Not a Taxable Benefit

THE CREDIBILITY FACTOR
CORPORATE SHARES NOT A TAXABLE BENEFIT Part II
By Victor Drummond ©
September 2007

In my previous article “CORPORATE SHARES ARE NOT A TAXABLE BENEFIT” I issued a challenge to anyone to try and prove me wrong.

That challenge was accepted by “Berris” who made a very convincing counter point by quoting the following statements from the very same document I had used to support my rationalizations.

The follow on statements are:-

“Cash and near-cash gifts or awards are always a taxable benefit to the employee.”
“Non-cash gifts or non-cash awards, on the other hand, may not be considered a taxable benefit, under certain circumstances.”

“A near-cash item is one that can easily converted to cash, such as a gift certificate, gift card, gold nuggets, securities or stocks.”

This very clear declaration in the T4130 Guide to Employer’s certainly appears to prove me wrong -- but lets exam the document more closely.

There is a mix of items listed as “near-cash” – some that meet the “Taxable Benefit” classification criteria, i.e. “Tangible”, and ALSO including some major feature such as:- “offering a variety of choices to the holder and/or possessing “INTRINSIC value” AND one item that does not, e.g. stock and corporate shares.

Which of the “near-cash items -- listed above -- actually meet the specified:- “Taxable Benefit” definition criteria?

(1) Gift certificate, or Gift Card. fully meet the “Taxable Benefit” classification criteria

(2) Gold Nuggets -- and Gold Dust: actually pre-date minted currency
in the USA and Canada.

They both are “Tangible” and both have “Intrinsic” value.
They provide an infinite variety of choices to the holder and are
therefore a no contest “Taxable Benefit.”

(3) Securities i.e. A Guaranteed Investment Certificate, (GIC), is:- “Tangible”.
It also has a face value and an “Intrinsic” value.
It also offers the holder a wide variety of places – and a wide variety of
times where and when it may be converted directly to cash.

A GIC therefore definitely qualifies as a “Taxable Benefit.

(4) Stocks – Have No “Tangible” aspects – No stock certificates are issued
anymore so the holder has nothing that can be touched.

When actual stock certificates were issued they seldom carried a face
value – and when they did carry a face value it was usually in the form
of:- “Par Value $1.00”.

Stocks do not convert to cash as easily as the “Tax Excluded Event
Tickets”.

That is because in the case of stocks a bidding process is involved
– and because stocks can only be converted to cash via one institution
i.e. the Stock Exchange the time and place of conversion to cash is
much more limited.

In fact the holder of Event Tickets can convert them to cash in more
places and at more times than can a stock holder convert shares.

Stocks can not be scalped on the street, or sold on the internet auction
markets e.g. E-Bay.

Stocks/shares therefore provide even less “Choice” options than
those: “Tax Excluded” Event Tickets.

Corporate shares and company stocks are the only item passed off as a
“Taxable Benefit” that:-

(1) Produces a real tax on a fabricated non-income that is then falsely
reported as: “Earned Income”.

This is not a creditable situation. It is unwarranted taxation of a
potential Gain and the felony is further compounded by then denying the
taxpayer any possible recovery of the unjustified taxes via the “Capital
Loss” claim. This denial is made in spite of the fact that document T4037
(page 15) specifically describes further profit gained on those same shares
is to be reported as a “Capital Gain”.

One minute a “Taxable Benefit” and the next minute a “Capital Equity”???
How many other “Taxable Benefits” can perform this transition?

Conclusion (1):- THIS SITUATION IS ABSOLUTELY INCREDIBLE.

(2) Produces the need for document T1212 –
“STATEMENT OF DEFERRED SECURITY OPTIONS BENFITS”. ???

Unless the taxpayer is being taxed at a level well beyond their:
REAL EARNED INCOME there is no need for this document.
Real Income taxes should always be payable out of the taxpayers
actual “Income”. When that is not possible -- then something is
very very out of kilter.

Document T1212 merely fills a need to try and make the classification of
stocks and shares appear to produce a legitimate taxable “Income” --
when in fact they haven’t yet been converted to a “Tangible” cash or cash
equivalent that might be taxed fairly.

