http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/99650/index.do 
Rogers Estate v. The Queen (November 25, 2014 – 2014 TCC 348) dealt with the taxation of a “Surrender Payment” received by the late Mr. Rogers in exchange for certain stock options that had been granted to him:
[1] The present case is an appeal from a reassessment made by the Minister of National Revenue (the “Minister”) for the Appellant’s 2007 taxation year. The dispute concerns the characterization of an amount (the “Surrender Payment”) received by the taxpayer, Edward S. Rogers (“Mr. Rogers”), in that year. The Surrender Payment was made to Mr. Rogers by Rogers Communications Inc. (“RCI”) in exchange for the surrender of options (the “Options”) which had been granted to Mr. Rogers under RCI’s employee stock option plan in 1997. The Appellant reported the Surrender Payment as a capital gain in his tax return for that year and accordingly included one half of the amount in his taxable income for that year.
[2] In 2011, the Minister reassessed the taxpayer to include the full Surrender Payment in income. This reassessment was defended by the Respondent on the basis of any of three alternative arguments, i.e.,: (i) that the amount was income from employment or an employment benefit under either section 5 or paragraph 6(1)(a) of the Income Tax Act (the “Act”); (ii) that the amount was a shareholder benefit taxable under subsection 15(1) of the Act; (iii) that the amount was a profit from an adventure in the nature of trade and taxable under subsection 9(1) of the Act.
[3] At trial, the Respondent abandoned the last of these arguments – namely, that the amount at issue is profit from an adventure in the nature of trade (the “Section 9 Argument”) – on the basis that there was insufficient evidence. The only evidence tendered at trial was the Statement of Agreed Facts, the Joint Book of Documents and the Discovery Read-Ins.
[4] At the end of the hearing, I asked the parties for written submissions on the question of whether I can nevertheless consider the Section 9 Argument. After consideration of the parties’ supplementary submissions, I decided that I am not bound by the Respondent’s concession on this point for the reasons set out below.
The underlying facts were quite straightforward:
[6] During all relevant periods, Mr. Rogers was the president and chief executive officer of RCI, a major Canadian diversified communications and media company. RCI had two classes of shares: Class A voting shares and Class B non‑voting shares. Both classes of shares were listed on the Toronto Stock Exchange (“TSX”). The Class B shares were also listed on the New York Stock Exchange. On April 13, 2007, Mr. Rogers beneficially owned and controlled nearly 91% of RCI’s issued and outstanding Class A shares. Therefore, Mr. Rogers and RCI were deemed not to deal at arm’s length for the purposes of the Act.
[7] In 1996, RCI implemented a stock option plan (the “Plan”) for the directors and key officers of RCI, including Mr. Rogers. The stated purpose of the Plan was to compensate the directors and key officers of RCI and its affiliates for their employment services and to enable them to acquire a proprietary interest in RCI through share options. The Plan was administered by the compensation committee of RCI’s board of directors (the “Compensation Committee”).
[8] On December 4, 1997, the board of directors of RCI granted Mr. Rogers an option to acquire Class B shares at an option price of $6.29 per share. On December 15, 2006, RCI’s shareholders approved a resolution passed by RCI’s board of directors effecting a two-for-one split of the Class B shares, which doubled the Options held by Mr. Rogers.
[9] Over the course of time, the terms of the Plan were amended in order to comply with various regulatory requirements, the one exception being an amendment on May 28, 2007 whereby RCI changed the Plan to allow a so‑called share appreciation right (“SAR”) to be attached to all new and previously granted options. The SAR permitted an option holder to surrender all or a portion of an option to RCI for a cash payment equal to the “SAR Price”. The SAR Price was equal to the average trading price of the Class B shares on the TSX for the business day on which the SAR was exercised, less the exercise price of the option. The exercise price of each option was fixed at the time the option was granted. Of note here is the fact that the Compensation Committee could refuse to allow an option holder to exercise a SAR, instead requiring him to exercise an option.
