Sunday, June 29, 2008
It must have seemed like..
IT SEEM TO BE A GOOD IDEA AT THE TIME
Further commentary of the official defence of bad laws.
By Victor Drummond ©
June 2008
Both Liberal and Conservative, Federal Political Parties, have used the argument that because the defective taxable benefit legislation – you know – the one that levies huge taxes on fictitious income – must be a good law because it has been in operation for a considerable length of time.
As pointed out in the prior posting “There is a Best Before Date”, (BBD), which makes the point that the longer something has been hanging around the more likely it is past its BBD.
Just the other day our Prime Minister, The Most Honourable Stephen Harper, was loudly praised – both in Parliament and publicly – for admitting the, very long standing law, by which aboriginal children were legally taken from their parents and sent to residential schools -- for conversion to something else – was indeed a very bad law.
Initially, however, it must have seemed to be a good law at the time it was passed by the parliament of Canada.
It took some 50 years to have that law ignored and another 47 years before it was publicly acknowledged to be a very bad law with an apology from Canada’s Prime Minister to those victimized -- who are still living.
This record is not very encouraging to Canadian taxpayers victimized by the defective taxable benefit legislation – which revealed its insidious nature in the year 2001.
By the foregoing account that leaves another 90 years, or so, before the government gets around to fixing the problem and compensating the victims – or their descendants.
Things may look a bit better if we review the Japanese Canadian Victims of the WWII anti-sabotage panic that led to thousands of innocent Canadians, of Japanese descent, being legally robbed of their property and sent to concentration camps well away from the West Coast of Canada.
It must have seemed to be a good idea at the time – and it only took about 45 years, or so, before the current government apologized and provided some form of compensation to the surviving victims.
If this incident is used as a guideline then the current taxable benefit victims, or their survivors, should expect to receive their apology and reasonable compensation around the year 2042.
When unforeseen detrimental effects -- of any law – become apparent why should it take people -- in a position of authority -- so long to admit it is a bad law take immediate corrective action?
In December 2006 Conservative, Member of Parliament, Gary Lunn proudly proclaimed “It took a change of government to get someone to listen, but the Prime Minister has come through and delivered tax relief on this issue.” He was speaking about a tax remission order, (TRO) he succeeded in having passed to correct the unfair, unjust, unreasonable, insidious and punitive tax levied on some 30 former employees of the SDL Optics/JDSU plant in his riding. If this law is bad -- in this instance -- then it is a bad law in all similar cases.
If the Prime Minister, and the Governor General for Canada, both recognized the taxable benefit legislation was a bad law, which they must have when they signed the Tax Remission Order, (TRO) (See Canada Gazette, 14 Nov 07 issue), why didn’t the government follow through with a bill to correct the law and compensate those already victimized? Could money have anything to do with the delay – do you suppose?
The United States Government faced the same problem when correcting the unforeseen conditions where many American Taxpayers were taxed -- on money never received – under the “Alternative Minimum Tax Legislation”, (AMT).
The AMT was eventually recognized as a bad piece of legislation, in its original form, and changes were made to:- (1) give tax credits to those taxed on phantom income”.
(2) Victims of the AMT could use the tax credits – initially at the rate of 5% per year against following year’s taxes, and (3) the Kerry-Lieberman Bill will increase the credit rate to 20% per year with any unused tax credits refunded in cash by the end of the fifth year.
If Canada can not afford to cancel all deferred taxable benefits taxes, levied on phantom income, with refunds to those who have already paid such taxes – then they could at least correct the defective legislation and issue tax credits having distributed annual application in order to spread the monetary loss over several years – as the Americans are doing.
Should you agree it is unreasonable to keep the defective taxable benefit legislation in operation and that its victims should be relieved of the distress this financially ruinous tax levies has caused – then kindly contact your candidate for election in the coming federal election and tell them:- “Commit to correcting the defective “taxable benefit legislation, and compensate those already victimized, if you or your party want my support.”
If not already familiar with this issue – visit the “Canadians for Fair and Equitable Taxation”, (CFET) web page at http://www.cfet.ca
Victor Drummond ©
Friday, June 20, 2008
It is not what is conferred that counts..
CONFERRED VALUE vs CONVEYED VALUE
A commentary on the Fair Judgment by Justice Donald Bowman
In his hearing of the Case of:- “The Executive Who Hates Golf”.
Reference:- The Toronto Globe and Mail Newspaper
Front Page – Issue of June 18, 2008
This commentary by Victor Drummond ©
June 2008
For the benefit of those who may not have read, or heard of, this court case here is a brief synopsis:-
A Canadian, by the name of Henry Rachfalowski, was hired by The Canadian Life Financial Corporation, (CLFC), in 1968, as a senior executive.
CLFC had a policy of demanding their senior executives become a member in a prestigious golf club, where they might entertain clients and maintain the corporations preferred image.
The corporation was reasonable in this respect as they paid the employee’s $5,000 initiation fee and the annual $2,049 membership fee for the employee.
In 2005 the Canada Revenue Agency, (CRA), reassessed Mr. Rachfalowski’s taxes for the year 2002 and included the $2049 Golf Club Membership fee in his income as a “taxable benefit”.
Henry Rachfalowski objected to paying tax on this perk as he claimed he did not enjoy the game and seldom even attempted to play it. He admitted he had visited the Golf Club on a few occasions, played one or two rounds and even had lunch once or twice in the club dining room.
But he claimed he was pressured into accepting this perk by his bosses and peer pressure was also applied on him to accept the club membership.
The CRA argued that the membership fee was a perk that symbolizes that rank has its privileges in the corporate structure. The courts have established it provided you with an economic benefit even when unilaterally conferred. Therefore the fact that you did not like golf should not be a determinative.
Mr. Rachfalowski took his case to the Tax court of Canada where in April he argued, before Mr. Justice Donald Bowman, that his employer, CLFC, had benefited from the club membership whereas he had not.
Justice Bowman took into account that Mr. Rachfalowski had been pressured into accepting the perk and he had not personally enjoyed any benefit from the membership.
In his ruling, released the week beginning June 15th 2008, Judge Bowman reviewed several “taxable benefit cases” and said:- “They all come down to one question”. “Just what did the employee get out of the alleged benefit that ought to increase his or her income?” “Not much in Mr. Rachfalowski’s case, the judge found.”
