
Share
|
|
July
17,
1972
|
10,000
|
$
3.20
|
|
January
6,
1977
|
5,000
|
4.36
|
|
October
7,1977
|
5,000
|
6.30
|
|
July
14,
1978
|
10,000
|
11.02
|
|
August
8,
1979
|
10,000
|
15.98
|
|
June
30,
1980
|
9,000
|
18.45
|
|
March
1,
1982
|
12,000
|
12.26
|
Copies
of
each
of
these
option
agreements
with
the
exception
of
the
July
17,1972
agreement
are
attached
hereto
as
Exhibit
"A".
4.
As
at
July
29,
1983,
Mr.
Dundas
was
the
owner
of
2,776
shares
of
Canadian
Reserve
and
held
the
following
remaining
options
to
purchase
further
shares
of
Canadian
Reserve:
|
Date
of
|
Remaining
Number
of
Shares
|
Option
Price
|
|
Option
Agreement
|
to
Which
Options
Applied
|
Per
Share
|
|
July
17,
1972
|
Nil
|
N/A
|
|
January
6,
1977
|
3,000
|
$
4.36
|
|
October
7,
1977
|
4,000
|
6.30
|
|
July
14,
1978
|
8,000
|
11.02
|
|
August
8,
1979
|
10,000
|
15.98
|
|
June
30,
1980
|
9,000
|
18.45
|
|
March
1,
1982
|
12,000
|
12.26
|
|
46,000
|
|
The
option
agreements
between
Mr.
Dundas
and
Canadian
Reserve
as
they
related
to
such
unexercised
options
are
hereinafter
referred
to
as
the
“Subject
Option
Agreements"
and
the
unexercised
options
thereunder
as
the
"Subject
Options".
5.
Under
the
terms
of
the
Subject
Option
Agreements,
Mr.
Dundas
would
earn
the
right
to
exercise
the
Subject
Options
over
time
based
on
the
number
of
years
of
continuous
employment.
For
each
year
of
continuous
employment
from
the
date
of
the
Subject
Option
Agreements,
Mr.
Dundas
would
earn
the
right
to
exercise
the
Subject
Option
as
to
one-fifth
of
the
number
of
shares
specified
in
the
Subject
Option
Agreements.
Section
3
of
the
Subject
Option
Agreements
provides
as
follows:
3.
EARNING
BY
EMPLOYMENT
If
the
employee
is
in
the
employment
of
the
Company
continuously
for
one
year
from
the
date
hereof
the
employee
shall
have
earned
the
right
to
exercise
the
option
as
to
one-fifth
of
the
number
of
shares
specified
above.
Thereafter
for
each
year
of
continuous
employment
of
the
employee
by
the
Company
and/
or
an
affiliated
corporation
to
a
total
of
four
such
years
of
employment
the
employee
shall
have
earned
the
right
to
exercise
the
option
as
to
one-fifth
of
the
number
of
shares
specified
above.
6.
As
at
July
29,
1983,
Mr.
Dundas
had
only
earned
the
right
to
exercise
the
Subject
Options
as
to
a
limited
number
of
the
Canadian
Reserve
shares
as
follows:
|
Date
of
|
Earned
|
Unearned
|
|
Option
Agreement
|
Rights
|
Rights
|
|
July
17,
1972
|
N/A
|
N/A
|
|
January
6,1977
|
3,000
|
Nil
|
|
October
7,
1977
|
4,000
|
Nil
|
|
July
14,
1978
|
8,000
|
Nil
|
|
August
8,
1979
|
6,000
|
4,000
|
|
June
30,
1980
|
5,400
|
3,600
|
|
March
1,
1982
|
2,400
|
9,600
|
|
28,800
|
17,200
|
The
Subject
Options
as
they
relate
to
such
earned
rights
are
hereinafter
referred
to
as
the
"Earned
Subject
Options"
and
the
unearned
rights
are
hereinafter
referred
to
as
the
"Unearned
Subject
Options”.
7.
On
January
23,
1980,
Reserve
Oil
and
Gas
Company
merged
into
Getty
Oil
Company
("Getty")
and,
as
a
result
of
such
merger,
Getty
acquired
8,516,226
shares
of
Canadian
Reserve,
which
shares
constituted
approximately
86%
of
the
total
issued
and
outstanding
shares
of
Canadian
Reserve.
The
acquisition
was
reviewed
under
the
Foreign
Investment
Review
Act
(Canada)
and
was
allowed
on
September
9,
1982
subject
to
undertakings
given
by
Getty
relating
to
maintaining
Canadian
participation
in
Canadian
Reserve
at
the
corporate
and
management
level
and
keeping
Canadian
Reserve
autonomous.
8.
The
relative
size
of
Getty
and
Canadian
Reserve
is
indicated
by
the
following
financial
information
relating
to
their
respective
1982
fiscal
years:
|
Selected
|
|
|
Financial
Data
|
Getty
Getty
|
Canadian
Reserve
|
|
Net
Income
|
$
|
691.6m
(U.S.)
|
$
6.5m
(Cdn.)
|
|
Sales
and
Other
Revenues
|
$12,311.6m
(U.S.)
|
$
54.7m
(Cdn.)
|
|
Total
Assets
|
$
9,924.5m
(U.S.)
|
$154.7m
(Cdn.)
|
9.
Upon
acquiring
the
majority
of
the
shares
of
Canadian
Reserve,
Getty
took
steps
to
gain
full
control
over
the
management
and
operations
of
Canadian
Reserve.
By
way
of
an
Information
Circular,
a
copy
of
which
is
attached
hereto
as
Exhibit
“B”,
Getty
outlined
its
plans
for
the
amalgamation
of
Canadian
Reserve
with
Getty
Oil
(Canadian
Operations),
Ltd.
("Getty
Canada")
to
form
a
single
corporation,
hereinafter
called
"Amalco".
10.
Pursuant
to
the
terms
of
an
amalgamation
agreement
made
as
of
June
22,
1983
between
Canadian
Reserve,
Getty
Canada
and
Getty
(the
"Amalgamation
Agreement"),
a
copy
of
which
is
attached
hereto
as
Exhibit
"C",
the
shares
of
Canadian
Reserve
held
by
the
minority
shareholders
were
to
be
converted
into
redeemable
preferred
shares
of
Amalco.
Immediately
following
the
amalgamation,
Amalco
was
to
exercise
its
right
to
redeem
such
redeemable
preferred
shares
at
the
redemption
price
of
$26.00
per
share.
In
this
manner,
the
minority
shareholders
of
Canadian
Reserve
were
to
be
bought
out
at
$26.00
per
share
and
Amalco
was
to
become
the
wholly
owned
subsidiary
of
Getty.
11.
The
price
of
$26.00
per
share
was
determined
on
the
basis
of
an
evaluation
prepared
by
Dominion
Security
Ames
Limited
("DSA")
which
stated
that
the
value
per
share
of
Canadian
Reserve
as
of
March
31,
1983
was
in
the
range
of
$22.60
and
$28.41.
The
$26.00
per
share
amount
represented
a
price
in
excess
of
the
midpoint
of
the
range
of
values
which
DSA
placed
on
the
shares
of
Canadian
Reserve.
12.
Getty
transferred
its
shares
of
Canadian
Reserve
to
Getty
Canada,
the
other
amalgamating
corporation,
prior
to
the
amalgamation.
13.
To
effect
the
amalgamation,
it
was
necessary
to
obtain
shareholder
approval
by
way
of
a
special
resolution
passed
by
a
majority
of
not
less
than
two-thirds
of
the
votes
cast
by
the
shareholders
of
each
class
of
shares
of
each
amalgamating
corporation.
In
addition,
in
order
to
comply
with
the
policies
of
the
applicable
securities
commissions
it
was
necessary
to
obtain
the
approval
of
the
majority
of
the
votes
cast
by
the
minority
shareholders
of
Canadian
Reserve.
Once
the
required
approval
was
obtained,
any
shareholders
who
objected
to
the
amalgamation
were
restricted
to
the
appraisal
rights
for
dissenting
shareholders
under
the
Business
Corporations
Act
(Alberta)
(“ABCA”).
14.
Under
the
ABCA,
it
was
also
necessary
to
obtain
shareholders'
approval
for
the
continuance
of
Canadian
Reserve
under
the
ABCA
prior
to
the
amalgamation.
