Near the beginning of each year, the taxpayer would notify each of its executives that an award of units (within a specifed range) would be made to the executive in respect of the three-year compensation period commencing with that year, which would then be used to determine, within 120 days after the end of that compensation period, the bonus that would be paid to the executive in respect of the compensation period. Bonuses were paid at the option of the taxpayer in cash or shares with full stated capital.
Margeson J. found that the taxpayer's deduction of the amount of the bonuses which were paid in treasury shares was not barred under s. 7(3)(b) because such shares were not paid or issued pursuant to an "agreement." The word "agreement" in s. 7 refers only to legally binding agreements, meaning contracts. There was no "meeting of the minds" that could have led to the formation of a bilateral contract (para. 71), nor did the employees do or refrain from doing anything specified in an offer for a unilateral contract (para. 86). The implicit notion that the bonuses would be earned through superior work performance was not enough to constitute an offer (para. 85). Even if there had been an agreement to pay bonuses, they could have been paid entirely in cash, so there was no agreement to issue securities.