One Too Many

ONLY IN CANADER YOU SAY --- THANK GOD
A commentary on the Unique & Unfair Income Tax Laws of Canada.
By Victor Drummond – July 2007 ©


Television viewers, in the Province of Ontario at least, have been exposed to a number of video clips portraying a series of Canada’s wonderful attributes being presented to persons of British origin. The theme response of the British viewer(s)
is always the same, i.e. “ONLY IN CANADER YOU SAY – WHAT A PITY.”

As these clips always portray some positive element of the Canadian Social/Political scene it seems only “Fair” and “Just” to point out there is at least one negative aspect as well. Something unique to Canada. e.g. Negative, and, zero gains taxed as a benefit.

If that feature of Canada’s Income Tax Regulations were produced as a video clip – and presented to viewers of British origin -- there is no doubt their response would be:- “ONLY IN CANADER YOU SAY – THANK GOD”

A Canadian Tax professional informed me the Canadian Income Tax Law is the only one, in the civilized world, that levies a benefit tax on unrealized (potential) profits.

My research -- to substantiate that claim I did not find a comparable tax in the USA, the UK or Australia. Although all three countries levy a tax on “Fringe Benefits” I did not find a tax on non-benefit benefits in the foregoing countries.
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Granted my research was not all encompassing and therefore I make this offer to everyone who reads this article.

IF ANY READER SENDS ME PROOF THAT ANOTHER INDUSTRIALIZED COUNTRY LEVIES A NON-PROFIT TAX ON SHARES ACQUIRED VIA ANY
AUTHORIZED AWARDS/INCENTIVE PLAN --- I WILL IMMEDIATELY WITHDRAW THIS ARTICLE AND POST A RETRACTION.
E-mail:- vic.drummond@sympatico.ca
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My initial reaction -- to the research I have done, was to present comparable excerpts of each countries “Fringe Benefits” tax regulations to illustrate the differences, and prove that Canada stands alone in this respect.

After wading through much of the quagmire and mind-boggling, hair splitting, morass of the Canadian “Income” Tax Act and multiple associated “Interpretive” bulletins, however, I decided to spare the sanity of my readers and merely point out some of the obvious Unfair , Arbitrary, and Ridiculous components of Canada’s Taxable Benefits regulations.

According to a Canadian Revenue Agency non-coded document titled:- “What is a stock option taxable benefit?”, -- a sort of FAQ list, -- there are three types of options issued to employees of Canadian corporations -- as follows:-
“Employee Stock Option Purchase Plan”, (ESPP),
Stock Bonus Plan, (SBP) and
Stock Option Plan, (SOP) which apparently is also known as an:-
“Employee Stock Option Plan”, (ESO).

(Plan descriptions per foregoing document:- )

ESPP – This plan allows the employee to acquire shares at a discounted price, (i.e. for an amount that is less than the value of the stock at the time of acquisition of the shares.) Many ESPP’s provide for a delay in the acquisition of the shares: an employee contributes a certain amount over a period of time and at pre-specified periods, the employee can purchase shares at a discount using the accumulated contributions.
The benefit is equal to the value of the shares, minus the amount paid.

Stock Bonus Plan , (SBP) – Under this plan, an employer agrees to give the shares to the employee free of charge. In effect, the employer agrees to sell or issue shares to the employee at no cost.

Stock Option Plan, (SOP/ESO) – This plan allows the employee to purchase shares of the employer’s company or of a non-arms-length company at a predetermined price.

Note:- This source document does not define:- “The Benefit” per these last two plans but it is safe to say it is the same formula as stated for the ESPP,
e.g. The benefit is equal to the value of the shares, minus the amount paid.

So if “The Benefit” per each plan is the same then the tax levied is the same and any tax relief given to victims of one plan is automatically an entitlement of victims of the other two plans. To rule otherwise is a violation of the rights of those excluded and a discredit to the Fairness quotient of those to apply, or support, that ruling.

No matter how you slice it -- the rationale to deny all victims of the ESPP, SBP, and ESO plans the same tax relief -- the argument is still pure baloney.