Accordingly,
at
the
extraordinary
general
meeting
of
the
shareholders
of
Canadian
Reserve
held
on
July
29,
1983,
(the
"Meeting"),
the
shareholders
of
Canadian
Reserve
voted
on
two
resolutions.
The
first
resolution
authorized
the
continuance
of
Canadian
Reserve
under
the
ABCA,
adopted
the
Articles
of
Continuance
and
authorized
the
directors
of
Canadian
Reserve
to
apply
for
a
Certificate
of
Continuance
of
Canadian
Reserve
under
the
ABCA.
The
second
resolution
related
to
the
adoption
of
the
Amalgamation
Agreement.
Both
resolutions
were
passed
at
the
Meeting
by
the
necessary
votes
to
constitute
special
resolutions.
15.
Upon
filing
the
necessary
documentation
with
the
Corporate
Registry
of
Alberta,
the
amalgamation
of
Canadian
Reserve
and
Getty
Canada
became
effective
and
a
Certificate
of
Amalgamation
dated
July
29,
1983
was
issued.
A
copy
of
the
Certificate
of
Amalgamation
is
attached
hereto
as
Exhibit
"D".
16.
Pursuant
to
the
Amalgamation
Agreement,
each
minority
shareholder
of
Canadian
Reserve
had
his
shares
converted
on
a
one-to-one
basis
into
redeemable
preferred
shares
of
Amalco.
On
July
29,
1983,
Amalco
exercised
its
right
to
redeem
such
shares
at
a
redemption
price
of
$26.00
per
share.
In
addition,
all
shares
of
Canadian
Reserve
held
by
Getty
Canada
were
cancelled
without
any
repayment
of
capital
and
without
conversion
of
such
shares
into
shares
of
Amalco.
All
shares
of
Getty
Canada
(all
of
which
were
held
by
Getty)
were
converted
on
a
one-to-one
basis
into
common
shares
of
Amalco.
Amalco
became
a
wholly
owned
subsidiary
of
Getty.
17.
Prior
to
the
amalgamation,
Getty
had
taken
steps
to
reorganize
Canadian
Reserve
at
the
management
level.
Various
people,
including
Glenn
E.
McKinley
from
Getty's
Los
Angeles
office,
who
became
director,
chairman
of
the
board
and
chief
executive
officer
of
Canadian
Reserve,
were
transferred
to
Calgary
by
Getty
to
assume
various
management
functions.
18.
In
his
capacity
as
director
of
Canadian
Reserve,
Mr.
Dundas
approved
the
contents
of
the
Information
Circular
and
its
distribution
to
the
shareholders
of
Canadian
Reserve.
In
addition,
Mr.
Dundas
participated
in
the
vote
of
the
disinterested
directors
as
to
the
determination
that:
(a)
the
terms
of
the
offer
by
Getty
Canada
were
fair
to
the
shareholders
of
Canadian
Reserve,
other
than
Getty
and
Getty
Canada;
and
(b)
the
amalgamation
of
Canadian
Reserve
and
Getty
Canada
in
accordance
with
the
terms
of
the
Amalgamation
Agreement
be
approved.
The
factors
considered
in
reaching
this
determination
are
stated
in
the
Information
Circular
to
have
included
(paraphrasing):
(a)
The
cash
price
being
offered
in
the
amalgamation
resulted
in
each
Canadian
Reserve
shareholder,
other
than
Getty
Canada,
receiving
$26.00
per
share
for
each
of
his
Canadian
Reserve
shares.
This
price
was
in
excess
of
the
midpoint
of
the
range
of
values
which
DSA
placed
on
the
Canadian
Reserve
shares
and,
in
the
opinion
of
the
Canadian
Reserve
board
of
directors,
was
fair.
(b)
The
price
of
$26.00
per
share
was
higher
than
any
sales
price
on
the
Toronto
Stock
Exchange
within
the
12-month
period
prior
to
the
first
announcement
of
the
proposed
amalgamation.
The
price
to
be
paid
compared
with
recent
historic
prices
of
the
Canadian
Reserve
shares.
(c)
Since
the
first
public
distribution
of
Canadian
Reserve
shares
no
dividends
had
ever
been
paid
on
Canadian
Reserve
shares
and
it
was
unlikely
that
any
would
be
declared
in
the
near
future.
(d)
Appraisal
rights
provided
under
the
ABCA
would
allow
those
shareholders
who
objected
to
the
amalgamation
to
have
their
Canadian
Reserve
shares
appraised
and
to
receive
the
appraised
cash
value
thereof.
(e)
Getty
had
agreed
that
although
it
would
vote
its
Canadian
Reserve
shares
in
favour
of
the
Amalgamation
Agreement
it
would
not
proceed
with
the
amalgamation
unless
the
amalgamation
was
approved
at
the
Meeting
by
at
least
a
majority
of
the
aggregate
of
votes
cast
in
respect
of
all
Canadian
Reserve
shares
not
controlled
by
Getty.
19.
At
the
Meeting,
Mr.
Dundas
voted
in
favour
of
the
amalgamation
with
respect
to
the
2,766
shares
of
Canadian
Reserve
which
he
beneficially
owned,
controlled
or
directed.
As
to
the
proxies
issued
in
his
favour
he
voted
in
accordance
with
the
directions
given
in
each
proxy.
At
the
time
of
the
Meeting,
Mr.
Dundas
was
not
certain
that
the
majority
of
the
minority
shareholders
would
approve
the
amalgamation.
20.
The
Amalgamation
Agreement
did
not
require
any
approval
on
the
part
of
the
Optionholders.
The
Optionholders
were
not
considered
in
determining
the
number
of
shares
required
for
necessary
shareholder
approval
at
the
Meeting.
They
had
no
right
to
vote
at
the
Meeting.
Nor
did
the
Optionholders
have
a
clear
right
to
dissent
and
to
obtain
an
appraisal
under
the
ABCA.
21.
Under
the
terms
of
the
Subject
Option
Agreements,
the
Subject
Options
would
survive
any
changes
in
the
shares
of
Canadian
Reserve
to
which
such
options
applied.
There
was
no
right
under
the
Subject
Option
Agreements
on
the
part
of
Canadian
Reserve
to
cancel
the
Subject
Options
in
the
event
of
an
amalgamation.
Section
6
of
the
Subject
Option
Agreements
provided
as
follows:
6.
Changes
in
Shares
If
the
shares
are
consolidated,
subdivided
or
converted
into
new
shares
or
shares
having
different
characteristics,
either
by
reason
of
amalgamation
with
another
company
or
otherwise,
the
number
of
shares
to
which
this
option
relates
shall
be
altered
and
the
purchase
price
per
share
shall
be
changed
to
the
extent
required
to
place
the
employee,
in
the
opinion
of
the
auditors
for
the
Company,
in
the
same
relative
position
as
he
would
have
been
had
such
consolidation,
subdivision
or
conversion
not
taken
place.
22.
Under
the
terms
of
Article
X
of
the
Amalgamation
Agreement,
on
the
effective
date
of
the
amalgamation,
each
outstanding
option
to
purchase
any
shares
(whether
or
not
then
exercisable)
in
the
capital
of
Canadian
Reserve
was
to
terminate
and
a
payment
was
to
be
made
to
the
holder
of
each
option
(the
"Optionholders")
in
accordance
with
the
formula
set
out
therein.
Article
X
of
the
Amalgamation
Agreement
reads
in
full
as
follows:
Article
X—Stock
Options
10.01
On
the
Effective
Date
of
the
Amalgamation
each
outstanding
option
to
purchase
any
shares
in
the
capital
of
Canadian
Reserve
shall
terminate
and
cease
to
exist,
and
shall
not
attach
to
or
be
exercisable
in
respect
of
any
shares
in
the
capital
of
the
Amalgamated
Corporation,
and
there
shall
be
paid
to,
or
for
the
account
of,
each
holder
of
each
such
outstanding
option
(which
shall
not
include
any
option
or
part
thereof
which
has
expired
or
terminated
in
accordance
with
its
terms)
an
amount
in
cash
equal
to:
(a)
the
product
of
$26.00
times
the
number
of
shares
in
the
capital
of
Canadian
Reserve
the
holder
of
such
option
would
have
received
if
such
option
had
been
fully
exercised
(whether
or
not
then
exercisable)
immediately
prior
to
the
Effective
Date
of
the
Amalgamation;
less
(b)
the
aggregate
exercise
price
the
holder
of
such
option
would
have
been
required
to
pay
to
Canadian
Reserve
if
such
option
had
been
so
exercised
(whether
or
not
then
exercisable)
immediately
prior
to
the
Effective
Date
of
the
Amalgamation.
