Missed Opportunity to..

WHY STOP THERE?
A logical comparison of the rationale
used by The Canadain Revenue Agency
to tax unrealized potential gain.
by Victor Drummond (c)
October 2007


A key element of The Canadian Revenue Agencies logic by which they attempt to justify taxing unrealized "Income" as a "taxable benefit" is the following "assumption".

"The employees who participated in their employer's Employee Share Purchase Plan(s), (ESPP/ESO etc.), had the opportunity to cash-in their shares at the time the shares were exercised, (came under the control of the employee).

And if they did not take their potential gain at that time it was a conscious decision on their part to take the risk of playing the stockmarket at their own risk.

A risk the CRA didn't want to participate in with their tax-on-profit rights.

Therefore the CRA logic being (that) they are fully justified in taxing the employee at the Fair Market Value, (FMV), of their ESPP/ESO shares -- at the time of exercise -- even though the taxpayer hasn't realized one cent of profit. Isn't that Fair?

The CRA claims it is fair -- so why stop there? There are several equally logical scenerios where the CRA could apply even more levies of taxes on potential but unrealized profits.

FOR EXAMPLE:-

The ESPP/ESO participating employee may have also made a conscientious decision not to purchase all the shares they were allowed, and could afford -- under the ESPP/ESO opportunity available to them and consequently denied the CRA even more legitimate? taxes.

Why not have the employer report the total ESPP/ESO shares available to the participating employees along with their credit rating so that the CRA can calculate the opportunity the employee consciously decided to forego and then the CRA can tax that opportunity as well.

Then there is the employee's opportunity to make a profit on selling shares short.

Allowing they already have shares to sell the broker would allow them to sell another block or two of identical shares short. This action could theoretically double or even triple the potential gains possible.

It is not the CRA's fault if the participating employee made a conscious decision not to avail themselves of the short sell opportunity. So why not tax this opportunity as well?

Therefore it is just as logical for the CRA to estimate the potential gain the employee could have made in this way and tax that unrealized, assumed, profit as well. Isn't it?

Yes all of the above rationales are equally logical -- and ridiculous.

Although the previous government demonstrated an amazing tolerance for unscrupulous and unfair taxation -- and money mis-management -- the time is long past for the present government to show they have a much higher level of:- honesty, integrity and credibility.

This could be easily done by introducing a bill to restore the unjustified taxation to it's rightful owners -- the original taxpayer -- and amend the taxable benefits legislation to exclude corporation shares from the taxable benefit classification to avoid future problems of this kind.

Failure to take this initiative puts the previous and current government organizations on the same credibility plane.


Victor Drummond (c)