This same source document adds more confusion to the issue under the title line:-
“When will the exercise or disposal of an option not result in a taxable benefit from employment?”

i.e. when:-

(a) The benefit conferred by the option agreement was not received by reason of the employee’s employment.

(o) If the employee is also a shareholder, or a unit-holder, it is a question of fact whether he or she received the shares or units as a shareholder, a unit-holder or an employee.

(b) There was no intention to issue securities under the terms of the agreement, but there was an intention to issue a cash payment to the employee as a means of compensation. (i.e… under a phantom stock plan.)

Item (b) above raises some questions, i.e. If there are no securities issued under the plan then what is there to exercise or dispose of? No wonder there is no “Taxable Benefit” to tax. The employee receives a CASH payment which is real taxable “Employment Income”.

The so-called “phantom stock plan” is nothing more than a scheme to give the employee more money – there are no shares actually purchased, vested, or exercised and income tax is definitely applicable.

What possible justification can there be to split hairs on the circumstances whereby a taxpayer comes into possession of corporate shares. Split hair No 1:-

i.e. when
(a) The benefit conferred by the option agreement was not received by reason of the employee’s employment.

(o) If the employee is also a shareholder, or a unit-holder, it is a question of fact whether he or she received the shares or units as a shareholder, a unit-holder or an employee.

What difference does it make whether the taxpayer received corporate shares as an employee of the corporation – or as a complete stranger to the corporation?

Is the “Income” of an employee different in some way from the “Income” of all other taxpayers?

What possible difference does it make if the person is a shareholder or a unit holder or an employee of the corporation? How about an employee who owns shares in his or her corporation that were purchased directly on the stock market, are they then a shareholder excluded from the “Taxable Benefits” tax on their ESPP shares?
If not why not?
What legitimate justification is there for discriminating against employees?




Split Hair No 2

The same document states in a paragraph titled:-
Canadian-controlled private corporation.

If an employee exercises a stock option granted by a CCPC, the taxable benefit will be included in the employee’s income in the year that the employee disposes of the shares and not when the employee exercised the option if:-

(c) when the agreement to sell or issue shares to the employee was entered into,
the issuing or selling corporation and the corporation whose shares were
acquired by the employee (if different) were CCPC’s

(d) right after the agreement was entered into, the employee dealt at arms length
with the employer, the corporation that entered into the agreement and the
corporation whose shares were acquired by the employee.

What possible difference does it make, (c), if the taxpayer is an employee of a CCPC or not?

If the Income Tax Act gives preferential treatment to CCPC corporations as compared to foreign owned corporations what kind of excuse is that to penalize the taxpayer? Sort out the beneficiaries here and treat all employees alike.

What possible difference does, (d), an arms-length relationship make when a taxpayer, enters into an agreement with their employer? There is an unrelated mix here of legal activities and tax levies.

If it is illegal for an employer to enter into a share plan with an employee and they are dealing at less than arms length with each other – that is a legal matter – not a tax issue.

If an illegal contract exists -- is acted upon -- and the employee receives shares as a result – then that may become a tax matter – but only when a profit, or loss, is actually realized. This regulation is pure smoke and mirrors.
(See prior posting:- “Partners in Crime”

It really does not matter whether or not Canada is the only industrialized country to impose taxes on citizens that have not realized the income they are being taxed on. What does matter is:-
ANY COUNTRY -- WHERE HONEST HARD WORKING CITIZENS CAN BE GAINFULLY EMPLOYED AN ENTIRE YEAR AND END UP OWING THE GOVERNMENT MORE MONEY THAN THEY ACTUALLY RECEIVED – IS A DISGRACE.

IF THERE IS ONLY ONE SUCH COUNTRY – IT IS ONE TOO MANY – AND IT SHOULD NEVER BE CANADA.


You may reach your MP by regular mail, postage free, or by E-mail via the following web page and following the links to the list of sitting MP’s.

http://webinfo.parl.gc.ca/MembersOfParliament/MainMPsAddressList.aspx?TimePeriod=Current&Language=E


Victor Drummond ©