10.02
Canadian
Reserve
will
give
notice
to
all
holders
of
options
to
purchase
shares
in
the
capital
of
Canadian
Reserve
that,
if
the
Amalgamation
is
consummated,
their
rights
as
such
holders
will
terminate
on
the
Effective
Date
of
the
Amalgamation
and
will
thereafter
be
limited
to
the
rights
provided
in
this
Article,
and
in
addition,
Canadian
Reserve
shall
distribute
to
such
holders
the
Information
Circular
and
other
material
required
to
be
distributed
to
the
Shareholders
of
Canadian
Reserve
and
referred
to
in
Section
9.05
hereof.
10.03
Canadian
Reserve
shall
use
its
best
efforts
(1)
to
enter
into
agreements
with
each
holder
of
options
to
purchase
shares
in
the
capital
of
Canadian
Reserve
whereby
such
holder
shall
consent
to
termination
of
the
option
held
and
accept
the
amount
payable
therefor
pursuant
to
this
Article,
in
full
satisfaction
of
their
rights
under
such
options,
or
(2)
failing
that,
in
consideration
for
payment
of
such
amount
to
obtain
releases
from
such
option
holders,
releasing
and
discharging
Canadian
Reserve,
Getty
Canada
and
the
Amalgamated
Corporation
from
any
and
all
claims
in
respect
of
or
relating
to
the
termination
of
such
options
pursuant
to
this
Article.
10.04
The
holders
of
options
to
purchase
shares
in
the
capital
of
Canadian
Reserve
shall
have
the
right
to
receive
from
the
special
account
to
be
established
by
the
Amalgamated
Corporation,
pursuant
to
paragraph
11.01
(c)
hereof,
the
amount
payable
to
each
such
holder
pursuant
to
this
Article,
upon
delivery
to
the
Guaranty
Trust
Company
of
Canada,
401-9th
Avenue
S.W.,
Calgary,
Alberta,
of
a
demand
for
such
payment
signed
by
the
said
holder
or
his
attorney
duly
authorized
in
that
behalf,
accompanied
by
a
statement
of
the
exercise
price
or
prices
of
such
option
and
the
number
of
shares
subject
to
the
option
in
respect
of
each
such
exercise
price
or
prices.
Payment
in
respect
of
such
option
may
be
refused
by
the
said
Trust
Company
until
it
is
satisfied
that
the
person
making
such
demand
for
payment
is
entitled
thereto
in
accordance
with
this
Amalgamation
Agreement.
The
said
Trust
Company
shall
not
incur
any
liability
in
refusing
in
good
faith
to
make
any
payment
in
respect
of
any
options
which,
in
its
judgment,
is
improper
or
unauthorized.
Cheques
for
payment
in
respect
of
such
options
will,
unless
instructions
to
the
contrary
are
given
in
the
said
demand
for
payment,
be
mailed
to
the
option
holders
entitled
thereto
at
their
respective
addresses
as
they
appear
on
the
records
of
the
Amalgamated
Corporation
or
to
the
address
designated
for
payment
in
the
said
demand
for
such
payment
following
delivery
of
a
demand
for
payment
as
above
described.
23.
Mr.
Dundas
was
first
made
aware
of
the
proposed
amalgamation
of
Canadian
Reserve
and
Getty
Canada
on
May
27,
1983
when
he
received
a
form
of
an
amalgamation
agreement
in
his
capacity
as
president
of
Canadian
Reserve.
Prior
to
that
time,
Mr.
Dundas
was
not
aware
of
the
possibility
of
the
termination
of
the
Subject
Option
Agreements.
24.
Article
10.03
of
the
Amalgamation
Agreement
received
by
Mr.
Dundas
on
May
27,
1983
read
as
follows:
10.03
Canadian
Reserve
shall
use
its
best
efforts
to
enter
into
agreements
with
each
holder
of
options
to
purchase
shares
in
the
capital
of
Canadian
Reserve
whereby
such
holders
shall
consent
to
termination
of
the
options
held
and
accept
the
amount
payable
therefor,
pursuant
to
this
Article,
in
full
satisfaction
of
their
rights
under
such
options.
25.
Mr.
Dundas
advised
Getty
that
he
would
not
consent
to
the
termination
of
the
Subject
Options,
and
that
he
would
not
encourage
the
other
Optionholders
to
consent
to
the
termination
of
their
options.
Getty
then
unilaterally
amended
Article
10.03
to
read
as
indicated
in
paragraph
22
on
page
11
hereof.
26.
Mr.
Dundas
was
of
the
view
that
the
Subject
Options
were
worth
more
than
the
$26
per
share
being
offered
because
of
the
future
growth
potential
of
Canadian
Reserve
which
Mr.
Dundas
would
be
entitled
to
participate
in
pursuant
to
the
terms
of
the
Subject
Option
Agreements.
In
this
regard,
section
4
of
the
Subject
Option
Agreements
provides,
in
part,
that
the
Subject
Options
could
be
exercised
over
a
term
of
ten
years
from
the
date
of
the
Subject
Option
Agreements.*
27.
Mr.
Dundas
consulted
with
other
employees
and
officers
in
a
similar
position.
The
group
determined
to
seek
legal
advice
as
to
what,
if
any,
remedies
would
be
available
to
them
in
the
event
the
special
resolution
approving
the
amalgamation
was
passed
and
the
options
would
be
terminated.
28.
Mr.
Dundas
and
the
other
Optionholders
were
advised
of
their
right
to
sue
Canadian
Reserve
for
damages.
They
were
also
advised
that
there
was
a
possibility
that
they
would
recover
no
more
in
damages
than
the
amount
provided
for
under
the
Amalgamation
Agreement.
29.
For
these
reasons,
and
conscious
of
the
impact
that
a
lawsuit
against
Canadian
Reserve
would
have
on
his
professional
reputation
and
his
position
as
an
employee
of
Canadian
Reserve,
once
the
special
resolution
approving
the
amalgamation
was
passed
on
July
29,
1983
and
Mr.
Dundas
received
a
copy
of
a
Notice
of
Termination
of
Outstanding
Options,
a
copy
of
which
is
attached
hereto
as
Exhibit
“E”,
Mr.
Dundas
executed
a
release
agreement
(the
''Release"),
a
copy
of
which
is
attached
hereto
as
Exhibit
"F".
I
have
had
difficulty
following
the
reasons
for
Mr.
Dundas’
view
as
to
the
reasons
for
a
significant
difference
in
values
between
the
shares
and
stock
options,
in
particular
since
the
options
were
exercisable
over
a
ten
year
period.
Mr.
Dundas
relied
on
future
growth
of
Canadian
Reserve
to
form
the
opinion
that
while
$26.00
per
share
was
a
current
value,
it
was
not
related
to
future
value
of
a
very
successful
company
insofar
as
stock
options
are
concerned.
I
question
whether
a
shareholder
would
have
accepted
$26.00
per
share
if
he
believed
the
company's
prospects
were
as
bright
as
stated
by
Mr.
Dundas.
When
a
person
purchases
a
share
in
any
corporation
one
of
his
primary
considerations
in
acquiring
the
shares
is
his
hope
and
expectation
that
the
shares
will
increase
in
value;
he
expects
the
corporation
to
do
well
in
the
future.
30.
The
Release
recites
the
terms
of
the
Amalgamation
Agreement
relating
to
the
termination
of
the
options
and
contains
an
express
acknowledgement
by
Canadian
Reserve
that
such
action
constituted
a
breach
of
the
stock
options
by
Canadian
Reserve
which
breach
is
referred
to
in
the
Release
as
the
''Unilateral
Termination”.
31.
Under
the
terms
of
the
Release,
Mr.
