CANADA: THE GREAT CANADIAN SELL—OUT : ESO and ESPP Tax Issues - 5 July 2009

WHAT WOULD IT TAKE FOR YOU TO BE...SOLD OUT?

THE GREAT CANADIAN SELL—OUT
A commentary on what it takes for Canada’s Government
to forsake you in a pile of debt that they dumped you in.

By Victor Drummond ©
July 1rst 2009

For
probably as long as the past 20 years the Canadian Government has
enjoyed the financial returns produced by their defective taxable
benefits legislation. And during the first 10 years, 1989 to 1999 all
was well.

Honest, hard-working Canadians -- fortunate enough to
be wooed by their Hi-Tech employers, and invited to share in the
employer corporation’s phenomenal growth via participation in an
Employee Shares Purchase Plan (ESPP) or an Employees Shares Option
(ESO) agreement – had reason to consider themselves to be living under
the worlds greatest system of government.

They may have wondered
about the reason for taxing their ESPP/ESO equities as of any profit
they might realize by selling their purchased equities on the day they
were delivered – BUT What-the-heck: all they had to do was sell enough
of the shares to cover the tax and hold the rest, for even more gains,
or sell them all and pocket the difference.

Although there were,
tax ramification, caution notes included in some employers’ ESPP/ESO
information notes few, if any participents, ever dreamed of being taxed
on gains that remained purely potential: i.e. phantom income: or in tax
amounts that often exceeded their gross income for the entire year.

Yet
that is precisely what happened when the Hi-Tech market went bust in
2000, and is still happening, to thousands of shocked Canadian
taxpayers.

Initially many victims of this insidious tax trap
thought the government had made an error and it would be rectified
promptly as soon the victim(s) reported the event to the taxman. After
all this was Canada not some destitute third world country controlled
by some despotic dictator.

And it seemed the government was
about to correct this tax rip-off when the government of the time first
announced the victims could defer payment of the taxes on phantom
income, until the equities were sold or disposed of, by utilizing the
features provided per the newly minted form T1212.

The
victims were initially under the impression this allowed them to defer
payment of taxes on the ESPP/ESO equities until the time of sale and
they would only be taxed on the actual gain, (if any) realized at that
time.

OH No screamed the tax-man! No matter what profit or loss
you have at the time you actually sell those ESPP/ESO equities you
still pay the taxes levied on the gain you could have made on the date
the equities were delivery to you, (exercise date). If by chance you
managed to sell your ESPP/ESO equities later at an even greater profit
then you will owe even more tax money by reason of your making an
additional “Capital Gain”.

But, If you happen to sell those same
equities at a loss – well that’s too bad. You can not apply the loss on
those same equities against the taxable benefit taxes previously levied
on them.
If you win we all win BUT if you lose we still win. What could be “fairer” than that?

More to the point what could be more unfair than that? Read on and you will find out.

So
beginning with the tax year 2000 thousands of Canadian taxpayers found
themselves financially ruined due to horrendous taxes levied on money
they never saw.

Many sent letters of appeal to every Canadian
government official from the Prime Minister all the way down to the
farthest back, back-bencher Member of Parliament (MP), to no avail.

Many
such appeals were totally ignored and those that did rate a reply were
advised the problem was not within the jurisdiction of the recipient
Minister but their letter was being forwarded to some other department
for consideration, which would be more accurately stated as
inconsideration because nothing was ever done to correct the problem.

(For
more detail of government response during this period, in time, review
the prior posted series:- “Appeals to Reason part 1 to part 17. (This
series is currently on hold: pending the result of a motion during FINA
meeting No 33. to consider the impact of correcting the problem.”

By
the time the federal election of 2005 was pending the shenanigans of
the long term Federal Liberal Government were becoming a bit too much
for the average, long suffering, Canadian voter to tolerate.

The
Federal Conservative Party were making promises, such as providing
Canadians with lower taxes, fairer taxation and more accountable
government.

This sounded good to most Canadians and so the
Conservative party – true to their word – when they formed the next
government produced a Tax Remission Order (TRO) that did actually
revoke the taxes and related penalties for all of 37 former employees
of the defunct SDL Optics Inc. (JDSU) corporation in the Conservative
riding of Saanich Gulf-Islands in British Columbia.

The TRO
event was announced with great fanfare: by MP, Gary Lunn in the riding,
along with the new Prime Minister the Right Hon Stephen Harper. When
questioned by a reporter, from the Victoria Times Colonist Newspaper,
about the scope of the TRO the Prime Minister replied “We’ll resolve it” and you added: “it will take a change of code” to correct the problem.

A
change of “code”? What code? Were you referring to the government code
of “ethics” or the flawed taxable benefit legislation?

You
must have been thinking of the government code of ethics because the
exclusive nature of the TRO merely made a bad situation worse for those
who were also taxed into financial ruin but were excluded from the tax
relief granted to a mere 37 victims.

Two years have gone by since you made that remark and so far nothing more has been “resolved” in regard to the unfair taxation of phantom income..

Now
our esteemed Minister of Finance, the Hon. James Flaherty, is telling
us the victims of taxation on phantom income are all treated the same
and the tax system, as presently operated, is “FAIR”.

Do those government persons who initiated, and authorized, the Saanich Gulf-Islands TRO agree with you? I hardly think so.

If they truly believed the existing system was “fair”
they would have merely advised those 37 former SDL Optics Inc.
employees to follow the same appeal system as was, and still is,
available to all other similar victims.

But they knew the system was corrupt and grossly unfair so the Saanich Gulf-Islands TRO was produced.

What
happened then? Why were the remaining thousands of Canadians, who are
caught in the same outrageous tax trap, left in various states of
financial devastation by the very government that had campaigned on the
promise of “reduced” and “fair” taxation for all Canadians?

According to the article “JDS deal dangerous precedent. Ottawa told” which appeared in the Victoria B.C. newspaper “The Times Colonist” on December 7, 2007, “Senior bureaucrats warned such a decision was unfair to other taxpayers and set a dangerous precedent….” “A
similar warning came from Canada Revenue Agency Commissioner William 

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