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

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.