Dundas
accepted
the
payment
of
a
certain
sum
of
money,
therein
defined
as
the
“Total
Release
Payment”,
in
full
settlement
of
his
rights
arising
out
of
the
Unilateral
Termination
and
released
Canadian
Reserve,
Getty
Canada
and
Amalco
from
any
causes
of
action
relating
to
the
Unilateral
Termination.
Sections
1
and
2
of
the
Release
provide
as
follows:
1.
The
Employee
hereby
accepts
the
payment,
of
the
said
Total
Release
Payment
in
full
settlement,
satisfaction
and
discharge
of
any
and
all
claims
and
rights
and
entitlements
to
damages
in
respect
of
or
arising
out
of
or
relating
to
the
Unilateral
Termination
of
the
Stock
Options
or
arising
out
of
or
relating
to
any
agreement,
arrangement,
relationship,
contract
or
dealing
whatsoever
arising
out
of
or
relating
to
the
Stock
Options
which
have
been,
or
might
have
been
asserted
against
the
Company,
Getty
Canada
or
the
Amalgamated
Corporation
of
their
respective
employees,
agents,
representatives,
shareholders
or
any
of
them
in
respect
of
or
arising
out
of
or
relating
to
the
Stock
Options.
2.
The
Employee
does
hereby
release,
acquit,
remise
and
forever
discharge
the
Company,
Getty
Canada
and
the
Amalgamated
Corporation
and
their
respective
employees,
agents,
representatives,
shareholders
and
all
of
them,
from
any
actions
and
suits,
causes
of
action,
claims
and
demands
whatsoever,
which
the
Employee
now
has
of
which
it
may
hereafter
have
arising
out
of
or
relating
to
the
Unilateral
Termination
of
the
Stock
Options
or
arising
out
of
or
relating
to
any
agreement,
arrangement,
relationship,
contract
or
dealing
whatsoever
arising
out
of
or
relating
to
the
Stock
Options.
32.
Section
3
of
the
Release
incorporates
the
procedures
under
the
Amalgamation
Agreement
relating
to
payments
in
respect
of
cancelled
options.
33.
Mr.
Dundas
disclosed
the
receipt
of
the
Total
Release
Payment
in
his
1983
Tax
Return
by
way
of
the
following
statement:
Damages
in
the
amount
of
$596,590.00
which
constitute
a
non-taxable
capital
receipt
resulting
from
the
breach
of
stock
options
granted
by
Canadian
Reserve
Oil
&
Gas
Ltd.
34.
By
Notice
of
Assessment
dated
September
4,
1984,
the
Minister
of
National
Revenue
(the
"Minister")
assessed
the
tax
payable
by
Mr.
Dundas
for
the
1983
taxation
year.
In
computing
the
income
of
Mr.
Dundas
for
the
purpose
of
the
Notice
of
Assessment,
the
Minister
did
not
include
the
Total
Release
Payment.
35.
By
Notice
of
Reassessment
dated
February
11,
1986,
a
copy
of
which
is
attached
hereto
as
Exhibit
“G”,
the
Minister
reassessed
the
tax
payable
by
Mr.
Dundas
for
the
1983
taxation
year.
In
computing
the
tax
payable
pursuant
to
the
Notice
of
Reassessment,
the
Minister
added
the
amount
of
Total
Release
Payment
in
computing
the
income
of
Mr.
Dundas
for
the
1983
taxation
year.
THE
FOREGOING
STATEMENT
OF
FACTS
is
hereby
agreed
to
by
the
parties
for
the
purpose
of
shortening
and
facilitating
the
hearing
of
the
appeal
of
this
matter
but
is
not
intended
to
represent
all
of
the
facts
or
evidence
to
be
relied
upon
by
the
parties
hereto.
This
Agreement
shall
not
bind
the
said
parties
in
any
other
proceedings
before
any
Court,
other
than
in
this
action.
No
evidence
inconsistent
with
the
facts
contained
herein
may
be
offered
at
the
trial
of
this
matter
but
additional
evidence
not
inconsistent
with
such
facts
may
be
offered
subject
to
all
rules
of
evidence.
Mr.
Dundas'
evidence
served
to
clarify
the
agreed
statement
of
facts.
Mr.
Dundas
testified
he
had
little
input
in
negotiating
the
release
with
Canadian
Reserve.
He
first
learned
on
May
27,
1983,
of
the
proposed
amalgamation
and
cancellation
of
the
subject
option
agreements
when
the
draft
of
the
Information
Circular
to
shareholders
and
proposed
amalgamation
agreement
was
given
to
him
as
president
of
Canadian
Reserve
to
verify
the
information
contained
in
these
documents
as
it
pertained
to
Canadian
Reserve.
Getty
Canada's
legal
counsel
advised
him
of
his
duties
as
a
director
to
use
his
best
efforts
and
to
vote
with
respect
to
the
proposed
amalgamation
in
an
unbiased
manner.
The
amalgamation
agreement
was
dated
as
of
the
22nd
day
of
June,
1983.
The
notice
of
the
extraordinary
general
meeting
of
the
shareholders
of
Canadian
Reserve
and
the
Information
Circular
with
respect
to
the
shareholders'
meeting
are
dated
“this
22nd
day
of
June,
1983”.
Mr.
Dundas
stated
that
prior
to
the
extraordinary
meeting
of
shareholders
of
Canadian
Reserve
on
July
29,
1983,
he
was
not
sure
that
a
majority
of
the
minority
shareholders,
i.e.,
shareholders
other
than
Getty
Canada,
would
vote
in
favour
of
the
amalgamation,
a
condition
for
the
amalgamation
to
proceed.
So
long
as
there
was
some
chance
the
amalgamation
would
not
proceed
he
saw
no
advantage
to
surrendering
his
subject
options.
He
said
he
never
advised
Getty
Canada
he
would
surrender
his
subject
options.
In
fact
he
said
he
advised
Getty
Canada
he
was
not
prepared
to
seek
the
surrender
of
similar
options
of
other
optionholders
or
to
surrender
the
subject
options.
Mr.
Dundas'
position
was
that
as
long
as
he
did
not
execute
the
release
his
position
with
respect
to
retaining
the
subject
options
was
not
imperiled.
Only
after
the
minority
shareholders
approved
the
amalgamation
during
the
morning
of
July
29
did
he
"probably"
decide
to
execute
the
release
to
Canadian
Reserve.
Counsel
for
the
respondent
questioned
the
appellant
as
to
when
he
first
learned
of
the
terms
of
the
release
he
executed.
He
replied
he
was
not
sure,
althought
the
first
time
he
saw
the
actual
form
of
release
was
on
the
day
he
signed
it.
He
explained
that
when
he
and
the
other
optionholders
first
learned
of
the
proposed
amalgamation
they
retained
a
lawyer
to
advise
them.
The
vice
president
and
legal
counsel
of
Canadian
Reserve,
a
Mr.
Sym,
also
an
optionholder,
represented
the
optionholders,
including
the
appellant,
and
instructed
their
lawyer
with
respect
to
arriving
at
a
settlement
with
Getty
Canada.
Mr.
Sym
reported
to
Mr.
Dundas
as
negotiations
with
Getty
Canada
progressed.
Mr.
Dundas
stated
he
signed
the
form
of
release
because
he
realized
it
would
be
difficult,
if
not
impossible,
to
obtain
more
than
$26
for
each
option.
To
sue
for
damages
in
excess
of
this
amount
would
require
evidence
he
was
not
at
all
certain
could
be
established.
The
release
was
signed
late
in
the
afternoon
of
July
29.
The
release
executed
by
Mr.
Dundas
was
between
him
and
Canadian
Reserve,
the
pre-amalgamated
corporation.
The
certificate
of
amalgamation
of
the
amalgamated
corporation,
also
named
Canadian
Reserve
Oil
and
Gas
Ltd.,
is
dated
July
29,
1983.
Statutory
Provisions
The
relevant
portions
of
section
7
of
the
Act
on
which
the
appellant
relies
follow:
7(1)(b)
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
corporation
with
which
it
does
not
deal
at
arm's
length,
(b)
if
the
employee
has
transferred
or
otherwise
disposed
of
rights
under
the
agreement
in
respect
of
some
or
all
of
the
shares
to
a
person
with
whom
he
was
dealing
at
arm's
length,
a
benefit
equal
to
the
value
of
the
consideration
for
the
disposition
shall
be
deemed
to
have
been
received
by
the
employee
by
virtue
of
his
employment
in
the
taxation
year
in
which
he
made
the
disposition.
