Supreme Court of Canada rules on correct interpretation of provisions in Quebec’ Taxation Act

In a case concerning how Quebec’s tax law treats income in the form of stock options when the taxpayer donates them to charity, the Supreme Court of Canada has found the stock options are taxable income and assessed at their fair market value at the time of the gift.

Des Groseillers v. Quebec (Agence du revenu), 2022 SCC 42 dealt with the correct interpretation of ss. 50, 54, and 422 of Quebec’s Taxation Act. The court unanimously dismissed the appeal, brought by taxpayer Yves Des Groseillers. The seven-judge panel included Justices Richard Wagner, Andromache Karakatsanis, Russell Brown, Malcolm Rowe, Sheilah Martin, Nicholas Kasirer and Mahmud Jamal.

“Revenu Québec is very satisfied that its position has been upheld by the Supreme Court of Canada and the Court of Appeal, and will take the time to analyse this decision to measure the impact on its other cases,” says Claude-Olivier Fagnant, a spokesperson from Revenu Quebec.

Des Groseillers was the director at BMTC Group Inc., whose compensation included a stock option plan, and in 2010 and 2011, he gave more than $3-million worth of these options to registered charities.

Though Des Groseillers took the official receipts and claimed benefits on his income tax returns in those years, he did not declare any income in connection with the stock options. The Agence du revenu du Quebec (Revenu Quebec) added the value of these donations to Des Groseillers’ taxable income, as well as BMTC’s payroll.

Des Groseillers and BMTC appealed the assessment and the trial judge found that, according to the meaning of s. 50 of the Taxation Act, Des Groseillers had received no taxable benefit. The judge also found Revenu Quebec could not justify the assessments with any other provisions.

Revenu Quebec appealed, and the Court of Appeal found in the tax authority’s favour. The court said the trial judge had erred in finding that s. 422 could not be invoked to complement the income calculation rules laid out in ss. 47 to 58.0.7, because those sections amounted to a complete code unto themselves. The court found that, absent any statute clearly to that effect, s. 54 does not exclude the application of s. 422 in an assessment of stock-option benefits.

The court also found the value of the income is equal to the fair market value of the stock option at the time of the gift.

Des Groseillers and BMTC were granted leave to appeal to the Supreme Court of Canada.

Under s. 422, the disposition of a property by a taxpayer is “deemed to be made at the fair market value of the property at the time of the disposition,” where the taxpayer disposes of it to “any person by gift.” Des Groseillers argued s. 422 did not apply to his case because ss. 47.18 to 58.0.7 was a “complete code” that held all the necessary rules for calculating the income resulting from the issuance of securities to employees. According to the appellant, those sections also covered “all the legal fictions that the legislature considered necessary to adopt in support of those rules,” said the SCC.

Des Groseillers also said s. 54 of the Taxation Act excluded the application of s. 422. Under s. 54, if a person has agreed to sell or issue its securities to someone with whom they do “not deal at arm’s length,” they are “deemed to receive no benefit under or because of the agreement other than as provided in this division.”

The SCC said that Quebec Court of Appeal Justice Guy Cournoyer had correctly analysed the issues. He had said that s. 50 does two things. It determines the time at which this type of benefit will be taxed, and, by treating the transfer as employment income, it establishes an exception to the “general rule” that a property disposition generates a capital gain or loss. Section 422(c)(ii) attributes a value to the consideration, said Justice Cournoyer, but that “has no impact on these legal fictions,” and there is “no actual conflict” between ss. 50 and 422.

Section 422’s “broad formulation” indicates the legislature’s purpose was “to attribute to any disposition of property by a person a value equal to the fair market value of the property for the purposes of computation of income,” said Justice Cournoyer. The legislature also did not exclude the part of the legislation dealing with employee stock options from s. 422’s application when the Taxation Act was enacted in 1972, or in subsequent amendments. The legislature’s “silence in this regard is telling” because there are other express references to the non-applicability of s. 422 elsewhere in the Act.

Section 54’s effect is to give precedence to certain sections over any other section laying down “a taxing rule,” but it does not prohibit Revenu Quebec from relying on other aspects of the Taxation Act in calculating someone’s taxable income, said Justice Cournoyer.

While the trial judge’s interpretation was that ss. 47.18 to 58.0.7 was a complete code and s. 422 cannot be used to calculate income provided for within it, those sections do not “constitute a code so complete and so hermetic that the application of s. 422 is excluded.”