REVENUE CANADA TAXATION MEMORANDUM
TO- Appeals Branch
FROM- Reorganization and Non-
Resident Division
R.A. Primeau
957-2127ATTENTION Mr. R.A. D'Avignon
Director GeneralRE Verena Busby Adverse Decision from Federal Court - Trial Division
We enclose your red adverse decision file and refer you to the memorandum of February 24, 1986 and addendum thereto of March 6, 1986 from the Small Business & General Division, Specialty Rulings Directorate.
It is of course important that the question of law regarding what is meant by the word "employment" in subsections 7(5) and 7(1) of the Income Tax Act be resolved by a higher court. Mr. Justice McNair states on page 11 of the Reasons for Judgment with respect to the taxpayer: "Certainly, she was not the employee of T.R.V. Minerals or New Minex but was simply a director in name of those companies." In our view, this is contrary to the combined effect of the subsection 248(1) definitions of "employment", "employee", "office", and "officer".
Mr. Justice McNair also made a finding of fact that the stock option benefits were received by Mrs. Busby because of her special relationship with Wolfgang Rauball, a principal shareholder in T.R.V. Minerals and New Minex, and also because she personally guaranteed certain bank loans of T.R.V. Minerals. We agree that this finding of fact would not be overturned by the Federal Court of Appeal.
However, Mr. Justice McNair made no finding of fact that such benefits were not by virtue of Mrs. Busby's employment with T.R.V. Minerals and New Minex. He was precluded from making such a negative finding of fact because, as indicated above, he decided as a question of law that Mrs. Busby was not the employee of these two companies. Should we be successful in overturning this point of law, i.e. in establishing that an "employee" includes an "officer" which in turn includes "director" and therefore an "employment" includes "the position of a corporation director", we would then have to argue that even if the benefits received were for the above-mentioned other reasons, they were also by virtue of Mrs. Busby's employment with the two companies. In other words, the question to be asked is simply whether Mrs. Busby could have received these benefits in the form that they were received if she had not been a director of the two companies.
If the evidence adduced at trial would answer this question in our favour (i.e. in the negative), we agree with the recommendation of the Small Business & General Division to carry on with our appeal of this case (which has been filed protectively). If not, we support their recommendation that the question of law with respect to the word "employment" be referred to the courts under subsection 173(1). If the latter course of action is taken, we suggest that the Crown should pay all solicitor-client costs in connection with such determination because after the outcome thereof the Crown would likely discontinue its appeal in this matter.
Director General Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
c.c. Mr. Don Joy Director, Publications Division
IT-113R2 , para. 9