7(3)
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)
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,
and
.
.
.
Appellant's
Submissions
The
position
of
the
appellant
is
that
what
he
received
from
Canadian
Reserve
pursuant
to
the
release
constituted
damages
as
a
result
of
a
breach
of
the
option
agreements
and
as
such
is
not
taxable.
By
entering
into
the
amalgamation
agreement,
counsel
argued,
Canadian
Reserve
agreed
to
the
cancellation
of
the
subject
option
agreements
and
placed
itself
into
a
position
where
it
could
not
fulfil
the
terms
of
the
agreements.
This,
in
his
view,
constituted
a
breach,
anticipatory
or
otherwise,
of
the
subject
options
and
Mr.
Dundas
thus
was
entitled
to
the
common
law
remedy
of
damages
against
his
employer.
He
did
not
pursue
this
remedy.
Instead
his
course
of
action
was
discharged
by
the
release
when
Mr.
Dundas
received
and
accepted
the
total
release
payment.
Appellant's
counsel
reasons
the
purported
damages
were
received
in
connection
W
th
the
subject
option
agreements
and
cannot
be
included
in
the
appellant's
income
under
section
5
or
6
of
the
Act
because
paragraph
7(3)(a)
provides
that
no
benefit
shall
be
deemed
to
have
been
received
or
enjoyed
by
an
employee
under
or
by
virtue
of
the
stock
option
agreements
for
the
purposes
of
Part
I
of
the
Act
except
as
provided
for
in
section
7.
Mr.
Dundas'
counsel
argued
his
client
did
not
receive
payment
in
consideration
of
a
transfer
or
disposition
of
his
rights
under
the
subject
option
agreements.
A
benefit
therefore
could
not
be
deemed
to
have
been
received
by
Mr.
Dundas
in
accordance
with
paragraph
7(1)(b).
What
transpired,
said
counsel,
was
once
the
Information
Circular
was
published
and
distributed
and
the
optionholders
were
advised
Canadian
Reserve
was
not
going
through
with
its
obligations
under
the
several
stock
option
agreements,
Canadian
Reserve
committed
an
anticipatory
breach
of
the
agreements
and
the
optionholders,
including
Mr.
Dundas,
were
entitled
to
damages.
All
rights
under
the
agreements
ceased
to
exist
and
as
a
result,
Mr.
Dundas
had
no
rights
to
transfer;
nevertheless,
although
he
could
not
sue
for
specific
performance
under
the
subject
option
agreements,
Mr.
Dundas
could
sue
Canadian
Reserve
under
the
agreements
for
damages.
The
appellant
relied
on
the
decisions
of
The
Queen
v.
Reynolds
et
al.,
[1975]
C.T.C.
85;
75
D.T.C.
5042
(F.C.T.D.),
[1975]
C.T.C.
659;
75
D.T.C.
5393
(F.C.A.),
affirmed
[1976]
C.T.C.
792;
77
D.T.C.
5044
(S.C.C.).
Mr.
Reynolds
and
other
employees
of
Bethex
Explorations
Limited
("Bethex")
held
options
to
purchase
a
stated
number
of
shares
in
Bethex
over
a
five-year
period.
Before
the
option
period
had
expired,
Bethex's
assets
were
purchased
by
Bethlehem
Copper
Corporation
Limited
("Bethlehem").
On
January
23,
1969,
Bethex
resolved
to
wind
up.
In
settlement
of
its
liabilities
to
the
taxpayers
under
the
option
contracts,
Bethex,
on
February
7,
1969,
entered
into
an
agreement
with
each
of
the
taxpayers
to
give
them
shares
of
Bethlehem
instead.
Each
of
the
taxpayers
received
a
certain
number
of
Bethlehem
shares.
The
respondent
contended
that
the
shares
ultimately
received
were
consideration
for
the
disposition
of
rights
under
the
share
option
agreements
within
the
meaning
of
section
85A
(now
section
7),
and
therefore
constituted
benefits
received
by
virtue
of
employment.
Accordingly,
the
market
value
of
the
shares
in
Bethlehem
was
added
to
income.
The
taxpayers
objected.
Mr.
Justice
Gibson
of
the
Federal
Court-Trial
Division,
explained
that
subsection
85A
dealt
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.
On
pages
87-88
(D.T.C.
5044)
he
says:
Paragraph
85A(1)(a)
refers
to
the
situation
where
the
employee
has
exercised
his
option
to
purchase
shares
from
a
corporation.
Paragraphs
85A(1)(b),
(c)
and
(d)
refer
to
situations
where
the
employee
transfers
or
otherwise
disposes
of
his
option
to
purchase
shares
to
a
third
person
or
persons
who
subsequently
acquires
such
employee's
rights
under
a
contract
option.
None
of
these
situations
contemplated
by
section
85A
of
the
Income
Tax
Act
obtained
in
the
cases
of
the
appellants.
What
transpired
in
these
cases
is
not
covered
in
section
85A.
In
these
cases
there
was
a
cancellation
of
the
rights
of
the
appellants
under
their
respective
option
agreements
to
acquire
shares
in
Bethex
by
reason
of
the
winding
up
resolution
of
Bethex
on
January
23,
1969.
Such
constituted
a
discharge
of
the
option
contracts.
What
each
of
the
appellants
had
left
after
this
breach
of
the
option
contracts
by
Bethex
was
a
new
cause
of
action
for
such
breaches.
The
appellants
were
each
entitled
to
the
common-law
remedy
of
damages
for
such
breach.
None
of
them
pursued
such
remedy.
Instead
their
new
causes
of
action
for
the
breaches
of
the
option
contracts
were
discharged
between
the
appellants
and
Bethex
by
the
agreements
on
February
7,
1969
whereby
the
appellants
were
to
receive
and
accept
the
said
shares
in
Bethlehem.
These
agreements
were
executed.
Each
appellant
subsequently
received
the
said
shares
of
Bethlehem.
The
receipt
by
each
of
the
appellants
of
these
shares
in
Bethlehem
was
not
income
with
the
meaning
of
the
Income
Tax
Act.
Subsection
7(1)
was
originally
analogous
to
subsection
85A(1)
of
the
Act.
The
Federal
Court
of
Appeal
dismissed
the
respondent's
appeal
from
the
judgment
of
Gibson,
J.;
the
Supreme
Court
of
Canada
upheld
the
judgment
of
the
Federal
Court
of
Appeal
without
reasons.
The
Federal
Court
of
Appeal
at
page
560
(D.T.C.
5394)
was
of
the
view
that
with
reference
to
paragraph
85A(1)(b),
now
paragraph
7(1)(b),
Mr.
Huestis:
.
.
.
cannot
be
said
to
have
"transferred
or
otherwise
disposed
of
rights
under”
the
option
agreement
within
the
meaning
of
those
words
in
the
paragraph
and
so
the
facts
do
not
fall
under
it.
However,
the
Court
stated
it
expressed
no
opinion
whether,
on
the
facts
of
Huestis,
it
might
have
been
possible
to
bring
into
income
benefits
under
section
5,
analogous
to
current
subsection
5(1)
and
6(1),
or
section
25,
identical
to
current
subsection
6(3).
The
Court
found
it
unnecessary
to
express
any
opinion
as
to
whether
there
was
an
anticipatory
breach
of
the
option
agreement.
In
the
view
of
appellant's
counsel,
before
the
amalgamation,
the
appellant
could
only
exercise
the
subject
options
available
up
to
the
date
of
amalgamation.
After
the
amalgamation
he
could
do
nothing.
The
amalgamation
of
Canadian
Reserve
and
Getty
Canada
took
place,
stated
counsel,
at
the
earliest
possible
time
on
June
29,
1983,
that
is,
one
second
past
midnight;
he
referred
the
Court
to
subsection
22(5)
of
the
Interpretation
Act
of
Alberta,
R.S.A.
1980,
c.
I-7,paragraph
9
of
Revenue
Canada
Interpretation
Bulletin
IT-474R
and
section
180
of
the
Business
Corporations
Act
of
Alberta,
R.S.A.
1981,
c.
