NATALE FERLAINO Appellant v. HER MAJESTY THE, 2017 FCA 105

Date: 20170517 Docket: A-175-16 Citation: 2017 FCA 105 CORAM: SCOTT J.A. BOIVIN J.A. DE MONTIGNY J.A. BETWEEN: NATALE FERLAINO Appellant and HER MAJESTY THE QUEEN Respondent Heard at Montréal, Quebec, on May 17, 2017. Judgment delivered from the Bench at Montréal, Quebec, on May 17, 2017. REASONS FOR JUDGMENT OF THE COURT BY: SCOTT J.A. Date: 20170517 Docket: A-175-16 Citation: 2017 FCA 105 CORAM: SCOTT J.A. BOIVIN J.A. DE MONTIGNY J.A. BETWEEN: NATALE FERLAINO Appellant and HER MAJESTY THE QUEEN Respondent REASONS FOR JUDGMENT OF THE COURT (Delivered from the Bench at Montréal, Quebec, on May 17, 2017).

SCOTT J.A. [ 1 ] This is an appeal brought forward by Natale Ferlaino (the appellant) from a judgment of the Tax Court of Canada (TCC) rendered by Smith J. (the Judge) on April 28, 2016, and reported at 2016 TCC 105 .

The Judge confirmed the Minister of National Revenue’s (the Minister) reassessments of the appellant’s 2010 and 2012 taxation years, and found that under subsection 7(1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the Act), the employment benefits received by the appellant as a result of the exercise of employee stock options denominated in U.S. dollars (USD) were to be calculated by converting the Canadian Dollar (CAD) value of the exercise price and the fair market value of shares at the time of the exercise, using the exchange rate in effect on the date the options were exercised. [ 2 ] We have not been persuaded that the Judge made an error in law in upholding the Minister’s reassessments by relying on a

contextual and purposive

interpretation of

section 7 of the Act. He correctly applied the relevant legal principles and case law relating tothe taxation of employee benefits derived from stock options denominated in a foreign currency. [3] We also agree with the Judge that

section 7 of the Act constitutes a complete code for the taxation of employee stockoptions. Tax implications for the exercise of stock options, including the conversion of foreign denominated amounts used to calculateemployee benefits arising under

section 7 of the Act, are solely triggered on their exercise date. [4] In the present appeal, no taxable transaction occurred when the stock options were granted to the appellant since he did notacquire at that time a taxable benefit (Steen v. Canada, (FCA), [1988] 1 C.T.C. 256, 19 F.T.R. 80). The case reliedupon by the appellant to support his position that tax implications are triggered upon granting stock options (Canada (Attorney General)v.

Henley, 2007 FCA 370, 371 N.R. 179 [Henley]) is distinguishable from the facts of this case, as this Court specifically mentioned inHenley (at paragraphs 13 and 18) that its conclusions were inapplicable in the context of employee stock options exercised undersection 7 of the Act.

Furthermore, the appellant has failed to point out any specific language in the Act or binding case law before thisCourt that justifies a different tax treatment for the calculation of taxable employee benefits derived from the exercise of foreigndenominated stock options. [5] The taxable transactions in this appeal occurred when the appellant exercised his stock options in 2010 and 2012, as this wasthe moment when the shares were acquired in exchange for an “amount paid” within the meaning of subparagraph 7(1)(a)(ii), and whenthe value of the appellant’s employment benefits could be ascertained under that same provision. [6] Only then was the appellant required under paragraph 261(2)(

b) of the Act to calculate his reportable benefits by convertingat once all relevant amounts, being the exercise price, along with the fair market value of the shares at the time the appellant exercisedhis options, using the exchange rate applicable on the date of the exercise. [7] For these reasons, the appeal will be dismissed with costs. « A.F. Scott » J.A. FEDERAL COURT OF APPEAL NAMES OF COUNSEL AND SOLICITORS OF RECORD Docket: A-175-16STYLE OF CAUSE: NATALE FERLAINO v. HER MAJESTY THE QUEEN PLACE OF HEARING: Montréal,Quebec DATE OF HEARING: May 17,2017 REASONS FOR JUDGMENT OF THE COURT BY: SCOTT J.A.

BOIVIN J.A. DEMONTIGNYJ.A. DELIVERED FROM THE BENCH BY: SCOTT J.A. APPEARANCES: Vincent Dionne For The Appellant Valérie Messore For The Respondent SOLICITORS OF RECORD:

NORTON ROSE FULBRIGHT CANADA LLP Montréal, Quebec For The Appellant William F. Pentney Deputy Attorney General of Canada For The Respondent