The Pledge of Fair Taxation...

YOU BE THE JUDGE
An illustration of three INCOME Tax Situations
And the relative Fairness of each of them.

A TRUTH IN FICTION

By Victor Drummond ©
December 2007


(1)Donald Thump works for Wireless Gadgets Incorporated, (WGI), and has detailed knowledge of his employers growth prospects – present and future.

He knows his employer is about to introduce a new product that will revolutionize the industry and create a lot of action in the stock market.

So Donald rounds up all the money he can find -- and borrow -- and on
April 1,1999 buys 10,000 shares of WGI from his stock broker.

Donald’s adjusted Cost Base, (ACB), is 5.50 per share --
with brokers commission included – giving a total cost of:- $55,000

On July 12th 2000 the shares of WGI are trading heavily at $1,200 per share.

So Donald decides to sell his shares – pay off his loans –
and retire to the Bahamas.

Donald’s gross return on his 10,000 shares is:- $12,000,000 and his net return
-- with the brokers selling commission, and interest paid on the money borrowed
– all his ACB deducted -- Donald was still left with a clear profit of:- $11,920,000

In March 2001 Donald reports his 2000 Capital Gain Income – at the period II, 66.6%
inclusion rate – as:- $7,946,666

With a bottom line Income Tax level of 43% Donald paid $3,376,066 in Capital Gains
Tax.

Donald is happy to pay this tax and walk away with his remaining $8,543,934
WHAT COULD BE FAIRER THAN THAT?

(2)William Thump, Donald’s brother, is a nere-do-well and was released
from penitentiary for grand larceny a week before Donald made his WGI,
10,000 share stock purchase in April of 1999.

When William discovered how well the WGI shares were doing he began checking up on
Donald’s co-workers.

Especially those having positions in higher management.

William eventually found out that Donald’s immediate superior had several accounts –
with the same broker his brother was dealing with – and this person had some large
blocks of WGI stock in two of his accounts.

By sifting through the documents and papers -- in Donald’s possession – William was
able to acquire all the data and information needed to duplicate his victims
identity – and thereby access his victim’s accounts with the stock broker.

On the same day -- Donald sold his 10,000 WGI shares – and using false identity
documents William liquidated 10,000 WGI shares from his victims accounts.

He then had the proceeds transferred to an un-numbered account off-shore.

As William had only the brokers selling commission to deduct -- he had a clear
profit of some $11,975,000

William decides to report his ill-gotten gains -- to revenue Canada -- under the
umbrella of CRA’s Information document IT 256R.

So in 2001 he reports a Capital Gain of $7,983,332 -- i.e the 66.6% inclusion rate.

Also at a bottom line tax level of 43% William pays $3,342,833 in Capital Gains Tax
and happily walks away with the remaining $8,632,167

The CRA doesn’t ask William how he acquired the WGI shares he sold – they are only
interested in the tax they can collect from him.

NOTE (A) Both Donald and William now have the RIGHT to apply Capital LOSSES from
the past three years and/or any future years against their year 2000, CAPITAL
GAINS TAX, and thereby recover part -- or even all -- of these taxes paid.

(B)Furthermore if William’s theft is discovered – and he is forced to repay the
money he pilfered – the CRA will rebate the taxes William has paid on his now non
-existent Capital Gain. WHAT COULD BE FAIRER THAN THAT?

(3) Doreen Thump -- Donald and Williams sister -- is employed by WGI and being a
highly valued employee has been given the opportunity to participate in the WGI
Employee Share Purchase Plans, (ESPP’s)

Upon the advice of her brother Donald -- to purchase all the shares in WGI that her
ESPP allows -- Doreen applies to purchase the 1999 maximum of 10,000 shares under
the plan.

Doreen’s application is vested in April of 1999 and the shares are to be exercised,
(delivered) one year later.

Until the shares purchased are actually delivered Doreen has absolutely no control
over them.

Under terms of her ESPP Doreen is allowed to purchase WGI shares at a discount of 15%
from the Fair Market Value, (FMV), the shares are deemed to be worth as of the day
of vesting.