B-15.
Counsel
submitted
that
once
the
special
resolutions
approving
the
amalgamation
were
passed,
the
subject
options
ceased
to
exist
and
the
optionholder
could
only
sue
for
damages.
The
effect
of
the
special
resolution
approving
the
amalgamation
to
the
subject
option
agreements
in
Canadian
Reserve
was
no
different
from
the
effect
of
the
winding
up
resolution
of
Bethex
to
its
stock
option
agreement
in
Reynolds,
supra.
Mr.
Dundas'
counsel
sought
to
distinguish
the
Reynolds
case
from
those
of
Greiner
et
al.
v.
The
Queen,
[1981]
C.T.C.
477;
81
D.T.C.
5371
(F.C.T.D.);
[1984]
C.T.C.
92;
84
D.T.C.
6073
(F.C.A.)
and
Harvey
v.
M.N.R.,
[1980]
C.T.C.
2826;
80
D.T.C.
1701
(T.R.B.)
and
The
Queen
v.
Harvey,
83
D.T.C.
5098
(F.C.T.D.).
In
these
cases,
he
said,
the
taxpayer
voluntarily
surrendered
his
options
prior
to
the
effective
date
of
an
amalgamation
and
so
the
option
agreements
were
not
breached.
Counsel
insisted
that
in
the
appeal
at
bar
the
rights
to
obtain
shares
ceased
to
exist
since
the
amalgamation
agreement
provided
that
if
the
amalgamation
was
consummated,
the
rights
of
the
optionholders
to
purchase
shares
would
terminate
on
the
effective
date
of
the
amalgamation.
The
appellant's
counsel
submitted
an
alternative
argument.
If
the
Court
finds
Mr.
Dundas
transferred
or
otherwise
disposed
of
rights
under
the
stock
option
agreements
pursuant
to
paragraph
7(1)(b),
the
full
amount
of
the
total
release
payment
ought
not
to
be
included
in
Mr.
Dundas'
income
because
as
at
the
date
the
agreements
were
cancelled,
Mr.
Dundas
did
not
have
the
necessary
years
of
continuous
employment
to
be
in
a
position
to
exercise
the
unearned
subject
options,
to
which
a
portion
of
the
total
release
payment
related.
Therefore,
Mr.
Dundas
could
not
be
said
to
have
transferred
or
otherwise
disposed
of
"rights"
in
so
far
as
the
unearned
subject
options
were
concerned.
The
portion
of
the
total
release
payment
which
related
to
the
unearned
subject
options
could
not
be
said
to
have
been
received
in
respect
of,
in
the
course
of,
or
by
virtue
of
Mr.
Dundas'
employment:
subsection
7(5).
Counsel
also
submitted
that
the
amount
of
the
total
release
payment
cannot
be
included
in
income
pursuant
to
any
of
paragraphs
6(1)(a),
6(1)(b)
or
6(3)(a)
of
the
Act.
The
total
release
payment
was
not
received
for
any
of
the
reasons
described
in
paragraphs
6(3)(c),
(d)
or
(e).
With
respect
to
subsection
6(1),
he
restated
his
position
that
the
total
release
payment
was
received
as
damages
for
breach
of
contract,
and
was
not
received
by
Mr.
Dundas
in
his
capacity
as
an
officer,
employee
or
director.
In
any
event,
he
stated,
pursuant
to
paragraph
7(3)(a),
the
payment
cannot
be
deemed
to
be
a
benefit
under
paragraph
6(1)(a)
or
(c)
or
subsection
6(3).
Respondent's
Submissions
The
respondent
had
three
basic
arguments.
Firstly,
that
Mr.
Dundas
falls
within
the
Reynolds
decision
if
one
disregards
the
forms
submitted,
that
is,
the
release
and
corporate
documentation
relating
to
the
amalgamation.
The
substance
of
the
transaction
in
the
appeal
at
bar
was
an
agreement
to
surrender
options
and,
respondent's
counsel
claimed,
Mr.
Dundas
intended
to
surrender
his
options
if
the
amalgamation
proceeded.
Secondly,
counsel
argued,
if
the
facts
are
outside
the
Reynolds
case,
the
total
release
payment
was
paid
under
the
agreement,
as
in
Greiner.
Mr.
Dundas
disposed
of
his
rights.
Counsel
also
relied
on
the
reasons
for
judgment
of
the
Supreme
Court
of
Canada
in
The
Queen
v.
Compagnie
Immobilière
BCN
Ltée,
[1979]
1
S.C.R.
865;
[1979]
C.T.C.
71;
79
D.T.C.
5068
where
Pratte,
J.,
at
pages
75
to
79
(D.T.C.
5071
to
5074),
discusses
the
meaning
of
the
expressions
“disposition”,
"proceeds
of
disposition”
and
“disposed
of”
and
concluded
a
disposition
may
include
the
extinction
of
a
right.
Finally,
counsel
submitted
that
if
the
damages
received
by
Mr.
Dundas
are
not
taxable
by
virtue
of
paragraph
7(1)(b),
they
are
taxable
under
sections
3,
5
and
subsection
6(1)
of
the
Act.
Consideration
of
Submissions
I
shall
consider
the
submissions
of
the
parties
dealing
first
with
paragraph
7(1)(b)
and
then
with
paragraph
6(1)(a).
(a)
If
Benefit
from
Employment-Paragraph
7(1)(b)
In
Reynolds,
supra,
the
Federal
Court
of
Appeal
held
that
paragraph
7(1)(b)
did
not
apply
to
the
facts
in
that
case
because
the
taxpayer
"could
not
be
said
to
have
transferred
or
otherwise
disposed
of
rights"
under
the
option
agreement.
Similarly,
submitted
appellant's
counsel,
Mr.
Dundas
could
not
be
said
to
have
transferred
or
otherwise
disposed
of
rights
under
the
subject
option
agreements
within
the
meaning
of
these
words
in
paragraph
7(1)(b)
since
the
subject
option
agreements
had
been
discharged
by
the
time
he
received
the
total
release
payment.
In
The
Queen
v.
Compagnie
Immobilière
BCN
Ltée,
supra,the
Supreme
Court
of
Canada
held
a
taxpayer's
rights
under
a
lease
had
automatically
terminated
when
that
lease
came
to
an
end
upon
the
taxpayer's
acquisition
of
the
lessor's
rights
under
that
lease;
the
Court
held
that
such
rights
should
be
regarded
as
having
been
disposed
of
by
the
taxpayer.
In
that
case
the
Supreme
Court
of
Canada
considered
the
meaning
of
the
words
“disposed
of”
in
subsection
1100(2)
of
the
Regulations
to
the
Act.
The
Court
was
of
the
view
the
expression
"disposed
of"
in
Regulation
1100(2)
“must
be
ascribed
the
meaning
which
conforms
with
that
of
(its)
companion
defined
expression
‘disposition
of
property'
and
'proceeds
of
disposition'
in
subsection
13(21)
[formerly
subsection
20(5)],(page
76
(D.T.C.
5072)).
The
Court
thus
analyzed
the
substantive
definitions
of
“disposition
of
property"
and
"proceeds
of
disposition”
in
paragraphs
13(21)
(c)
and
(d)
of
the
Act
[formerly
paragraphs
20(5)(c)
and
(d)].
The
expression
“disposed
of”
and
the
word
“disposition”
used
in
paragraph
7(1)(b)
are
found
throughout
the
Act:
see,
for
example,
sections
26,
40,
70,
85,
88,
95,
97,
104,
107,115,
116,
133,
138
and
199.
When
the
expression
"disposed
of"
and
the
words
“transfer”
and
"disposition"
are
used
in
these
and
other
provisions,
they
are
to
be
interpreted
according
to
their
natural
meaning
in
the
context
of
the
particular
provision.
The
words
should
be
interpreted
in
a
manner
consistent
with
the
legislator’s
intent.
The
Oxford
English
Dictionary
defines
the
verb
"transfer"
as
follows:
To
convey
or
take
from
one
place,
person,
etc.
to
another,
to
transmit,
transport;
to
give
or
hand
over
from
one
to
another.
Law:
To
convey
or
make
over
(title,
right,
property)
by
deed
or
legal
process.
