Bill:- It surprises me that so many people think they know the track record of the ESPP/ESO Incentive Shares Otions plans and the tax policy applied in Canada.

I have just now finished reading a sequence of E-Mails sent to me by a victim of the tax on ficticious income. This former Nortel employee opted to take shares when his ESO shares option agreement was about to expire.

He then requested advice from the Nortel Plan administrators as to what tax liabilty would he incur if he sold his holdings at the then $6.00 per share market going price. His tax levy was based on a share price of $60.00 per share at the tme of exercise.

He has documented proof the Plan adminstrators told him very clearly he would only have to pay tax on the $6.00 per share actually received when he sold.

Bill. Do not assume these victims did not attempt to find out what the risk was when they exercised their shares.

Most were in a state of total shock when they were taxed on the potential gain they might have received -- but didn't.

If you really care what took place leave your e-mail address at www.cfet.ca -- petitions and I will be happy to give you documented evidence of what I just said.

Ken

I'm shocked by what you're saying here Kathy. It seems that you are simply saying that we should protect stupid people from themselves.

Why on earth, should people who get involved in business/financial transactions where they aren't full aware of what they are getting into, be given any kind of special treatment when it comes to paying their taxes? If you applied this logic to everyone we'd have no taxes being paid. Do you or anyone you know, understand how your own income taxes work? I sure don't. It's why I pay someone I can hold accountable. If this woman says her own accountant was negligent in knowing how this would end, then the accountant is the one your story should have pursued. It's crazy to think that anyone other than a reputable tax accountant or attorney would know the intricacies of exercising stock options. If you made a financial transaction of this magnitude, without doing your due diligence, then you're an idiot. I have no sympathy for you. Our tax system should not protect you, full stop. Ignorance is not an excuse for breaking the law. Sorry, you are way wrong. If any of our society was held accountable using this school age mentality, we'd be defunct as a country. Your emotions have no place here.

Kathy:- Bill Russel is out to lunch on this issue. Here is one of the studid comments he made: "

Again I would suggest you interview, on air, a tax accountant who can explain precisely how this stock option process works and what the potential benefits are. Then when an employee makes a huge tax free gain we can underdstand and not demand they pay their fair share of tax on it like the rest of us would be forced to."

"Then when an employee makes a huge TAX FREE GAIN"

Kathy there is no such thing as a TAX FREE GAIN in the ESPP/ESO Stock plan set-up. If you have a potential gain at the time of stock delivery you are hit with this "Taxable benefit tax" and then taxed on those same shares again if you happen to sell them afterwards for an additional "Capital Gain".

Intitally both the Hi-Tech Corporations and the Government of Canada described the ESPP/ESO plans intent was to provide participating employees with an incentive to remain loyal to the employer and to share in the fruits of their contribution to the employers success if and when the shares purchased increased in value.

In the beginning there was no mention of any potential gain in the shares they purchased being classed as a unique "Earned Income" taxable benefit item when these "Incentive Share Option" (ISO) plans were first introduced.

Most participants expected to be taxed on the profit they realized (if any), at the time they sold their stock -- not on some fictional value determined by the calculated Fair Market Value at the time of delivery.

As most people are now aware the U.S.A. government has amended their equivalent "Alternative Minimum Tax" legislation to put an end to taxing American citizens on "phantom income" And they have done so retroactively. Ref: www.reformamt.org

Hopefully now that CBC "GO PUBLIC" is a National Program you will do a repeat of the Shannon MacLeod Interview for all Canadians to see.

Kathy,

I am pleased to find this topic is alive and well on your blog site. We corresponded briefly and it is good to have the opportunity to continue our discussion publicly.
The first issue I would like to raise with you concerns your failure to grasp the fact that these schemes are for the purposes of tax avoidance/reduction and are in fact a "gamble". You say these "victims" do not play the stock market. Yes they most certainly did, and got well bitten in the process.

