The Education of Jennifer Jones

The Education of Jennifer Jones
A Fable to Illustrate Very Real Unfair Taxation
In Canada
©
Written by Victor Drummond
March 28 2007

Although Walter had been born and raised on a farm he found his interests and aptitudes more suited to science and technology. So when his father passed away he declined to take over the farm and gave title to the property to his younger brother William.

Walter met the love of his life, Janet MacIntosh, at a church picnic in the fall of 1983 and they married in June of 1984. Their first, and only child, Jennifer, was born in November 1985, and was instantly their pride and joy. Not only did Jennifer grow to be the antithesis, of the dumb blond syndrome, she was both beautiful and highly intelligent.

Jennifer was at the head of her class, all through public and high school, and was nominated valedictorian in her final year at high school. Her uncle, William Jones, was so proud of Jennifer that he opened a trust account of $20,000 to finance her University education and he named Jennifer’s father, Walter, as Trustee.

After leaving the farm Walter took courses at the University of Waterloo. Upon graduation, with a Master’s degree, he went to work for Bell Northern Research Laboratories (BNR), in Ottawa and was assigned to a Fibre-optic research project.

Walter’s expertise in the field of fibre-optics soon came to the attention of other researchers, formerly with the BNR Labs, and he was offered a position with a company they had formed: i.e. – JDS Optics Incorporated. The deal offered Walter the same take-home pay and an opportunity to grow with a young company that had demonstrated remarkable growth from the day it was formed.

Among other employees Walter was encouraged to buy shares in the company. The shares were not trading, on any established stock exchange. Consequently the price per share was volatile and subject to unpredictable changes in value. Because the JDS Optics Inc. was a Canadian Controlled Private Corporation, (CCPC), any shares given, or sold to company employees were classed as a Capital Investment by Revenue Canada. Therefore Walter’s Income tax would not be affected by the gift, or discount purchase, of shares in his employer’s company -- unless he later sold them and realized a profit.

Being a total novice in the area of trading shares Walter declined, at first, to purchase any shares -- of any kind.
After seeing fellow employees make handsome profits, through participation in company shares Option Plans, Walter
eventually changed his mind and decided to participate in the next offering(s) of company stock.

About that time JDS Optics Inc. found it expedient to merge with a subsidiary of the Furukawa Corporation of Tokyo Japan. The subsidiary company was the Fitel Optics Corporation and the merged company then became incorporated as JDS Fitel Inc.

Furukawa Incorporated also acquired a 51% interest in JDS Fitel causing the latter to lose its CCPC status. Now if the company gave, or sold, its shares to its employees the shares would be classed as a “Taxable Benefit” by Revenue Canada. From then on any price advantage the employees might be given, at the time of purchase, and/or at the time of receipt of the shares, is added to their “Employment Income” at the current “Inclusion Rate”. This action produced a higher tax rate on their real income plus the potential income, (seldom actually realized), for each share they purchased.

Walter signed all succeeding Option Plan agreements and began to buy as many shares as his contracts allowed. To pay for these shares he took out a second mortgage, on his home, and withdrew the $20,000 from Jennifer’s Education trust.

He was thrilled when his holdings more than doubled in the first year. He signed the next option plan and watched with great anticipation as the company shares split 2 for 1 several times and continued to climb in value per share year after year. In July 2000 Walter owned 2,600 shares of JDSU stock which was then trading at: $1,350 per share. He had another 400 shares on purchase that would be delivered in March 2001-- at which time Walter planned to sell out the total 3000 shares, pay off his loans and take a vacation with his family.

Unfortunately by January 2001 JDSU shares had fallen in value to less than half the value they had the previous July. Walter then decided to wait for the next upturn in JDSU share value before selling his shares. By March 2001 the value of JDSU shares had fallen by another 50% and were then trading in the $250.00 per share range. Walter’s 3000 shares were now only worth : 3000 x 250 = $750,000. This amount would not cover the total debt he owed on:- his mortgages, deferred Taxes and Jennifer’s Education Trust Fund. If he sold the shares now it would trigger the deferred tax debt so Walter decided to wait out the market decline and sell out as soon as he could break even -- or close to break even.

The awaited market recovery never materialized and by the end of 2002 JDSU shares were trading around $20.00
each making Walters holdings worth a total of: 3000 x 20 - $60,000. He could not actually realize even this amount of money because if he sold his shares the proceeds would not cover half the outstanding deferred tax that the sale would trigger.

To add insult to injury Walter was released from the employment of JDS Uniphase during the downsizing of the company in 2003. His termination bonus barely covered the overdue mortgage payments and Walter was left financially decimated.

Walter’s brother, William, was so angry with Walter, over the loss of Jennifer’s education fund that he would no longer speak to him. Walter’s wife, Janet, was also very upset with him but went out to find a job to help keep the family with a roof over their head, and clothed and fed. Jennifer, however, moved away from home to a place of her own and went out to work. She then applied for a co-operative course at Waterloo University. Jennifer can achieve her University education by taking work assignments between semesters. It will take her a couple of years longer – but she will eventually get the education she so richly deserves. No Thanks to Revenue Canada.

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Authors Comment:-

Although this story is partly fiction it is typical of events that actually happened to thousands of honest, hard working, Canadians. How would you feel if your employer rewarded you with company shares, for outstanding performance, only to end up owing Revenue Canada considerably more money than the shares were actually totally worth when you sold them?

If you want to see the Canadian Government level the playing field and provide the same rules to every Canadian Taxpayer post a comment and/or send a copy of this article to anyone you know that may have been a victim of unfair taxation and/or send me an E-mail:- vic.drummond@sympatico.ca

Victor Drummond ©