The judge found the Golf Club membership was primarily for the employers benefit and ruled in favour of the victimized Mr. Rachfalowski.
Mr. Justice Donald Bowman’s ruling in essence said:- “A conferred perk is only a taxable benefit when the conveyed result is also of benefit to the recipient.”
A spokesperson for the CRA, when asked to comment on this ruling, said this decision will not be appealed.
=============================================
At long last a sensible, fair and just assessment of exactly what is, and what is not, a taxable benefit.
Why is it that from July 2000, when the tech market boom went bust and Canadian taxpayers began to be levied real taxable benefit taxes, on purely potential -- but non-existent ESPP/ESO gains -- that no one in authority could, or would, recognize this very simple fact, i.e.
“Where a person does not realize a benefit -- from anything conferred upon them by an employer – then there is no benefit to tax.”
In the cases of ESPP/ESO perks the employer was the guaranteed beneficiary, of these schemes whereas the employee was always at risk the conferred benefit may result in a conveyed loss. And in the year 2000 that is exactly what happened.
Now with a federal election pending, and the public is once more going to be barraged with campaign promises – keep this outrageous situation in mind.
There are thousands of honest hard-working Canadian taxpayers who have been legally robbed via the current “taxable benefit legislation” which gives permission to the CRA to extort huge sums of money from perks that never conveyed one cent of a taxable benefit to the recipient.
In fact the very opposite is the case. These same tax victims are being tax on a perk that has resulted in a huge loss of even their initial investment but the legislation prevents them from claiming their “Capital Losses” to reduce the taxes levied on the non-existent gain.
That is the height of incredible unfairness -- greed and stupidity -- that our elected representatives are willing to ignore and allow to persist.
For real accounts of a few such victims visit the “Canadians for Fair and Equitable Taxation”, (CFET) web pages at:- http://www.cfet.ca
Read the petition, and the comments of those who have signed the petition.
If none of the federal political party leaders acknowledge this atrocity, and commit to correcting this outrageous situation – then when it comes time to vote I intend to write in – Justice Donald Bowman – on every option on my ballot.
That will be my protest vote.
See you at the Election Polls – O’Grady.
Victor Drummond ©
A commentary on the Fair Judgment by Justice Donald Bowman
In his hearing of the Case of:- “The Executive Who Hates Golf”.
Reference:- The Toronto Globe and Mail Newspaper
Front Page – Issue of June 18, 2008
This commentary by Victor Drummond ©
June 2008
For the benefit of those who may not have read, or heard of, this court case here is a brief synopsis:-
A Canadian, by the name of Henry Rachfalowski, was hired by The Canadian Life Financial Corporation, (CLFC), in 1968, as a senior executive.
CLFC had a policy of demanding their senior executives become a member in a prestigious golf club, where they might entertain clients and maintain the corporations preferred image.
The corporation was reasonable in this respect as they paid the employee’s $5,000 initiation fee and the annual $2,049 membership fee for the employee.
In 2005 the Canada Revenue Agency, (CRA), reassessed Mr. Rachfalowski’s taxes for the year 2002 and included the $2049 Golf Club Membership fee in his income as a “taxable benefit”.
Henry Rachfalowski objected to paying tax on this perk as he claimed he did not enjoy the game and seldom even attempted to play it. He admitted he had visited the Golf Club on a few occasions, played one or two rounds and even had lunch once or twice in the club dining room.
But he claimed he was pressured into accepting this perk by his bosses and peer pressure was also applied on him to accept the club membership.
The CRA argued that the membership fee was a perk that symbolizes that rank has its privileges in the corporate structure. The courts have established it provided you with an economic benefit even when unilaterally conferred. Therefore the fact that you did not like golf should not be a determinative.
Mr. Rachfalowski took his case to the Tax court of Canada where in April he argued, before Mr. Justice Donald Bowman, that his employer, CLFC, had benefited from the club membership whereas he had not.
Justice Bowman took into account that Mr. Rachfalowski had been pressured into accepting the perk and he had not personally enjoyed any benefit from the membership.
In his ruling, released the week beginning June 15th 2008, Judge Bowman reviewed several “taxable benefit cases” and said:- “They all come down to one question”. “Just what did the employee get out of the alleged benefit that ought to increase his or her income?” “Not much in Mr. Rachfalowski’s case, the judge found.”
The judge found the Golf Club membership was primarily for the employers benefit and ruled in favour of the victimized Mr. Rachfalowski.
Mr. Justice Donald Bowman’s ruling in essence said:- “A conferred perk is only a taxable benefit when the conveyed result is also of benefit to the recipient.”
A spokesperson for the CRA, when asked to comment on this ruling, said this decision will not be appealed.
=============================================
At long last a sensible, fair and just assessment of exactly what is, and what is not, a taxable benefit.
Why is it that from July 2000, when the tech market boom went bust and Canadian taxpayers began to be levied real taxable benefit taxes, on purely potential -- but non-existent ESPP/ESO gains -- that no one in authority could, or would, recognize this very simple fact, i.e.
“Where a person does not realize a benefit -- from anything conferred upon them by an employer – then there is no benefit to tax.”
In the cases of ESPP/ESO perks the employer was the guaranteed beneficiary, of these schemes whereas the employee was always at risk the conferred benefit may result in a conveyed loss. And in the year 2000 that is exactly what happened.
Now with a federal election pending, and the public is once more going to be barraged with campaign promises – keep this outrageous situation in mind.
There are thousands of honest hard-working Canadian taxpayers who have been legally robbed via the current “taxable benefit legislation” which gives permission to the CRA to extort huge sums of money from perks that never conveyed one cent of a taxable benefit to the recipient.
In fact the very opposite is the case. These same tax victims are being tax on a perk that has resulted in a huge loss of even their initial investment but the legislation prevents them from claiming their “Capital Losses” to reduce the taxes levied on the non-existent gain.
That is the height of incredible unfairness -- greed and stupidity -- that our elected representatives are willing to ignore and allow to persist.
For real accounts of a few such victims visit the “Canadians for Fair and Equitable Taxation”, (CFET) web pages at:- http://www.cfet.ca
Read the petition, and the comments of those who have signed the petition.