Does it not seem odd to you that some of your "victims" were able to amass enormous tax bills? Does this not imply the potential for tax free gain was also very high? Did you check with your tax accountant before cashing your last paycheck from the CBC?

I most certainly understand that these people have been very hard hit financially but the thing is, their predicament is a creation of their own choices. If in fact they were misled by their employers with regard to the inherent risks, then they should sue for fraud. The fact that the whole scheme failed spectacularly does not suggest for a moment that the tax laws are at fault. And it certainly does not make a case for a break from the taxman.

Again I would suggest you interview, on air, a tax accountant who can explain precisely how this stock option process works and what the potential benefits are. Then when an employee makes a huge tax free gain we can underdstand and not demand they pay their fair share of tax on it like the rest of us would be forced to.

There is a lack of critical analysis in your thinking on this subject. For example you state the employeee may not be allowed to sell the shares right away after purchase. Why is this a condition? Curious at all? If you cannot find out I will be glad to continue our correspondence and explain. Hint: potential exploitation of share price manipulation by the chief executives of the company. You are swimming with sharks here Kathy, where is your cage?

Capitalism is the problem. Add a little fascism to that. And we've got BC and Canada perfectly described. With our taxes (for next billion years) going to finance the 2010 Olympics which are currently $45 million over budget (and it's only June) all services to BC resdents are being cut. People with disabilties submitting applications for benefits are being denied for trivial reasons whereas they were not before. When they resubmit, they pass. Something is very wrong with the politics of BC and Canada and it's called corruption. The only purpose of a capitalist government is to fatten the coffers of the rich, the corporations, and the government coffers and to re-employ itself. The only reason government employees work is to assure they keep on working. The government's purpose is always self-serving. It doesn't have a heart. It will grad money from the poor and downtrodden. That's what it's doing now as the middle-class becomes the new poor.

Any Tax return can be re-filed and re-submitted, even years after the fact. People need to consult with a true Taxation Expert, like myself. The Income Tax Act, does not permit taxation were No Income was earned after deducting or allowing expenses related to the so called Income or Profit earned. I see these errors everyday.
Un-Educated and un-informed so called professional Accountants and Lawyers are to Blame for most Canadians over paying their Taxes.
The Income Tax Act actually protects Tax payers from CCRA.

Few of us like paying taxes. We work hard and like to spend the dollars we receive for our efforts on our families, our selves and those close to us. When we pay taxes, we have less to spend. But can you imagine being taxed on income that you did not see, that did not actually result in any benefit to you or to your loved ones? Being taxed as if you received dollars of income when you received nothing? So now you owe dollars for something you did not get. Bad enough to pay taxes but to pay them for nothing received is a tragedy yet this is what is happening to hundreds, perhaps thousands of Canadians and the current Government of Canada will do nothing to rectify this financially horrific situation. Perhaps we have the wrong party governing. I thought this one was about fairness.

Kathy - great article and good follow up w/ "suck it up?". thanks for helping out the little guy.

My biggest problem with the whole issue has been the fact that the cra pretends to administer the laws equally for all canadians, but then if you have a big enough lobby (like the small group at jdsu, good for them) or you are an ex-prime minister, the laws really aren't all that equal.

When they brought in the changes to the tax laws to allow deferral of income on options and stock purchase plans, as with most newly enacted laws, the interpretations and understanding wasn't fully there yet. Very few if any among my many colleagues, who are all university educated, really understood the implications until it was too late. Accountants at the time of the tech bubble also did not provide proper advice as the bubble was not forseeable by many.
I "sucked it up" and paid over 50k in taxes on underlying shares that were worth less than a thousand. Sure i get to carry forward a capital loss into the future, but the chances i'll ever use it up before i die is next to impossible.