[10] On December 3, 2007, Mr. Rogers excised his SAR by surrendering the Options to RCI in exchange for the Surrender Payment. RCI did not withhold any amount and it did not issue a T4 slip to the Appellant with respect to the Surrender Payment. The Appellant reported the Surrender Payment as a capital gain in the 2007 taxation year.
On the Crown’s argument that the Surrender Payment was income from employment the court held against the Crown:
[38] I agree with the reasoning endorsed in Chrysler and Bowens. A textual, contextual and purposive reading of section 7 of the Act leads me to conclude that this provision is meant to provide a complete code for the taxing of benefits arising under or because of a stock option agreement. The text of paragraph 7(3)(a) is clear and unambiguous: it deems an employee to have neither received nor enjoyed any benefit under or because of a stock option agreement, except as provided by that section. The relevant provision reads as follows:
7(3) If a particular qualifying person has agreed to sell or issue securities of the particular person, or of a qualifying person with which it does not deal at arm’s length, to an employee of the particular person or of a qualifying person with which it does not deal at arm’s length,
(a) except as provided by this section, the employee is deemed to have neither received nor enjoyed any benefit under or because of the agreement;
. . .
[Emphasis added.]
[39] If the carve‑out in section 7(3)(a) is interpreted in a narrow fashion, as the Respondent argued it should be – that is it only applies if the benefit is subject to tax under subsection 7(1) of the Act – it would mean that a non-arm’s length transfer could become immediately taxable notwithstanding the fact that section 7 specifically provided that this should not be the case. For example, paragraph 7(1)(b) of the Act allows an employee to transfer options to his or her holding corporation for a consideration without there being immediate taxation. However, when the holding corporation exercises the options or disposes of them to an arm’s length person, the benefit is subject to tax in the hands of the employee. If I accept the Respondent’s interpretation, the benefit in the above example would be subject to double taxation.
[40] The Appellant notes the subsequent amendments to section 7 that have closed this loophole. Effective March 4, 2010, subsection 7(1) was amended to include new paragraph 7(1)(b.1) of the Act, which effectively covers the issue at bar. Essentially, an employee is deemed to have received an employment benefit when the employee disposes of rights under a stock option agreement to an employer with which the employee does not deal at arm’s length. The amendment was made effective on a prospective basis. The Appellant suggests that the amendment serves to confirm that no other provision in section 7 applied to the Surrender Payment at the relevant time. I agree with this interpretation.
[41] Another of the Respondent’s submissions is that paragraph 7(3)(a) does not apply to the Surrender Payment because it was not the case that RCI “agreed to sell or issue securities” to the Appellant when he surrendered his Options. Rather, he received cash in lieu of exercising those Options.
[42] In my opinion, the Respondent’s arguments overlook the broad wording of subsection 7(3) of the Act. The provision provides that, except as provided in section 7, an employee “is deemed to have neither received nor enjoyed any benefit under or because of an agreement” whereby an employer has agreed to issue shares to its employees. Subsection 7(1) covers benefits that arise because options are exercised and shares are received by the employee and benefits that arise because the employee disposes of rights under an agreement to a person with whom the employee is dealing at arm’s length. Subsection 7(3) is meant to exclude benefits arising from the non-arm’s
[43] In the instant case, it is incontrovertible that RCI had agreed to issue or sell shares to Mr. Rogers. The grant of the SAR to Mr. Rogers did not negate RCI’s undertaking to issue shares. It was an added feature which allowed Mr. Rogers’ to elect to dispose of the Options in exchange for the Surrender Payment. In this context, the Surrender Payment was a benefit received by the Appellant under or because of the Option Agreement. It would have been taxable under subsection 7(1) of the Act had RCI and the Appellant been dealing at arm’s length.