If none of the federal political party leaders acknowledge this atrocity, and commit to correcting this outrageous situation – then when it comes time to vote I intend to write in – Justice Donald Bowman – on every option on my ballot.
That will be my protest vote.
See you at the Election Polls – O’Grady.
Victor Drummond ©
Wednesday, June 11, 2008
That is my candidate..
I LIKE HIS LOOKS
A commentary on the criteria
Canadian Voters use to select a Candidate
to support in an Election
By Victor Drummond ©
June 2008
In a democracy, such as we have in places like Canada, when an election is called, eligible citizens are offered the opportunity to select, and vote for, one out of several possible candidates.
For weeks prior to an actual voting day – the political parties will bombard citizens with all kinds of radio, newspaper and television advertising in an attempt to garner enough support to win the election. Hopefully by a wide margin of votes.
If any specific political party fails to have real merit -- to justify their being elected -- then they will focus on attack ads in an attempt to make the other parties look as bad, or worse, than they are.
On the other hand when a party has a good track record they will run ads that highlight the really good things they accomplished while in office – and/or the wonderful suggestions they put forward and/or supported while in a position of opposition.
Then to supplement their comparative track record, good or bad, they will drag out an issue or two -- that their spin doctors tell them a major percentage of the population would like to see come into operation – and they will support these issues in their pre-election promises to the voters.
If there doesn’t happen to be a hot item on the public’s mind at the right time – then they will create one. If there happened to be a rash of street shootings of late then they will support the gun registry.
The fact that criminals do not register their guns in the first place is completely ignored.
In a case where there have been a rash of rapes with many of the victims murdered, then they will promise to support tougher sentences on conviction and with harder terms of parole. Even if they were the party to introduce the hug-a-thug policy in the first place.
If the incident of crimes, by young offenders, becomes a hot item – then they will then promise to amend the young offenders act to deter this avenue of minimum penalty crime.
Global warming was a hot issue, (pardon the pun), until last winter when Canada had the coldest, and longest winter on record for the last 50 years or more. Now some so-called-experts are claiming that a change in the ocean currents has offset global warming for the next decade or so. So that issue won’t likely be on the political platform agenda anytime soon.
How about the issue of Canadians being the highest taxed people of any of the G7 nations?
The Conservatives used that issue, last time, in their pre-election platform and when elected actually did something about revoking the unfair, unjustified tax situation for 30 or so honest, hard-working victimized Canadian taxpayers. Reference:- The Canada Gazette issue of November 14 2007 – SDL Optics Tax Remission Order, (TRO) -- article
It is very unlikely the Conservatives -- or any other federal political party will repeat that item in their next pre-election platform – as it appears the Conservatives have bitten off more than they could chew on that issue.
Since the TRO has been revealed they have gone stone deaf and stupid regarding any further appeals for equal and/or fair treatment.
At present there are no would-be champions, in any of the opposition parties, offering to correct this real thorny, punitive and, outrageous situation.
This leaves thousands of other honest, hard-working Canadians to remain victimized in the very same way and every Canadian stripped of their RIGHT to fair, justified and equal treatment under the law.
But do not look to any federal candidate -- for election to Canada’s Parliament -- to champion you, and all Canadians on this loss of rights or the remaining tax victims on their
abuse and loss of financial security.
Among my friends and associates I have found a few that have a vested interest in one political party or another – and regardless of how good, or bad, the party track record is -- they will vote for their benefactor.
That method of candidate selection is not good for the country or Canadian society.
Then I have other friends who vote for a friend-of-the-family who happens to be a candidate regardless of the friend’s performance while in office or the performance of the party he is a member of.
Again this method of selection is not good for the country or Canadian society.
Among the most outrageous reason for voting for a political candidate – is his or her looks and personality.
If the looks of a candidate were any kind of criteria for voting them into office then Paul Bernardo and/or Carla Homolka would be elected by an overwhelming majority if they ran for office in an election.
There would be very few Canadians, however, who would want to be represented by either one of those two.
So by what criteria should a Canadian voter choose a candidate to vote for?
The track record of the party is the most important criteria.
(1) The Party performance.
If any party -- you would prefer to see elected -- has been advocating the government do
anything -- that you personally do not approve of -- then inform your local candidate that your vote will depend upon he, or she, working to oppose the objectionable action.
Conversely if this party is not truly representing their constituents and ignoring them while they are being victimized by unfair, unjustified legislation which is not being applied equally and are not defending the RIGHT of all Canadians to justified and fair taxation --then tell your local candidate you demand they commit to correcting this atrocity if they desire your support.
(2) The candidates performance.
Regardless of how well the party performs the person you elect is going to go to sit in Parliament to represent you and all Canadians. If that person has no spunk, no moxie, no standards to speak up for – then a vote for that person is a wasted vote.
They will just go to Ottawa and sit there accomplishing nothing more than waiting for a paycheck.
If not already familiar with this issue – visit the “Canadians for Fair and Equalized Taxation”, (CFET), web page at:- http://www.cfet.ca
Read the petition you will find there and follow the signatures link to see the comments of other Canadians – some of which are also victims of this outrageous legislation.
Victor Drummond ©
Sunday, June 8, 2008
Everything has...
THERE IS A BEST BEFORE DATE
A commentary on the idiotic excuses proffered by
Federal Ministers to defend an obsolete and
Insidious item of legislation.
By Victor Drummond ©
June 2008
Prior to the introduction of the policy of marking foods and medications with a “Best Before Date”, (BBD) or a “Use by Date”, (UBD), there were no established guidelines for the consumer to refer to regarding the purchase and storage of these items.
Consequently there were rather frequent incidents of people falling ill after eating tainted food or after using medication that had lost its effectiveness.
Spoiled seafood products and antibiotics were among the most frequent items to be the cause of illness -- or even death -- of the user.
The practice of applying a BBD spread rapidly from a few -- known high-risk -- items to a whole spectrum of things – many of which are not prone to spoilage -- or even significant loss of potency, if properly stored.
A belief that the longer an item had been properly stored the better it becomes applies to very few things.
The production of wine is the one of those items and the other is the proper storage of certain kinds of cheese.
Besides food and medication there are a few other aspects of society that can drift from being beneficial to humans to being detrimental in the extreme.
One very important element -- impacting upon the quality of humans living together – is a system of establishing and maintaining acceptable conduct at all levels of society.