Then in an attempt to make the taxation of unrealized income appear to
be – somewhat charitable to the victimized taxpayer – the T1212 form
includes a condition whereby the taxpayer can claim a “security
options deduction” by reporting securities sold, during the year,
on line 249 of the taxpayers tax return.

This unexplained “securities options deduction” turns out to be nothing
more or less that the same deduction formerly given by reporting the
pretend gain at the current inclusion rate.
But the name now sounds more like a generous gift on the part of the CRA.

(2):- THE VERY EXISTANCE OF FORM T1212 IS ABSOLUTELY INCREDIBLE.

(3) Of the almost infinite number of ways a person may come into
possession of shares of a corporation, or a company, what REAL
difference does it make -- to anyone –- which method was actually
employed?

The factors of interest to the CRA are:- Quantity, acquisition cost,
liquidation gain. or loss.

These factors are present no matter how the shares, or stock, are acquired.

The CRA doesn’t even care if the shares are stolen, (see prior posting:-
“Partners in Crime”).

For some reason if the taxpayer acquires employer’s shares via an
Employee Share Purchase Plan, (ESPP), or an Employer Shares Option,
(ESO), plan AND the employer -- in both cases -- is not a Canadian Controlled
Private Corporation, (CCPC), THEN the shares are classified as:-
“A taxable benefit”?

WHY? Especially when so many special interpretations and guideline
explanations are required in order to make the “taxable benefit”
classification look and sound legitimate – AND after being
taxed,on pretend gains, the shares automatically become – what they
really always were – A CAPITAL EQUITY.

Every additional brochure, guideline, and/or pamphlet -- issued by the CRA
–- attempting to provide a reason for making shares and stocks fit the
taxable benefit classification and to make this classification appear
justified – merely adds more credibility to the fact that stocks and
shares:

DO NOT FIT IN THE TAXABLE BENEFIT CLASSIFICATION – UNDER ANY
CIRCUMSTANCES.

Conclusion (3):- CLASSING SHARES AND STOCKS AS A TAXABLE BENEFIT
LACKS ANY FORM OF CREDIBILITY.

Now how about this statement in the document T4130 that declares:

“A near-cash item is one that can easily converted to cash, such as a gift certificate, gift card, gold nuggets, securities or stocks.” AND “Cash and near-cash gifts or awards are always a taxable benefit to the employee.”
I have already pointed out that according to the basic definition of a “taxable benefit” that shares and stocks are less qualified than the tax excluded:- “Event Tickets” according to their:- Lack of a “tangible” aspect, Lack of an “Intrinsic” value and lack of holders choice as to when, where and how the shares/stocks may be converted to anything of real value.

So what is the result of this conflict? It adds up to NOTHING MORE OR LESS THAN
A CONTRADICTION OF CLASSIFICATION CRITERIA.

When a dispute arises due to CONTRADICTIONS in document terms, and/or conditions,
an arbitrator -- or other judiciary agent, i.e. Court of Law, -- will study the
document to determine the intent of the author(s) when the terms and conditions were initially compiled, and to resolve the dispute fairly on conclusions reached.

The process is not difficult – so lets have a go at it.

The source document -- of CRA Bulletin T4130 – “Employer’s Guide to “Taxable Benefits” and of CRA Document T4037 – the Capital Gains Guide.-- is the:- Canadian Income Tax Act, (CITA)

This document is passed by Canada’s Parliament, and the senate and signed into law by the queens representative – Canada’s Governor General and the Prime Minister of Canada.

It is implied -- by its title -- the Canadian Income Tax Act, (CITA), is intended to set out the terms and conditions under which the government Tax Administration agency – The Canada Revenue Agency, (CRA), may levy taxes on the “INCOME” of Canadian citizens.
(Not on a pretend potential Income of Canadian citizens.)

Clarification of the base CITA document -- articles, and sub-articles -- is left to the administration agency (CRA) which attempts to make the rules and regulations a bit clearer under a wide range of conditions and circumstances.

They endeavour to do this by way of “Interpretive Documents”, Rulings publications and Guideline documents such as the:- “Employers Guide to Taxable Benefits T4130”.

Even then taxpayers often need to request rulings from the CRA when the published guides e.g. T4130 and Interpretation Bulletin’s and Information Circulars etc. do not provide a clear answer to their specific situation.

