An employee was requested by his employer to exercise stock options (giving rise to a s. 7(1)(a) benefit of $5 per share, equaling the $10 FMV of the shares minus the $5 exercise price) and was requested to hold those shares, so that when he ultimately sold them, he received proceeds of $4 per share. He sued and received damages equaling his $6 per share loss or, alternatively, received damages computed as the difference between the purchase price of the shares ($5 per unit) and the sale price of such shares ($4 per share) plus the income tax payable due to the inclusion of the s. 7 benefit.
CRA applied the surrogatum principle to find that the compensation for the foregone capital gain or the loss sustained as compared to the exercise price was on capital account, but applied Gernhart to find that the compensation for taxes imposed on the s. 7 benefit was taxable as being in lieu of a s. 6 benefit.