As social and/or government need(s) changed the related rules, (laws), required updating. Or in many cases -- needed to be struck down completely regardless of the length of time the now defunct law had been in operation.
Consequently -- in the case of man made laws -- the longer a law has been in force the greater the probability it is no longer valid.
A person might conclude that a law -- designed to provide Canadians from potential bodily harm and/or premature violent death – is indisputably a good law -- with no expiry date.
Well the Supreme Court of Canada didn’t think so as they unanimously struck down the Security Certificate Law on the basis that it conflicted with rights guaranteed to all Canadians under the “Canadian Charter of Rights and Freedoms”.
Ref:- http://www.cbc.ca/canada/story/2007/02/23/security-certificate.html
Apparently laws that deny Canadians their rights and/or personal protection – guaranteed under the Canadian Charter – are not good laws.
So in that event the Supreme Court of Canada should take a careful look at the portion of the Canadian Income Tax act as it relates to the taxing of Corporate shares acquired by employee’s via Employee Share Purchase Plans, (ESPP’s) and Employee Share Option, (ESO), schemes.
This insidious, unfair, unjustified, unreasonable and punitive law contains penalties for its victims if they have outstanding tax levies and wish to leave Canada.
A clear violation of the charter right to freedom-of-movement as guaranteed by article 6.
The charter also guarantees all Canadians the right “Not to be subjected to any cruel, and/or unusual treatment or punishment” according to Article 12
It would be pure idiocy to claim the levy of punitive and excessive taxes on “income” that never actually materialized -- is not unusual treatment, is not cruel and is not severe punishment for some nonexistent misdemeanour.
Therefore this law also violates article 12 of the charter.
To compound this felony the miserable effort to provide some measure of fairness -- to a miniscule sample of Canadian Taxpayers via the SDL/JDSU Tax Remission Order, (TRO), (per Canada Gazette Nov. 14/07 issue) – merely added an element of favouritism to the mix. This boondoggle created a violation of another article of the Charter, i.e., Article (15).
Allowing the defect -- in the legislation relating to taxing ESPP/ESO equities -- was not apparent at the time the legislation was initially enacted, and its insidious, unfair, unjust, and punitive impact was possibly not anticipated by the authors of this law – then it might be weakly argued that initially this law was perhaps tolerable -- but never really good.
When the tech market bust happened -- in July of the year 2000 -- then the obscure trap in the ESPP/ESO taxable benefit legislation became apparent. It began to generate huge tax levies on purely theoretical -- but nonexistent -- gains. This legislation very quickly became punitive, abusive, and grossly unfair.
There is absolutely no doubt that a reasonable, fair, compassionate, intelligent, person would immediately recognize this law was now a very bad law.
It was also obvious to everyone -- outside of the government in power -- this law is still in operation well past its BEST BEFORE DATE, i.e. July 31st 2000
When taxpayers began receiving tax levies – in the year 2001 -- that were, 300% and greater than their total real income -- for the entire year – they started appealing to Members of Parliament -- (MP’s) and even directly to the Prime Minister -- for fair and reasonable tax levies.
I came across a copy of correspondence between a victim -- who had to take out a second mortgage to pay this extortionist tax -- and the Most Honourable PM – that went along these lines.
(Reply from the PM’s Office, paraphrased):- “Thank you for drawing your concerns regarding your year 2000 tax levy to the attention of this office.” Pleased be advised your letter will receive prompt and careful consideration.” Tax matters are not in the jurisdiction of the PM’s office but your letter is being forwarded to the office of the Honourable Ralph Goodale, National Minister of Finance, for action.”
Signed for -- The Most Honourable PM.
======================================
Some months later the victim received a reply from the Honourable Ralph Goodale In essence the reply said:- “The Law is Good -- as it is – so pay up.” (Paraphrased)
========================================
In 2007 an appellant received, (about a year after sending the letter of appeal), a very similar reply from the Honourable James M. Flaherty Minister of Finance,
Following is the best argument the Minister could muster in defence of this obscene legislation and his denial of the appellant’s request – even after a year to formulate a reply:-
(1) “The tax treatment of stock-based compensation has been in effect for many years.”
(2) “and is based on the rationale that employees who exercise stock options may be compared to individual investors who acquire shares at fair market value with after tax dollars or borrowed money.”
(3) “This tax treatment applies equally to shares acquired through an employee share purchase plan.”
(4) “Individuals who exercise stock options are also subject to the same general income tax rules for capital gains and losses on the underlying shares as other investors and are generally not allowed to deduct the capital losses from other income.”
Sincerely
James M. Flaherty, Minister of Finance.-----------------------------------------------------------------------
Applying ordinary common sense to the foregoing statements reveals the total lack of comprehension the author has of the actual situation, i.e.
Item (1) does more to imply the law is obsolete than it does to justify its continued application.
Item (2) is pure and simple gobbledy-gook.
(a) In the last part of this idiotic statement the source of the money used to hase securities is totally irrelevant.
(b.1) Individual investors who acquire shares at fair market value do not pay tax unless and until they sell those shares at a profit.
(b.2) Employee’s who acquire shares via an ESPP or ESO are levied taxes as of the potential gain they might have realized if the shares could actually be sold at the FMV at the time they took possession.
As the bidder controls the price actually realized in a shares transaction the FMV is no guarantee the seller will actually receive that price per share.
Therefore the employee is being taxed on an assumed – but purely theoretical – non-existent amount of money.
Individual (b.1) is taxed on real gain, if any, and employee
b.2) is taxed on potential gain,if any.
Therefore the stated comparison does not exist.
The Item (2) statement is totally incorrect -- either by ignorance of the facts or plain deceit.
Item (3) A repeat of the item (2) comparison – which is incorrect and merely an attempt to muddy the waters.
Since the issuing of the SDL Optics victims TRO -- this stated tax treatment equality -- does not even apply to all ESPP/ESO victims.
Item (4) This statement is also making a false comparison.
If there actually was a realized income from the ESPP/ESO shares then there would be a basis for a taxable benefit tax.
AND
Where there is a basis for a, taxable benefit, tax then it is reasonable to exclude the offsetting of this tax by preventing the taxpayer from deducting it from other income.
BUT
When a tax is levied on a purely theoretical income there is no real basis for a tax so preventing the taxpayer from offsetting this extortion from other income merely compounds the felony.