I cannot claim ignorance, I knew about the tax implications, but here is my "story" and how I have been personally affected.
I was part of a small company that had promise of going public. Eventually they did go public and I had vested considerable number of shares being an executive in the company. I chose to leave the company as the position was not what I had expected on entry to company. The options I had were values at $0.20 USD and on resigning from company, I had three months to exercise the stock or lose them. After about 2 months, I decided to exercise the stock as the current trade value was $65.00USD and rising - wouldn't you? As I was a company insider I was locked out of trading the stock until a 6 month period after IPO.
My first day of allowed trade was April 16, 2000. The first day I could trade stock was sitting at sub $10.00.
I researched my options, discovering there was no way to avoid the impending tax. By not selling the shares, I could defer paying taxes but not indefinitely - if the company sold or went out of business - taxes would be do. And if I died, the tax burden would become my families. Neither option was appealing.
I was able over the next few months sell the stock for an average of about $16.00 USD per share. The highest the stock reached was around $23.00 before tanking to less than $2.00 USD by year end then basically getting dissolved into another company.
I was left with a tax bill of over $80000.00 on stock that I only earned about $16,000 on. To pay the bill, I had to 1) sell my house and at a loss because of markets at time, 2) divest almost 100% of my RRSP (which because of the markets, some of it was not doing so well), and 3) have my parents co-sign a loan (which I was lucky to have this option or else my family and I would have had to live on the street for a while). I finally paid off that loan in 2007 - and as the loan was not for an investment, I could not even write off the interest.

Before the tech bubble burst, Canadian tech companies were offering a lot of options to employees in the hopes of retaining them, because they couldn't, at that point, pay the salaries to compete in the hot tech market. Good employees were being lured by other companies with incentives of money and/or stock. At the height of that bubble, the Cdn gov't brought in a tax law allowing deferral to encourage employees not to buy and sell immediately, but to keep those options as investment in the company. It was being sold as good for employer and employee.

BUT no one understood how the law would be interpreted. When we exercised our now worthless, and potentially bankrupting stock options (owing over $100,000 in taxes), tax advisors and EVEN THE CRA could not explain to us how the law would be interpreted. We chose to hold on based on the promise that deferral was beneficial, and that tech stocks were climbing. Soon after exercising, the stock began to tumble, and a trading ban kept us from being able to bail out to at least break even and pay the tax. Our (my husband's) income at this company at the time was around $40,000...certainly not the "serious money" that others claim options holders must be making...and not enough for one family to live on in Vancouver (we've since moved out of province for a lower cost of living.)

Now we live in the shadow of stress of having our worthless stock being disposed of, triggering this tax. We've already lost our initial $10,000 investment, and that's fine...it was part of the risk we took. We would like to see the ability to at least write off our capital losses against this income so that we don't lose our home. We don't play the stock market, we simply made a poor decision based on limited government tax information at the time.

I fail to see how it is in the benefit of the Canadian government to bankrupt thousands of families due to this problematic tax law.

JM -- the assumptions you're making about Shannon McLeod are huge. You know nothing about her financial situation, but you are assuming that she must be a fat cat, a rich stock speculator trying to get away with something.

I know that this is not necessarily the case. 10 years ago, I was earning $30k / yr for a small company that went public and gave me 10,000 options valued at $1 each, before the company went public.

In the 2 yrs that I had to wait before I could exercise my options, the tech bubble took place and my shares shot up to $50 / share. I exercised them as soon as I could (I paid $10k to buy them), but chose to hold them a bit because I wanted to "support my company". I received no tax advice from my company, or anyone. I had never owned stock in my life.

Within a few weeks, the tech bubble burst and my shares dropped like a rock.

For years I had no choice but to hold on to my shares and never sell, because if I did I'd be hit with a $100k + income tax bill....which I certainly can't afford, not being a fat cat stock speculator, and because my stock dropped to less than $1. And I couldn't write this loss off against capital gains as I had no other investments to sell.

The company has now gone under, and so in the government's view my shares have been disposed even though I never chose to sell them, and I owe them over $100k in taxes.

The problem, Kathy, is that people read "stock market, taxes," and see really big numbers, and immediately dismiss it with "they probably had it coming"...