The court similarly rejected the Crown’s argument that the Surrender Payment was an employment benefit:
[44] That leads to the Respondent’s next submission, which is that if the Surrender Payment is not taxable under section 6 then it is “salary, wages and other remuneration” and is accordingly to be included in income under subsection 5(1) of the Act. That provision reads as follows:
5(1) Subject to this Part, a taxpayer’s income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by the taxpayer in the year.
[45] The Appellant submits that the Surrender Payment is not “salary” or “wages” because it was neither a fixed payment for regular work nor a periodic payment for the labour or services of an employee. So the question becomes: can the Surrender Payment be characterized as “salary, wages and other remuneration?” In my view, no.
[46] The terms “salary”, “wages” and “other remuneration” are not defined for the purposes of section 5. The ordinary meaning of the terms “salary” and “wage” connote a periodic and fixed payment by an employer to an employee for work or for services rendered. The Surrender Payment does not fall within that meaning.
The “shareholder benefit” argument met with the same fate:
[50] Both parties referred me to the decision of Judge Bowman, as he then was, in Del Grande v. The Queen. In that case, the taxpayer was an officer and 25% shareholder of two corporations with respect to whose shares he was granted options to purchase. The options were worthless at the time they were granted in 1982. When he exercised those options over three years later, the shares had a fair market value of $171,738. By reassessment, the Minister added the amount of $171,738 to the appellant’s income in 1985 on the basis that the appellant had received a “benefit or advantage” within the meaning of paragraph 15(1)(c). On appeal, Judge Bowman held that there was no benefit conferred on the appellant in 1985 since the companies were doing no more than honouring a commitment which had previously been made. Moreover, any benefit received by the appellant was received not by virtue of his being a shareholder but rather by virtue of his position as an officer or director of the companies.
[51] In the Respondent’s view, the facts of the instant case distinguish it from Del Grande. First, the Appellant was the controlling shareholder of RCI. He held nearly 91% of the Class A voting shares. The Respondent suggests that the Appellant caused the SAR to be approved by the shareholders. Given his shareholding, the outcome of the vote to approve the amendment to the Plan granting the SAR was a foregone conclusion.
[52] In my opinion, the Respondent fails to take into account the fact that Mr. Rogers gave up something of equal value to receive the Surrender Payment. The Surrender Payment reflected the “in-the-money value” of the Options. It was consideration for the cancellation of the unexercised Options. Viewed in this light, the Surrender Payment can hardly be described as a “benefit” taxable under subsection 15(1) of the Act.
[Footnote omitted]
The court reached the “adventure in the nature of trade” argument by a more convoluted route. As noted above the Crown abandoned this argument at trial “on the basis that there was insufficient evidence. The court nonetheless determined that it was open to it to rule on the point:
[19] In the instant case, the Respondent pleaded the Section 9 Argument and advanced a case, in part through the Statement of Agreed Facts, that is, at least in principle, capable of supporting a section 9 argument. At trial, the Respondent abandoned such an argument on the basis of insufficient evidence only after all the evidence had been presented through the Statement of Agreed Facts. The Respondent’s abandonment of her position therefore amounts to a conclusion of mixed fact and law. It cannot bind the Court as it is trite law that the Court cannot be bound by the parties’ interpretation of a point of law. For these reasons, Lipson does not apply here.
[20] The Appellant argues that consideration of the Section 9 Argument is akin to usurping the Minister’s assessment power and thereby depriving the taxpayer of the benefit of the limitation period. The assessment process involves ascertaining the facts, applying the law to those facts and determining and assessing tax on that basis. Since the Respondent abandoned the Section 9 Argument due to lack of evidence, the Appellant argues it would be akin to opening a new assessment process for the Court to consider the abandoned argument.
[21] The Appellant has no direct authority for this argument. With respect, I consider it to be without merit as this is a circumstance where the Respondent pleaded and advanced an argument which it later withdrew on the basis of its own interpretation of an issue of mixed fact and law. All the evidence has been presented. The Court has not requested that the Respondent present further evidence. Rather, it is the Appellant that is asking the Court to consider itself bound by the Respondent’s concession on a point of law even though it is trite law that the Court cannot be bound by such a concession.