In summary this reply -- to a taxpayer in financial distress appealing for correction of an unjustified tax -- is nothing more than an insult to the intelligence of the average fifth grader and absolutely no credit what-so-ever to the author.
============================================
Moving the clock back to the December 2006 we find a newly elected conservative MP -- for the riding of Saanich Gulf-Islands, British Columbia -- proudly declaring “It took a change of government … etc.” to bring tax fairness to a paltry 30 ,or so, ESPP victims in his riding.
There is no doubt MP Gary Lunn recognized the ESPP/ESO tax legislation as not “a good law”.
In reality it never was -- and never will be -- a good law.
It was designed to be nothing more or less than an up-front money grab.
Not only did Gary Lunn acknowledge this fact, so did Prime Minister Stephen Harper, and the Governor General for Canada, Michael Jean, when they each signed the same Tax Remission Order.
There have been a number of newspaper journalist reporting on this issue and none of them have said, -- or even implied – that taxing people for “income” that never actually existed – could possibly be according to a good law.
Not only is the taxable benefit legislation – as it applies to ESPP/ESO plans – a very bad law it is well beyond its BBD of July 31 2000.
The same can be said regarding authorities that continue to ignore the problem and/or insult the intelligence of Canadians with rationales that are totally lacking in substance.
There can never be justification for taking money from taxpayers on the excuse they could have made a profit. IF?
If none of our elected representatives and/or those who aspire to become our elected representatives have the comprehension and/or compassion to understand the harm this legislation is wreaking upon innocent hard working Canadians THEN they also are past their BBD.
If you would like to see a revival of decency, ethics and fairness in your elected federal representative send a message to your Member of Parliament informing him, or her, that you demand the defective taxable benefit legislation be corrected and those already taxed – on “income” that never existed be fairly compensated.
An organization called “Canadians for Fair and Equitable Taxation”, (CFET) has made it easy for you to E-mail your MP. Visit their web page:- http://www.cfet.ca and use the -- Mail an MP -- link to send your message.
Everyone should inform their MP that they are intelligent adults and will not be flimflammed by irrational argument. Let them know that your BBD is still a long way off.
If you haven’t signed the petition for “Fair Taxation” you may do so while visiting the CFET Web page.
Victor Drummond ©
A commentary on the idiotic excuses proffered by
Federal Ministers to defend an obsolete and
Insidious item of legislation.
By Victor Drummond ©
June 2008
Prior to the introduction of the policy of marking foods and medications with a “Best Before Date”, (BBD) or a “Use by Date”, (UBD), there were no established guidelines for the consumer to refer to regarding the purchase and storage of these items.
Consequently there were rather frequent incidents of people falling ill after eating tainted food or after using medication that had lost its effectiveness.
Spoiled seafood products and antibiotics were among the most frequent items to be the cause of illness -- or even death -- of the user.
The practice of applying a BBD spread rapidly from a few -- known high-risk -- items to a whole spectrum of things – many of which are not prone to spoilage -- or even significant loss of potency, if properly stored.
A belief that the longer an item had been properly stored the better it becomes applies to very few things.
The production of wine is the one of those items and the other is the proper storage of certain kinds of cheese.
Besides food and medication there are a few other aspects of society that can drift from being beneficial to humans to being detrimental in the extreme.
One very important element -- impacting upon the quality of humans living together – is a system of establishing and maintaining acceptable conduct at all levels of society.
As social and/or government need(s) changed the related rules, (laws), required updating. Or in many cases -- needed to be struck down completely regardless of the length of time the now defunct law had been in operation.
Consequently -- in the case of man made laws -- the longer a law has been in force the greater the probability it is no longer valid.
A person might conclude that a law -- designed to provide Canadians from potential bodily harm and/or premature violent death – is indisputably a good law -- with no expiry date.
Well the Supreme Court of Canada didn’t think so as they unanimously struck down the Security Certificate Law on the basis that it conflicted with rights guaranteed to all Canadians under the “Canadian Charter of Rights and Freedoms”.
Ref:- http://www.cbc.ca/canada/story/2007/02/23/security-certificate.html
Apparently laws that deny Canadians their rights and/or personal protection – guaranteed under the Canadian Charter – are not good laws.
So in that event the Supreme Court of Canada should take a careful look at the portion of the Canadian Income Tax act as it relates to the taxing of Corporate shares acquired by employee’s via Employee Share Purchase Plans, (ESPP’s) and Employee Share Option, (ESO), schemes.
This insidious, unfair, unjustified, unreasonable and punitive law contains penalties for its victims if they have outstanding tax levies and wish to leave Canada.
A clear violation of the charter right to freedom-of-movement as guaranteed by article 6.
The charter also guarantees all Canadians the right “Not to be subjected to any cruel, and/or unusual treatment or punishment” according to Article 12
It would be pure idiocy to claim the levy of punitive and excessive taxes on “income” that never actually materialized -- is not unusual treatment, is not cruel and is not severe punishment for some nonexistent misdemeanour.
Therefore this law also violates article 12 of the charter.
To compound this felony the miserable effort to provide some measure of fairness -- to a miniscule sample of Canadian Taxpayers via the SDL/JDSU Tax Remission Order, (TRO), (per Canada Gazette Nov. 14/07 issue) – merely added an element of favouritism to the mix. This boondoggle created a violation of another article of the Charter, i.e., Article (15).
Allowing the defect -- in the legislation relating to taxing ESPP/ESO equities -- was not apparent at the time the legislation was initially enacted, and its insidious, unfair, unjust, and punitive impact was possibly not anticipated by the authors of this law – then it might be weakly argued that initially this law was perhaps tolerable -- but never really good.
When the tech market bust happened -- in July of the year 2000 -- then the obscure trap in the ESPP/ESO taxable benefit legislation became apparent. It began to generate huge tax levies on purely theoretical -- but nonexistent -- gains. This legislation very quickly became punitive, abusive, and grossly unfair.
There is absolutely no doubt that a reasonable, fair, compassionate, intelligent, person would immediately recognize this law was now a very bad law.
It was also obvious to everyone -- outside of the government in power -- this law is still in operation well past its BEST BEFORE DATE, i.e. July 31st 2000
When taxpayers began receiving tax levies – in the year 2001 -- that were, 300% and greater than their total real income -- for the entire year – they started appealing to Members of Parliament -- (MP’s) and even directly to the Prime Minister -- for fair and reasonable tax levies.