It's a complex issue that has serious ramifications for a bunch of honest people, but there are too many people unwilling to try to make sense of complex issues and so go into Internet Commando mode and pass judgment on people and situations they don't understand.

I decided not to sell, just as people do all the time. The $100k tax punishment being inflicted on my $10k investment mistake, however, is really out of proportion.

Kathy:- Thanks for posting your article Suck it Up.

Those who defend the government levying taxes on potential rather than real income are in need of more information.

What difference does it make whether equities are purchased with after tax dollars or before tax dollars? If the employee never receives hard cash as a result where is the benefit?

When Jusrice Donald Bowman of the Tax Court of Canada ruled that it makes no difference what the dollar value happens to be of a benefit conferred upon an employee unless the employee is actually conveyed a real benefit then there is nothing to tax - period.

Any other rationale used to justify levying a hard currency tax on a purely potential income is nothing more than smoke and mirrors.

No one is looking for a special dispensation of ad hoc relief. Paying taxes on fantasy monies never seen is simply wrong and unfair. The act must be changed. Anything short of that will just be another kluged patch like the deferral was in the 1st place.

Are you aware of the USA situation and does that not add some context ? Certainly when any FINA member or MP has been talked to in the past they were always wanting to know what the USA had done. When it was nothing there was sense of relief that leaving ours as a harmful ruinous broken mess was OK – as long as theirs was as well. Now the USA has corrected their mess and we remain rare amongst the G8 to treat ESO in this manner.

Kathy – I think the crux of the issue is your acceptance that a stock purchase subsidized by an employer doesn’t create taxable income. You didn’t challenge the premise that they “didn’t realize any income”. I suspect that most of the people taking the hardline position have never participated in a stock purchase plan, and like me, are comparing their situations to Shannon McLeod’s. When I buy shares and invest in the stock market, I do it with after-tax dollars - I’ve already paid my taxes on my income. The tax laws on stock option benefits or stock purchase plan benefits put Shannon McLeod on an even keel with me by making sure she is taxed up front on the benefit she received from her employer. When she gets to buy shares at a discount off the market price, it’s just another form of compensation from her employer. Since I don’t have this benefit I clearly see two transactions: In my situation I get a paycheque from my employer with income taxes deducted, and then I make a conscious decision to purchase shares and take a risk in the markets. Shannon McLeod is no different - first she gets a payment in kind from her employer (the discount on the stock that I can’t get) followed by her decision to hold on to those shares (her risk in the stock market). It’s clear to me that the discount should be taxable income – no different than if her employer handed her a bundle of cash. Calling it phantom income is just sleight-of-hand. Kathy, what if you took a year’s worth of your paycheques and invested them in the stock market. If the stocks crashed, would you say you had phantom income and shouldn’t be taxed on that year’s worth of salary? People are quick to spot unfairness and I think that’s why the viewers’ reactions were so one-sided. What Shannon McLeod is really saying is that it’s unfair her stocks crashed in value. Most anyone with market investments can sympathize with that, but don’t ask us to also subsidize her tax bill when we’ve already paid ours.

First of all, lets assume this woman really did not know about taxes owing on exercised stock options. Lets even assume that she's a hard working, average person who bought in to her company stock option plan (a very generous assumption, I'm betting she was granted them).

How do you explain her $100,000 tax bill? For her to have had to pay $100,000 in tax, assuming an average marginal tax rate of 30%, her stock options would have been "in the money" (when the market price exceeds the exercise price) in the amount of $333,000. This means, at the time she exercised her options, she could have turned around and sold these shares and made a profit of $333,000. For her to have stock options like this, she would had to been making some serious money.

Even now, if her shares have fallen by 50%, I'm betting she could sell the shares she still has and more than cover her bill. If she waits for the market to recover, she'll be able to cover this tax bill several times over. I have absolutely no pity for someone pretending to be ignorant in order to save some cash. If she was so ignorant she wouldn't have exercised her options when they were so much in the money.