The Taxation Trio: Fair Market Value, Statutory Interpretation, and Employee Stock Options
In Des Groseillers v Quebec (Agence du revenu), 2022 SCC 42, the Supreme Court of Canada (“SCC”) unanimously confirmed the Quebec Court of Appeal’s also-unanimous holding in Agence du revenu du Québec v Des Groseillers, 2021 QCCA 906 that employee stock options constituted taxable income. Pursuant to Article 50 of Québec’s Taxation Act (“Tax Act”), an employee who disposes of stock options to an arm’s-length party is deemed to receive a taxable employment benefit that is equal to the difference between the actual consideration for the disposition and what the employee really paid to acquire the stock option. Both appellate courts agreed stock options must be assessed at fair market value.
Taxpayer Yves Des Groseillers, a director at BMTC Group Inc, received a compensation package that included employee stock options. In 2010 and 2011, Des Groseillers donated more than $3 million in stock options to registered charities. Des Groseillers, however, did not report these stock options as income in his 2010 and 2011 tax returns. The tax system seeks to ensure integrity of tax collected for all taxpayers. Inaccurate tax returns harm the integrity of taxation (and this is perhaps precisely the moment when courts pay more attention to tax disputes).
Examining this gap, the Agence du revenu du Quebec (Quebec’s revenue agency, also called Revenu Québec) included these stock option benefits in calculating Des Groseillers’ taxable income. (The agency also included the value of the employee stock options in calculating BMTC’s payroll.) Both BMTC and the taxpayer appealed the assessments.
The trial judge initially determined that the employee stock options did not constitute taxable benefit. Upon appeal by Revenu Québec, the Quebec Court of Appeal overturned the trial decision. The appellate court held that section 54 of the Tax Act does not preclude the application of section 422 of the Tax Act in an assessment of stock options.
Section 422 claims that disposition of property is “deemed to be made at the fair market value of the property at the time of the disposition.” The text of the Tax Act fully captures employee stock benefits in calculating taxpayers’ income. Des Groseillers turned to sections 47.18 to 58.0.7 to opine that these sections functioned as a complete tax code excluding Quebec’s revenue agency from invoking other rules in the Tax Act to calculate income, however.
Both the Quebec Court of Appeal’s decision (penned by Cournoyer J.A.) and the SCC decision stated that section 422 can be deployed to compute taxpayers’ income in specific circumstances where any disposition as gifts may be deemed to be transferred at fair market value at the time of disposition. The SCC also parsed the legislative history of section 422 to understand its application. Specifically, section 422’s purpose intentionally seeks to attribute the fair market value of property to dispositions to accurately calculate income; employee stock options fall within the ambit of section 422 as the Quebec legislature did not preclude section 422 from applying to these benefits.
Section 422 of the Tax Act also contains substantially similar language to paragraph 69(1)(b) of the federal Income Tax Act, RSC., 1985, c 1. Paragraph 69(1)(b) notes that taxpayers are “deemed to acquire the property at its fair market value” if they acquire “a property by way of gift, bequest or inheritance or because of a disposition that does not result in a change in the beneficial ownership of the property.” Similarly, section 422 of the Tax Act notes that “the disposition or acquisition 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 or acquisition.” Both statutes involve a determination of fair market value in calculating taxable income when taxpayers dispose of property. The SCC, contemplating the similar text of both provisions, dismissed the taxpayer’s appeal.
Jinyan Li, a professor at Osgoode Hall Law School, and David Piccolo, a tax partner at TaxChambers LLP, note that the SCC, since 1984, has articulated a modern approach to statutory interpretation (as of Stubart Investments Ltd v The Queen,  1 SCR 536, a general anti-avoidance rule case). The modern rule of statutory interpretation involves looking to the text, context, and purpose of tax legislation. Similarly, section 12 of the Interpretation Act, RSC 1985, c I-21 underscores that interpretation should assume a fair, large and liberal construction.
Understanding tax provisions often involves complicated exercises in statutory interpretation. In certain cases, courts have referenced both the French and English definition of certain words to understand the breadth of provisions. In this case, the SCC cross-referenced two pieces of statutes to accurately situate the disposition of employee stock options in calculating taxable income. Looking at the language of two tax statutes created more consistency in statutory interpretation.
Former French King Louis XIV’s finance minister, Jean-Baptiste Colbert, once remarked that “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” French goose or Canadian goose, taxpayers generally wish to minimize payable taxes. Minimization of taxes, from the SCC’s perspective, should ultimately accord with the precise wording of statutes determined via textual and contextual statutory interpretation. Parsing both federal and Quebec tax statutes, the SCC rendered more consistency in statutory interpretation through finding similarities between two different sets of legislation. Going forward, litigants might expect to see more judicial cross-referencing of legislative texts.