I came across a copy of correspondence between a victim -- who had to take out a second mortgage to pay this extortionist tax -- and the Most Honourable PM – that went along these lines.
(Reply from the PM’s Office, paraphrased):- “Thank you for drawing your concerns regarding your year 2000 tax levy to the attention of this office.” Pleased be advised your letter will receive prompt and careful consideration.” Tax matters are not in the jurisdiction of the PM’s office but your letter is being forwarded to the office of the Honourable Ralph Goodale, National Minister of Finance, for action.”
Signed for -- The Most Honourable PM.
======================================
Some months later the victim received a reply from the Honourable Ralph Goodale In essence the reply said:- “The Law is Good -- as it is – so pay up.” (Paraphrased)
========================================
In 2007 an appellant received, (about a year after sending the letter of appeal), a very similar reply from the Honourable James M. Flaherty Minister of Finance,
Following is the best argument the Minister could muster in defence of this obscene legislation and his denial of the appellant’s request – even after a year to formulate a reply:-
(1) “The tax treatment of stock-based compensation has been in effect for many years.”
(2) “and is based on the rationale that employees who exercise stock options may be compared to individual investors who acquire shares at fair market value with after tax dollars or borrowed money.”
(3) “This tax treatment applies equally to shares acquired through an employee share purchase plan.”
(4) “Individuals who exercise stock options are also subject to the same general income tax rules for capital gains and losses on the underlying shares as other investors and are generally not allowed to deduct the capital losses from other income.”
Sincerely
James M. Flaherty, Minister of Finance.-----------------------------------------------------------------------
Applying ordinary common sense to the foregoing statements reveals the total lack of comprehension the author has of the actual situation, i.e.
Item (1) does more to imply the law is obsolete than it does to justify its continued application.
Item (2) is pure and simple gobbledy-gook.
(a) In the last part of this idiotic statement the source of the money used to hase securities is totally irrelevant.
(b.1) Individual investors who acquire shares at fair market value do not pay tax unless and until they sell those shares at a profit.
(b.2) Employee’s who acquire shares via an ESPP or ESO are levied taxes as of the potential gain they might have realized if the shares could actually be sold at the FMV at the time they took possession.
As the bidder controls the price actually realized in a shares transaction the FMV is no guarantee the seller will actually receive that price per share.
Therefore the employee is being taxed on an assumed – but purely theoretical – non-existent amount of money.
Individual (b.1) is taxed on real gain, if any, and employee
b.2) is taxed on potential gain,if any.
Therefore the stated comparison does not exist.
The Item (2) statement is totally incorrect -- either by ignorance of the facts or plain deceit.
Item (3) A repeat of the item (2) comparison – which is incorrect and merely an attempt to muddy the waters.
Since the issuing of the SDL Optics victims TRO -- this stated tax treatment equality -- does not even apply to all ESPP/ESO victims.
Item (4) This statement is also making a false comparison.
If there actually was a realized income from the ESPP/ESO shares then there would be a basis for a taxable benefit tax.
AND
Where there is a basis for a, taxable benefit, tax then it is reasonable to exclude the offsetting of this tax by preventing the taxpayer from deducting it from other income.
BUT
When a tax is levied on a purely theoretical income there is no real basis for a tax so preventing the taxpayer from offsetting this extortion from other income merely compounds the felony.
In summary this reply -- to a taxpayer in financial distress appealing for correction of an unjustified tax -- is nothing more than an insult to the intelligence of the average fifth grader and absolutely no credit what-so-ever to the author.
============================================
Moving the clock back to the December 2006 we find a newly elected conservative MP -- for the riding of Saanich Gulf-Islands, British Columbia -- proudly declaring “It took a change of government … etc.” to bring tax fairness to a paltry 30 ,or so, ESPP victims in his riding.
There is no doubt MP Gary Lunn recognized the ESPP/ESO tax legislation as not “a good law”.
In reality it never was -- and never will be -- a good law.
It was designed to be nothing more or less than an up-front money grab.
Not only did Gary Lunn acknowledge this fact, so did Prime Minister Stephen Harper, and the Governor General for Canada, Michael Jean, when they each signed the same Tax Remission Order.
There have been a number of newspaper journalist reporting on this issue and none of them have said, -- or even implied – that taxing people for “income” that never actually existed – could possibly be according to a good law.
Not only is the taxable benefit legislation – as it applies to ESPP/ESO plans – a very bad law it is well beyond its BBD of July 31 2000.
The same can be said regarding authorities that continue to ignore the problem and/or insult the intelligence of Canadians with rationales that are totally lacking in substance.
There can never be justification for taking money from taxpayers on the excuse they could have made a profit. IF?
If none of our elected representatives and/or those who aspire to become our elected representatives have the comprehension and/or compassion to understand the harm this legislation is wreaking upon innocent hard working Canadians THEN they also are past their BBD.
If you would like to see a revival of decency, ethics and fairness in your elected federal representative send a message to your Member of Parliament informing him, or her, that you demand the defective taxable benefit legislation be corrected and those already taxed – on “income” that never existed be fairly compensated.
An organization called “Canadians for Fair and Equitable Taxation”, (CFET) has made it easy for you to E-mail your MP. Visit their web page:- http://www.cfet.ca and use the -- Mail an MP -- link to send your message.
Everyone should inform their MP that they are intelligent adults and will not be flimflammed by irrational argument. Let them know that your BBD is still a long way off.
If you haven’t signed the petition for “Fair Taxation” you may do so while visiting the CFET Web page.
Victor Drummond ©
Wednesday, June 4, 2008
How about a rational...
HOW ABOUT A RATIONAL TAX RATIONALE
A commentary on a taxable benefit law that severely punishes
Canadians who fail to take a potential gain when the opportunity arises.
By Victor Drummond ©
June 2008
Imagine yourself as an employee of a High Tech Corporation back in 1985.
Your work performance is outstanding and your employer corporation is growing by leaps and bounds.
Demand for your employer’s products far exceed the corporation’s production capacity
and competing corporations are hiring head-hunters to lure key employees to change from one employer to another.