The
same
dictionary
defines
"(to)
dispose"
as
follows:
To
put
or
get
(anything)
off
one's
hands;
to
put
away,
stow
away,
put
into
a
settled
state
or
position;
to
deal
with
(a
thing)
definitely;
to
get
rid
of,
to
get
done
with,
settle,
finish.
In
recent
use
sometimes
spec.
to
do
away
with,
"settle",
or
demolish
(a
claim,
argument,
opponent,
etc.);
also
humorously,
to
make
away
with,
consume
(food).
Mr.
Justice
Pratte
said
on
page
5073
of
The
Queen
v.
Compagnie
Immobilière
BCN
Ltée.,
supra,
the
verb
"to
dispose"
has
a
very
broad
meaning.
Later
on,
on
pages
79-80
(D.T.C.
5075),
he
stated:
As
already
indicated,
the
verb
"to
dispose
of”,
in
its
first
meaning,
encompasses
the
idea
of
destruction;
one
of
the
meanings
of
the
verb
"to
destroy"
is
"to
put
an
end
to,
to
do
away
with”
(Shorter
Oxford
English
Dictionary,
see
Destroy).
The
extinction
of
a
right
through
merger
is
but
one
method
of
"destroying"
that
right,
that
is
of
putting
an
end
to
its
existence.
In
Re
Leven,
[1954]
3
All
ER
81,
it
was
said
that
the
word
"disposition"
taken
by
itself
and
used
in
its
most
extended
meaning
was
“wide
enough
to
include
the
act
of
extinguishment”.
The
Reynolds
case
was
heard
by
the
Federal
Court
of
Appeal
in
1975
and
was
affirmed
without
reasons
by
the
Supreme
Court
of
Canada
in
1976.
In
1979
the
Supreme
Court
allowed
the
Minister's
appeal
in
the
Compagnie
Immobilière
BCN
Ltée
case,
supra.
Although
the
Supreme
Court
considered
the
expression
“disposed
of”
albeit
within
the
context
of
capital
cost
allowance
provisions
of
the
Act
and
Regulation
1100(2),
it
did
not
restrict
its
consideration
of
the
meaning
of
the
expression
"disposed
of”
solely
to
its
companion
defined
expressions
in
subsection
13(21).
The
Supreme
Court
referred
as
well
to
a
dictionary
definition
of
the
expression
"disposed
of"
as
well
as
the
Chancery
Division's
consideration
of
the
word
“disposition”,
both
being
terms
used
in
paragraph
7(1)(b).
The
expression
"has
transferred
or
otherwise
disposed
of"
used
in
paragraph
7(1)(b)
contemplates
means
by
which
rights
under
an
agreement
may
change
ownership.
The
word
"otherwise",
when
used
as
an
adverb,
is
defined
by
the
Shorter
Oxford
English
Dictionary
on
Historical
Principles
to
mean
:
In
another
way,
or
in
other
ways;
differently;
in
other
circumstances;
if
not.
The
word
"otherwise"
in
paragraph
7(1)(b)
provides
for
dispositions
in
the
widest
possible
meaning
which
includes
what
is
generally
considered
to
be
a
transfer
and
voluntary
or
involuntary
dispositions.
Paragraph
7(1)(b)
refers
to
the
transfer
or
disposition
of
"rights"
under
the
agreement.
The
rights
under
an
agreement
contemplated
by
the
provision
include
not
only
the
right
to
acquire
shares
but
any
rights
the
employee
may
have
in
the
agreement.
In
my
view
when
Mr.
Dundas
executed
the
release
he
disposed
of
his
remaining
rights
under
the
subject
option
agreements
to
Canadian
Reserve,
notwithstanding
the
purported
cancellation
of
the
subject
options
themselves.
The
release
specifically
recognized
that
Mr.
Dundas
had
rights
under
"any
agreement
.
.
.
arising
out
of
or
relating
to
the
stock
options
.
.
.”.
The
facts
contemplated
in
paragraph
7(1)(b)
therefore
have
been
satisfied
in
that
(a)
Mr.
Dundas
transferred
or
otherwise
disposed
of
rights
under
the
subject
option
agreements,
and
(b)
the
rights
were
disposed
of
to
a
person
with
whom
he
was
dealing
at
arm's
length,
namely,
Canadian
Reserve.
(b)
If
Benefit
from
Employment-Section
6
If
the
final
release
payment
represented
damages
only
for
breach
of
the
subject
option
agreements
and
was
not
paid
in
respect
of
the
transfer
or
disposition
[of]
any
rights
under
those
agreements,
the
payment
may
be
included
in
computing
the
income
of
Mr.
Dundas
from
an
office
or
employment
pursuant
to
paragraph
6(1)(a).
Subsection
7(1)
is
a
deeming
provision.
In
R.
v.
Vermette,
[1978]
2
S.C.R.
838
(S.C.C.),
Beetz,
J.
described
the
function
of
a
deeming
provision
at
page
845:
A
deeming
provision
is
a
statutory
fiction;
as
a
rule
it
implicitly
admits
that
a
thing
is
not
what
it
is
deemed
to
be
but
decrees
that
for
some
particular
purpose
it
shall
be
taken
as
if
it
were
that
thing
although
it
is
not
or
there
is
a
doubt
as
to
whether
it
is.
A
deeming
provision
artificially
imports
into
a
word
or
an
expression
an
additional
meaning
which
it
would
not
otherwise
convey
besides
the
normal
meaning
which
they
retain
where
they
are
used;
it
plays
a
function
of
enlargement
analogous
to
the
word
“includes”
in
certain
definitions;
however,
“includes”
would
be
logically
inappropriate
and
would
sound
unreal
because
of
the
fictional
aspect
of
the
provision.
Dickson
J.,
as
he
then
was,
also
explained
the
purpose
of
such
a
provision
in
R.
v.
Sutherland,
[1980]
2
S.C.R.
451
at
456:
The
purpose
of
any
"deeming"
clause
is
to
impose
a
meaning,
to
cause
something
to
be
taken
to
be
different
from
that
which
it
might
have
been
in
the
absence
of
the
clause.
The
deeming
provision
of
paragraph
7(1)(b)
altered
the
law
governing
stock
option
plans
granted
by
corporate
employers
and
benefits
received
under
them.
Prior
to
the
enactment
of
the
predecessor
to
paragraph
7(1)(b)
in
1953
a
benefit
arose
in
the
year
the
employer
corporation
granted
the
option
to
the
employee.
If
the
market
value
of
the
shares
increased
between
the
time
the
option
was
granted
and
the
date
the
employee
exercised
his
right
to
acquire
shares,
there
was
no
further
benefit
to
the
employee.
When
the
employee
eventually
sold
the
shares
the
gain
was
on
account
of
capital.
Subsection
7(3)
states
that
where
a
corporation
has
agreed
to
sell
or
issue
shares
of
its
capital
stock
to
an
employee
no
benefit
shall
be
deemed
to
have
been
received
by
the
employee
under
or
by
virtue
of
the
agreement
for
purposes
of
Part
I
of
the
Act
except
as
provided
for
by
section
7.
Subsection
7(3)
applies
to
deemed
benefits
and
provides
that
such
benefits
arising
from
a
stock
option
agreement
are
taxable
only
if
they
meet
the
conditions
contained
in
section
7.
Subsection
7(3)
therefore
provides
that
only
benefits
deemed
to
be
received
or
enjoyed
by
an
employee
under
or
by
virtue
of
a
stock
option
plan
in
accordance
with
section
7
are
included
in
income
for
purposes
of
subsection
5(1).
Or
inversely,
if
a
benefit
is
to
be
included
in
employment
income
of
an
employee
under
subsection
7(1)
or
7(1.1),
then
by
virtue
of
subsection
7(3)
no
part
of
the
benefit
received
under
or
by
virtue
of
the
agreement
contemplated
in
subsection
7(1)
and
7(1.1)
may
be
included
in
employment
income
under
another
provision
in
Part
I
of
the
Act.
Therefore
if
an
employee
receives
a
benefit
from
his
employer
otherwise
than
under
or
by
virtue
of
an
agreement
contemplated
in
subsections
7(1)
or
7(1.1),
he
is
liable
to
include
the
value
or
amount
in
his
income
by
virtue
of
section
6.