As the shares were estimated to have an FMV of $5,20, (before commission), Doreen paid $44,200 for her 10,000 shares – plus a $0.20 commission per share.

This gave Doreen an Adjusted Cost Base, (ACB), of $46,200 for her 10,000 share
purchase of WGI stock.

In April of year 2000, -- when her WGI shares were exercised, (delivered), -- Doreen
was thrilled to see her 10,000 shares were now trading at $875.00 each and worth an estimated $8,750,000.

Doreen consulted Donald who advised her to hold on to her shares as they were gaining in value daily with no downturn in sight.

A few of Doreen’s co-workers and close friends were also enjoying the potential windfall of a few million dollars and decided to celebrate by taking their summer
vacation together touring around Europe.

So on July 2nd 2000 they each sold 5 shares of WGI stock which was then trading at $1,050.00 per share and took the approximately $5,000 cash to buy their European
tour tickets.

The happy party left for Europe on July 5th and would not return to Canada until July 30th 2000.

Unfortunately while Doreen and her party were away a major stock market correction got under way. By the time they all returned to Canada – on July 30th – WGI shares were trading at less than $100,00 per share.

Doreen was very disappointed but decided half a loaf was better than none so she sold her 9,995 shares via an at-market order and received $98.00 per share. This gave her a return of $975,125 after paying the broker a selling commission.

The nearly $12,000,000 drop in her potential profit was not of great concern to Doreen as a gross gain of $980,125 -- (allowing for the $5,000 received from the earlier sale of 5 shares), --gave her a rather warm and fuzzy feeling.

With her ACB of $46,200 deducted Doreen was left with a net gain of $933,925 which still left her quite pleased and content.

That is until Doreen’s year 2000, T4 was received showing an “Earned Income” of over $8,700,000

The WGI payroll department had submitted Doreen’s T4 for year 2000 showing an FMV for her 10,000 WGI shares -- as of April 1, 2000 the date they were delivered to her -- as being $875.00 per share. This produced a gross taxable benefit of:- $8,750,000 – less her adjusted cost base of $46,200 – leaving Doreen with a false net taxable benefit gain of:- $8,703.800.

At the year 2000, period II inclusion rate of 66.6% the taxable benefit added to
Doreen’s “Earned Income” was:-$5,802,054

With a bottom line tax level of 43% applied to this fictitious “Earned Income” Doreen was levied a “taxable benefit” tax of:- $2,494,883

The so called taxable benefit tax exceeded Doreen’s real Gross income by:- $1,560,958
i.e. 2,494,883 minus 933,925

Canada Revenue Agency, however, generously provided Doreen with a tax unto death deferral via form T1212.

If Doreen had any WGI shares left in her possession, -- that were acquired via an ESPP’s process – she could not dispose of them -- in any way -- without causing her deferred taxable benefit taxes to become payable on the very next taxation return date.

Furthermore as long as the deferred taxes are not paid Doreen can not move out of Canada.

Last but not least – If Doreen had any prior year, or following years LOSSES on any shares investment of any kind – she can not apply any of those losses against the real taxes already levied on the fictitious taxable benefits.

She is much worse off than William who stole his shares.
HOW IS THIS AS FAIR TAXATION FOR ALL CANADIAN TAXPAYERS?

So how would you rate Canada’s current government’s -- Fair Taxation Pledge to ALL Canadians – On a Scale of ONE to TEN? ( 1 meaning “non-existent” and 10 “truly Fair”)

If you said ZERO then you are right on target.

Kindly give your support for truly fair “Income Taxation” when the polls open for the next Federal election.

Victor Drummond ©

Authors comments:-

Although the persons named are fictional -- the scenarios are not.

The scenarios related in this article represent many typical,
real tax situations that have -- and still are -- causing severe
financial distress and totally destroying the peace of mind of many
Honest, Hard Working Canadian Taxpayers.

Fair Taxation for “All Canadians” remains a myth as long as
defective “taxable benefit” Legislation remains in operation.

Shares traded on a stock exchange are NOT A TAXABLE BENEFIT no matter how
they are acquired.