By Terrance S. Carter

Under Quebec’s Taxation Act (the “Act”), stock options donated to charities by an employee are considered employment income and will therefore be included in calculating that employee’s income tax obligation. The Supreme Court of Canada (the “SCC”) made this ruling on November 17, 2022, in Des Groseillers v. Quebec (Agence du revenu).

Mr. Des Groseillers (the “Appellant”) had received stock options from his employer, which he donated to various registered charities. Agence du Revenu du Québec (ARQ) audited the Appellant and added the value of this donated stock to his employment income, increasing his tax liability under sections 50, 54 and 422 of the Act.

Section 50 is a deeming rule which states that once an employee disposes of certain securities, such as employee stock options, the employee will be deemed to have received a benefit in the amount that the value of the disposition exceeds what the employee paid for the security (e.g. if an employee received shares for free and sells them for a profit, the entire profit will be included in their income). Section 54 specifies that if a corporation sells or issues one of its securities to one of its employees, then the employee is deemed not to receive a benefit other than as provided in Division VI (sections 47.18-58.0.7) of the Act. Subparagraph 422(c)(ii) states that when a taxpayer disposes of property in various circumstances (including when the taxpayer gifts the property to “any person”), the value of this transaction is deemed to be at fair market value at the time of the disposition of the property.

The Appellant appealed the ARQ’s decision from their audit, which added the value of donated stocks to his employment income, to the Court of Quebec. Here, the court ruled in favour of the Appellant, finding that he received no benefit from the donation, so the value of the donated stocks should be excluded from the calculation of his taxable income. The ARQ appealed this decision to the Quebec Court of Appeal, where the original decision was overturned in favour of the agency. Following this, the Appellant brought the case to the SCC.

The Appellant argued that section 422 did not apply to him, because Division VI of the Act (of which section 422 is not a part) was “a complete code that contains, within itself and in an exhaustive manner, all the rules for the computation of income derived from the issuance of securities to employees.” Since section 54 applied (which states that an employee is deemed not to receive a benefit when they receive securities from their employers unless Division VI provides otherwise), this should exclude the application of section 422 altogether.

In a unanimous decision, the SCC considered how sections 50, 54 and 422 should be interpreted. The SCC provided three reasons why it did not agree with the Appellant’s arguments. First, the SCC concluded that there was no conflict between the application of section 50 of the Act and section 422. Section 50, a deeming provision, indicates the time at which an arrangement, such as an employee stock option, will be taxed and provides that a disposition of property in this context would be taxed as employment income rather than as a capital gain or loss. Section 422, the SCC found, does not impact this deeming provision at all. Second, the SCC inferred that, through the “broad formulation” of section 422, the legislative intent of the section was to deem the value of any disposition of property to be at fair market value for the purposes of calculating taxable income. The legislature had not explicitly said that section 422 did not apply to Division VI, which was telling, since there existed several other express references regarding the non-applicability of section 422 to other provisions in the Act. Third, the SCC concluded that section 54 “does not, in the absence of clear legislative indicia to this effect, constitute a code so complete and so hermetic that the application of section 422 is excluded.” Therefore, since section 422 of the Act did apply, the Appellant’s arguments were rejected and the appeal was dismissed. 

​Read the November 2022 Charity & NFP Law Update