I
find
it
difficult
to
accept
both
of
the
appellant's
arguments,
namely,
that
he
did
not
dispose
of
rights
under
the
subject
option
agreements
and
that
damages
were
received
by
virtue
of
those
agreements.
If
Mr.
Dundas,
for
argument's
sake,
did
not
dispose
of
any
rights
under
the
subject
option
agreements,
any
damages
he
may
have
received
would
not
have
their
roots
in
the
subject
option
agreements.
At
the
time
the
final
release
payment
was
made
after
the
meeting
of
the
shareholders
on
July
29,
1983,
Canadian
Reserve
was
still
a
viable
operating
corporate
entity
and
Mr.
Dundas
was
its
president.
The
payment
of
the
final
release
payment
and
the
execution
of
the
release
were
events
that
transpired
prior
to
the
issuance
of
the
certificate
of
amalgamation.
The
amalgamation
had
not
yet
occurred.
Let
us
assume
the
money
Mr.
Dundas
received
from
Canadian
Reserve
represented
damages
for
breach
of
contract,
in
respect
of
the
subject
option
agreements.
The
subject
option
agreements,
once
established,
created
a
term
and
condition
of
employment
of
the
employee
who
was
party
to
the
agreements.
The
subject
option
agreements
were
entered
into
by
the
appellant
by
virtue
of
his
employment
with
Canadian
Reserve.
As
in
Kaiser
Petroleum
Ltd.
v.
Canada,
[1990]
1
C.T.C.
62;
90
D.T.C.
6034
what
we
are
facing
in
the
appeal
at
bar
is
a
payment
by
an
employer
to
an
employee
although
in
the
appeal
at
bar,
the
payment
is
made
because
of
a
breach
in
the
fulfilment
of
a
term
and
condition
of
employment.
Had
Mr.
Dundas
not
been
an
employee
of
Canadian
Reserve
in
1983
he
would
have
been
entitled
to
nothing.
Mr.
Justice
Pigeon
wrote
in
the
reasons
for
judgment
of
the
Supreme
Court
of
Canada
in
Jack
Cewe
Ltd.
v.
Jorgenson,
[1980]
1
S.C.R.
812;
[1980]
C.T.C.
314;
80
D.T.C.
6233,
at
page
315
(D.T.C.
6234;
S.C.R.
814)
that:
Damages
payable
in
respect
of
the
breach
of
a
contract
of
employment
are
certainly
due
only
by
virtue
of
this
contract.
I
fail
to
see
how
they
can
be
said
not
to
be
paid
as
a
benefit
under
the
contract.
The
comments
of
Pigeon,
J.
in
Cewe
are
obiter
dicta.
However
the
statement
emanates
from
the
Supreme
Court
of
Canada.
In
Ottawa
v.
Nepean,
[1943]
O.W.N.
352;
3
D.L.R.
802,
Robertson,
C.J.O.
said
at
page
804
of
the
latter
report:
What
was
said
there
may
be
obiter,
but
it
was
the
considered
opinion
of
the
Supreme
Court
of
Canada,
and
we
should
respect
it
and
follow
it,
even
if
we
are
not
strictly
bound
by
it.
Canadian
Reserve
granted
the
subject
option
agreements
to
Mr.
Dundas
for
the
reason
only
he
was
a
senior
employee
of
the
corporation.
The
very
root
of
the
subject
option
agreement
was
Mr.
Dundas'
employment
with
Canadian
Reserve.
Any
damages
he
received
from
Canadian
Reserve
because
of
the
cancellation
of
the
subject
option
agreements
were
in
respect
of
or
by
virtue
of
his
employment
with
Canadian
Reserve.
Paragraph
6(1)(a)
reads
as
follows:
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,
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,
(ii)
under
an
employee
benefit
plan
or
employee
trust,
or
(iii)
that
was
a
benefit
in
relation
to
the
use
of
an
automobile,
except
to
the
extent
that
it
related
to
the
operation
of
the
automobile.
The
benefits
contemplated
by
paragraph
6(1)(a)
include
all
possible
benefits.
Mr.
Justice
Dickson
(as
he
then
was)
stated
in
The
Queen
Savage,
[1983]
C.T.C.
393;
83
D.T.C.
5409,
at
page
399
(D.T.C.
5414),
that:
The
meaning
of
“benefit
of
whatever
kind"
is
clearly
quite
broad;
In
Norwegijick
v.
The
Queen,
[1983]
1
S.C.R.
29;
[1983]
C.T.C.
20;
83
D.T.C.
5041
(S.C.C.),
Dickson,
J.
was
of
the
view,
at
page
25
(D.T.C.
5045),
that
in
paragraph
6(1)(a):
The
words
"in
respect
of"
are.
.
.
words
of
the
widest
possible
scope.
They
import
such
meanings
as
"in
relation
to”,
"with
reference
to"
or
"in
connection
with”.
The
phrase
"in
respect
of”
is
probably
the
widest
of
any
expression
intended
to
convey
some
connection
between
two
related
subject
matters.
In
Savage,
supra,
Dickson,
J.
agreed
with
Evans,
J.A.
in
R.
v.
Poynton,
[1972]
3
O.R.
727;
[1972]
C.T.C.
411;
72
D.T.C.
6329
at
page
420
(D.T.C.
6335-36;
O.R.
738),
when
the
latter
spoke
of
benefits
received
or
enjoyed
in
respect
of,
in
the
course
of,
or
by
virtue
of
an
office
or
employment:
I
do
not
believe
the
language
to
be
restricted
to
benefits
that
are
related
to
the
office
or
employment
in
the
sense
that
they
represent
a
form
of
remuneration
for
services
rendered.
If
it
is
a
material
acquisition
which
confers
an
economic
benefit
on
the
taxpayer
and
does
not
constitute
an
exemption,
eg
loan
or
gift,
then
it
is
in
the
all-embracing
definition
of
section
3.
In
my
view,
if
the
final
release
payment
represented
damages
only,
the
payment
was
received
by
Mr.
Dundas
in
relation
to
or
in
connection
with
his
employment
notwithstanding
the
immediate
triggering
of
the
payment
was
the
purported
cancellation
of
the
subject
option
agreements.
The
subject
option
agreements
were
granted
to
the
appellant
by
Canadian
Reserve
by
virtue
of
his
employment
with
the
corporation.
Any
payment,
as
damages
or
otherwise,
for
any
cancellation
of
the
subject
option
agreements
was
a
benefit
received
in
respect
of
Mr.
Dundas’
employment
under
paragraph
6(1)(a)
and
constitutes
income
from
a
source
that
is
employment.
Accordingly
the
amount
of
the
final
release
payment
would
be
included
in
income
for
1983
in
accordance
with
subsection
5(1)
and
section
3.
Alternative
Submission
of
Appellant
As
mentioned,
counsel
for
the
appellant
argued
in
the
alternative
that
since
Mr.
Dundas
did
not
have
the
necessary
years
of
continuous
employment
to
be
in
a
position
to
exercise
the
unearned
subject
options,
the
full
amount
of
the
total
release
payment
ought
not
to
be
included
as
a
benefit
under
paragraph
7(1)(b).
He
could
not
transfer
or
dispose
of
rights
he
did
not
have
yet.
The
portion
of
the
total
release
payment
with
respect
to
this
unearned
subject
option
could
not
have
been
received
in
respect
of,
in
the
course
of,
or
by
virtue
of,
Mr.
Dundas'
employment
pursuant
to
subsection
7(5).
He
must
be
employed
for
a
longer
period
of
time
in
order
to
obtain
such
rights.
This
argument
must
fail.
Mr.
Dundas
was
entitled
to
exercise
rights
to
the
subject
option
on
the
condition
he
remained
an
employee.
It
is
only
if
he
ceased
to
be
an
employee
that
he
would
not
be
permitted
to
exercise
the
rights.
Even
if
counsel's
submission
with
respect
to
paragraph
7(1)(b)
is
correct,
the
amount
of
the
total
release
payment
with
respect
to
the
unearned
subject
options
would
be
included
in
income
in
accordance
with
subsection
6(1)
of
the
Act.
There
is
no
doubt
that
Mr.
Dundas'
right
to
damages
was
by
virtue
of
his
employment
with
Canadian
Reserve.
The
appeal
is
dismissed.
Appeal
dismissed.
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