Nevertheless the court went on to reject the adventure in the nature of trade argument:
[65] Applying the tests outlined in Baird, the first question is whether Mr. Rogers dealt with the Options in the same way as a dealer would.
[66] The Respondent says the answer to that question is yes because Mr. Rogers waited until the last possible day to dispose of his Options in consideration of the Surrender Payment.
[67] With respect, I disagree with the Respondent’s portrayal of how traders deal with options. Traders use options for a variety of purposes. The Options held by Mr. Rogers are commonly referred to as call options. A call option allows a holder to buy a security at a fixed price within a specific period of time.
[68] A call option also allows a trader to leverage his bet that the underlying securities will rise in value over a short period of time. A trader does this by risking only the option price rather than employing capital equal to the full price of the security.
[69] In most cases, a trader will dispose of the option when he is satisfied with the increase in the money value or profit to be realized through the sale of the option. Mr. Rogers did not behave in this manner. He held the Options right up to the last moment and surrendered them when they were about to expire.
…
[72] When the Options were granted to Mr. Rogers, the Plan did not provide for a SAR. I surmise that, but for the addition of the SAR almost ten years after the grant of the Options, Mr. Rogers would have eventually exercised the Options and added the additional shares to his considerable shareholdings in RCI. The Respondent accepts that, had he done so, the shares received by Mr. Rogers would have been capital property and a taxable capital gain or loss would have been realized or incurred on a subsequent disposition of the shares. There is nothing in the record to suggest that Mr. Rogers acquired the Options with the intent of disposing of them or the underlying shares for cash.
[Footnote omitted]
That was not the end of the matter however. The appellant’s counsel, in what can only be termed a Hail Mary pass, moved months after the end of trial to amend the Notice of Appeal on the basis that the late Mr. Rogers was wrong to treat the Surrender Payment as giving rise to a capital gain:
[74] On August 29, 2014, almost three and a half months after the hearing of this appeal, the Appellant brought a motion for leave to amend its Notice of Appeal in order to put forward a new argument (the “New Argument”), namely that Mr. Rogers mistakenly treated the Surrender Payment as a capital gain. According to the Appellant, this New Argument merits my consideration because it is based on the outcome in Mathieu c. La Reine, a recent decision of this Court released on June 27, 2014.
[75] I dismissed the Appellant’s motion for the reasons outlined in my order, which I will not repeat here. However, I would like to make two observations. First, in Mathieu, the Court did not address the question whether the surrender of the options by the appellant therein gave rise to a capital gain. This issue was not raised by the parties nor was it considered by the Court.
[76] While subsection 7(3) of the Act deems there to be no benefit when options are disposed of, this deeming provision applies only for the purposes of section 6 of the Act. It is important to note that a capital gain is not defined in the Act as a gain arising or resulting from the disposition of capital property. Instead, subsection 39(1) defines a capital gain broadly as “the taxpayer’s gain . . . from the disposition of any property” other than property specifically excluded under that provision (“Excluded Property”). Recognizing the potential for overlap with other sections of the Act, the legislator chose to specifically exclude gains that are otherwise included in income under section 3.
[77] In the case at bar, Mr. Rogers realized a gain from the disposition of the Options. The Options are property. They are not Excluded Property. Because of subsection 7(3) of the Act, no part of the gain was otherwise included in income under section 3. Therefore, the gain is a capital gain for the purpose of section 39. Consequently, Mr. Rogers was correct in considering that he realized a capital gain corresponding to the amount of the Surrender Payment received as proceeds of disposition for his Options.
[Footnotes omitted]
In the result the appeal was allowed with costs affirming the late Mr. Roger’s treatment of the Surrender Payment as giving rise to a capital gain.
Comment: There is no mention in the reasons for judgment of the amount of the Surrender Payment.