Although the CRA may endeavour to correctly interpret the intent of the CITA author’s the interpreters are only human and prone to make errors – the same as everyone else.

The contradiction encountered in Guide T4130 is a prime example of a probable
interpretation error.

So we compare the impact -- and bottom line consequences of allowing both of the possible Classifications of shares/stocks to be assumed to be true – one at a time -- and applying the one classification that offers the most reasonable bottom line result.

(A) Assuming stocks and shares are actually a “Taxable Benefit”.
The bottom line results are:-

(A-1) Taxpayers end up being taxed on money they never actually received.
(A-2) Taxpayers are not treated “Fairly”, or “Equally” under the law.
(A-3) Taxpayers with deferred taxes are penalized if they move out of Canada.
(A-4) Taxpayers who have paid taxes on shares (per a potential but unrealized
profit)are prevented from claiming any part of the taxes paid if the shares
later actually produce a loss.

This situation is a mix of unfair and unreasonable and unwarranted
results.
There are two other legal documents recently passed by parliament, and the senate, and signed into the laws of Canada. Being more recent they should automatically take precedence over prior acts signed into Canadian Law.

The first is “The Canadian Charter of Rights and Freedoms”, (TCCORF) signed into Canadian Law by both the Prime Minister of Canada and the Queen of England, (Canada), personally.

The second is the:- “The Taxpayer Bill of Rights”, (TBOR).

Result (A-1) above is clearly a violation of the Taxpayers right to fair taxation.
Result (A-2) above is a violation of TCCORF article 15(1) and a violation of TBOR article 8.
Result (A-3) above is a violation of TCCORF) article 6(1).
Result (A-4) above is another infringement of TCCORF article 15(1).

It is unreasonable to believe the original authors of the Canadian Income Tax Act intended any of the A-1 to A-4 results to be the outcome when they originally wrote the terms and articles of the
“Income Tax Act".

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(B) Assuming stocks/shares are not a “Taxable Benefit”

The bottom line results are:-

(B-1) The Taxpayer only pays taxes on money actually received at the time of sale
– and then only if the shares/stocks are sold at a profit,
i.e. “A GENUINE CAPITAL GAIN, (INCOME), IS REALIZED”

(B-2) If the Taxpayer has previously paid taxes on a realized Capital Gain -- and
then suffers a Capital Loss – the loss may be applied to recover Capital
Gains Taxes paid within the prior three years – or carried forward
indefinitely -- to be applied against any future Capital Gains.

Results (B-1), and (B-2) above do not violate any articles of neither the TCCORF nor the TBOR. This interpretation is by far the most fair, reasonable and justified of the two possibilities.

This outcome is far more believable -- as being the intended result -- when the authors originally wrote the terms and articles of the Canadian Income Tax Act.



SUMARRY OF BOTTOM LINE RESULTS:-

When corporate shares or stocks ARE classed as a “Taxable Benefit”:-

Results (A-1) through (A-4) both cheat the Taxpayer and violate articles of a superior Act passed by:- Parliament, and the senate and signed by the Prime Minister of Canada and by the Queen of England (and Canada) personally, i.e. “The Canadian Charter of Rights and Freedoms.”

Article 8 of “The Taxpayers Bill of Rights is also violated.

CLASSIFICATION OF STOCKS AND SHARES AS A TAXABLE BENEFIT HAS ZERO CREDIBILITY

==============================================

When corporate shares or stocks are NOT classed as a “Taxable Benefit”:-

Results (B-1), and (B-2) above do not violate any articles of neither the TCCORF nor the TBOR and therefore provide the best possible bottom line result.

THIS RESULT HAS 100% CREDIBILITY.

It is obvious therefore that the authors of the CITA never intended Corporation shares or stocks -- in general -- to be classed as a “Taxable Benefit” when they created the CITA.

Conclusion:- Stocks/shares neither meet the definition criteria of a “Taxable Benefit” nor the credibility factor and are consequently NOT A TAXABLE BENEFIT.”
Live with this situation – if you can -- If you can not live with Injustice, Unfairness and/or Unequal treatment of your fellow taxpayers then spread the word:-

No public commitment to correct this situation means NO VOTE.

Victor Drummond ©