Competing corporations -- Canadian, American and Foreign -- are offering more money; more perks; and fully paid moving expenses to people they want to hire.
To battle this attack -- on their most valued employees -- your corporation is now offering you, among other key employees, the opportunity to acquire corporation stock under an Employee Share Purchase Plan, (ESPP).
In order to illustrate the insidious nature of the defective “taxable benefit” legislation -- applicable to these plans -- this commentary will set real variables -- in this example scenario -- that would not necessarily be found in this combination -- for any one actual ESPP contract and/or applied by any one specific tax victim. Never-the-less each element of this example is valid for the typical events described.
This particular illustrative plan allows participants to vest, (order), 1000 shares per year, over a 15 year term, with paid-up shares to be exercised, (delivered), one year after each vesting.
The basic cost, per share, to plan participants -- is fixed by the Fair Market Value, (FMV), as of the date of the initial vesting, less 15%. In this instance the given FMV -- at the time the initial ESPP contract is signed on July 30th 1985 -- is $1.00 per share.
Therefore the basic cost -- to plan participants -- is fixed at $0.85 per share at the time of each vesting, i.e. each lot of 1000 shares have a basic cost of $850.00, per year, over the 15 year term of this ESPP contract. (1985 through 2000)
The basic cost per share, however, becomes inflated when the buyer is charged a brokerage fee, (commission), for buy and sell orders and/or levied taxes on any increase in the shares. FMV – which is greater than their ACB – at time of exercise.
If you do not sell any shares --at time of exercise -- you are still levied tax on the potential paper profit the shares FMV represent at that time even though you have not yet actually received any monetary return on your investment.
For sake of simplicity -- in this example scenario -- the bottom line Income Tax percentage is set at 38 although the range would actually vary according to the years federal, and provincial rates set, and the level of your taxable income.
For illustrative purposes’ the share FMV increase is fixed at $10.00, per year, and you are going to sell 100 shares each year, from 1988 to the year you taxable benefit tax equals 50% of your gross real income, to offset Taxable Benefit and Capital Gains taxes levied against your real and theoretical gain from year to year.
i.e. July 30th FMV per share:- !986 = $10.00, 1987 = $20.00, 1988 = $30.00 ….. 2000 = $150.00
Then the tech market bubble burst and the shares FMV on July 30th 2001 = $10.00
To clearly reveal the insidious aspect of the taxable benefit legislation – as it is applied to Employee Share Purchase Plans, (ESPP’s) and Employee Options (ESO’s) plans your actual “Earned” income -- and the tax it generates – is not included in this illustration.
Therefore the tax amounts shown here are purely the taxes levied as a product of the ESPP transactions. At the point where your ESPP generated tax depletes your REAL GROSS INCOME by 50% you will begin to apply the tax deferment option by completing form T1212 each year to defer taxes that exceed your real income by 50%.
At this stage you can no longer sell any of your ESPP shares as this would nullify the tax deferments.
In order to identify when that point has been reached in the on-going tax events your initial gross salary in the year 1985 is set at $35,000 with fixed annual increases of 2.5% per year from 1986 through 2000.
When you begin using the tax deferment option the hidden tax trap is set and it is triggered when the tech market crash begins in July of the year 2000.
The cost per share of the first shares exercised was $0.85 and the law states shares transactions must operate on a First In – First Out, (FIFO) basis.
Consequently the shares ACB will remain fixed at $0.85 per share until the first 1000 shares exercised are all sold even though the ACB of each years 1000 share vesting will be altered by the taxes levied and/or broker’s commissions charged.
The corporation, per share price in 1975 per the Initial Public Offering was $0.10.
To arrive at the July 30th 1985 FMV of $1.00 the publicly traded shares -- in your Employers Corporation -- have double in value and even tripled in value since the company became incorporated as a multi-national organization.
You feel comfortable working for your present employer. Your annual salary is adequate and the working conditions are comparable to most other corporations.
You bought a home nearby and this location has shopping, schools, transportation, good neighbours, and entertainment within easy walking distance.
Therefore you are not inclined to change employers if a change of residence would be involved.
Although you have no prior experience -- in stock market transactions and minimal knowledge of stock market operations -- the opportunity to own a part of your employer’s corporation appeals to you and would no doubt enhance your standing with your employer.
Furthermore the corporation’s track record appears to offer a solid guarantee you will make money if you buy the corporations shares. So you sign on.
As the corporation shares have been averaging consistently higher value for years the FMV looks good and the ESPP allows you to purchase your shares at a 15% discount below the calculated FMV. So you are in the money (theoretically), right from the day you vest, (order), your shares.
Not only that -- but you can order your quota of shares under a payroll deduction scheme which facilitates payment without depleting your savings account or paying interest on borrowed money.
There are other peculiar aspects to buying your shares via this ESPP.
For example you can not just go to a broker and pick up the shares you ordered, and paid for. The shares ordered are held in some form of escrow until the plan next delivery date, (exercise date).
In the time between the date of order, (vesting date), and the date you take control of your shares, (exercise date), you have no control over the latest block of shares you have ordered and paid for.
In this case the time between your initial vesting date and first exercise date is one year.
At first exercise date, July 30/86 you receive 1000 shares of your employers stock and the price you paid per share compared to the current trading price gives you a potential gain of $9,150.00, i.e. (1000 x 10) – 850 = $9,150.00
A very nice paper profit for a first go at the stock market. Of course you do not take this profit as the shares have gained $9.00 each in the past year alone and there is no end in sight.
Your 1986 “Income Statement” (T4) -- the year you first received your allotted ESPP shares -- reports your “Earned Income” as being some $4,575.00 greater than you calculated it should be from your pay slips.
This inflated “income” discrepancy is explained to you as being the addition of the taxable benefit portion of the theoretical gain -- you haven’t yet actually realized – created by the difference between the price you actually paid for your vested shares and their FMV at the time of exercising, (delivery).
The math goes like this:- On July 30th 1986 when your initial 1000 shares were exercise you had a paper profit of $9,150.00 as noted above. The Capital Gains inclusion rate for 1986 is 50%
Therefore your employer was obliged -- by law -- to add 50% of your paper gain, (9150 x 0.5) = $4,575.00 to your real income.
You then paid an additional “income tax of:- 4575 x 0.38 = $1,738.50
(What? Taxes on a purely paper gain?) (Yes, and you haven’t yet realized one cent of that paper profit.)
This tax is a real cost of acquiring the next 1000 shares and consequently the Adjusted Cost Base, (ACB) of the 1000 shares exercised, (delivered) on July 30th 1987 is: - (850 + 1738.50) / 1000 = $2.5885 per share.
But you can not claim this higher cost against the shares you sell until the initial 1000 shares exercised have all been sold.
So on July 31 1987 you sell 100 of the first 1000 shares, to offset the taxable benefit tax levied on the shares delivered on July 30th 1986.
Consequently you incur a Capital Gain on July 31/1987 of:- (100 x 20) – (100 x 0.85) = $1,915.00 which you will report on your 1987 tax return in April 1988.
As the CG inclusion rate in 1987 is again 50% you will be taxed another (1915 x 0.38) = $727.70 on those same shares.
Because a CG tax may be offset by past and/or future CG losses this tax does not inflate your ESPP shares ACB.
Your second order of 1000 shares, (vested July 30th 1986), is exercised on July 30th 1987.
The paper profit on this date is:- (1000 x 20) – (1000 x 2.5885) = 20,000 – 2,588.5 =
$17,411.50
The Capital Gains inclusion rate for 1987 is still 50 percent. Therefore your “Earned Income” is inflated by (17411.5 x .500) = $8,705.75 which at the bottom line tax rate of 38% produces a taxable benefit tax of:- $3,308.19
This tax increases the ACB of the shares vested in 1988 to:- (850 + 3,308.19)/1000 = $4.1582 per share.
The Capital Gains Tax on the 100 shares sold in 1988 is:- (1915 x 0.5000)x 0.38 = $363.85 which can only be offset by past, or future, Capital losses.
It appears that holding your shares past their date of exercise is the wise thing to do because the shares in your employer’s corporation are averaging a higher and higher price every week.
If things keep going -- the way they have in the past two years -- you will be a multi-millionaire by the time your initial ESPP contract expires on July 30 2000.
Things really look rosy as of July 31st 1988 as you are currently holding 2,700 shares which are now trading at $30.00 per share -- producing a gross paper value of $81,000.00
Along the way, however, you have paid out real expenses to build this $81,000 paper castle in the air, i.e.
(1) You have paid $850 shares cost per year for 3 years for a total basic outlay of: $2,550.00
(2) You have paid real taxable benefit taxes for two years, and are set-up to pay for year three * in April 1989.
(3) You have paid $363.85 in Capital Gains Tax, (1988)
Therefore your total real cost, to date, is:- 2,550.00 + 1,738.50 + 3,308.19 + * 6,545.93 + 363.85 = $14,506.47 by the time the 1988 Income * taxable benefit tax is paid.
*i.e. (1988 ESPP tax.) = ((1000 x 30) – (1000 x 4.1582) x 0.666) x 0.38) = ((30,000 – 5,257.90) x 0.666) x 0.38 = $6,545.93
You have sold 300 shares, to date, to realize a gross CG of:- (100 x 10) + (100 x 20) + (100 x 30) = (1000 + 2000 + 3000) = $6,000.00
Your actual, ESPP operations, tangible Profit/Loss balance, as of July 31 1988 is:-
Credits = $6,000.00 and Debits = $14,,506.47 for a net deficit of $8,506.47
Based upon a database spreadsheet – with the ESPP parameters from 1985 through 2003
-- your Taxable benefit tax exceeds 50% of your real gross income in the year 1995.
Therefore on July 31 1995 you sell the last 100 shares of your initial vested 1000 share allotment and begin to apply the T1212 request to defer the 1995 and future years taxable benefit taxes. (The trap is now set.)
To this point you have paid a total of:- $121,681.38 in accumulated Taxable Benefits tax and $$14,947.60 in accumulated Capital Gains Tax but have only actually received $54,150.00 in real accumulated returns from the sale of your first 1000 ESPP shares.
At this stage your ESPP -- P&L Balance sheet is:- Credits = $54,150.00 and Debits = $121,681.38 for a net deficit of $67,531.38
By July 30th 2000 the tech market boom has peaked and shares in your ESPP which had been trading at $150.00 each are losing value almost daily. No one seems to know if the market will recover, stabilize or continue it’s downward trend.
Based upon faith in the management skills of your employer plus hope and past market performance you decide to hold your ESPP shares for one more year. You decide not to order (vest) your year 2001 shares allotment and stand pat with the 2001, 1000 shares delivery.
As of July 30th 2001 You now have accumulated ESPP deferred taxes of:- $$168,162.35 which will lose deferment status as soon as you sell, trade or dispose of any of your 15,000 ESPP shares.
Or if your employer corporation ceases operations, due to bankruptcy and/or take-over by another company.
Furthermore the FMV of those shares has now fallen to $10.00 per share which you would be very fortunate to receive if you placed a sell order for that many shares. Even so the total proceeds of the sale would only return $150,000 which is $18,162.35 short of retiring the deferred taxes.
Surely the stock market has bottomed and there is nowhere for your ESPP shares to go but up – if you wait a bit longer. As the ACB of your ESPP shares now exceeds the FMV you will not incur additional taxable benefit taxes this year.
The hidden trap is now sprung and the noose around your neck is drawing tighter.
By July 30th 2002 the -- per share -- FMV has fallen to $5.00. This reduces the theoretical return on the sale of your 15,000 shares to $75,000 which is now short $93,162.35 of retiring your outstanding deferred taxes.
Your employer corporation is now beginning to reduce production costs by closing some production departments – consolidating other departments and retiring some senior employees.
For now your employment position appears safe and all should turn out well if the stock market would only recover some of its past glory.
On July 30th 2003 you receive the really bad news.
Your position has been removed from the corporate organization chart and you are being dehired effective August 30th 2003. Your separation package consists of 13 months pay including one month of unused annual vacation. Your total separation benefit will be $60,000.
To add insult to injury the FMV of your ESPP shares has dropped to its 1985 level of $1.00 per share. If you sold your 15,000 shares now – and added your separation package you could only compile a total of $75,000 which is still $93,162.35 short of retiring the deferred tax on money you have never actually received.
You have a $14,947.60 balance of accumulated CG taxes already paid but you can not recover any of that money unless you sell ESPP shares at a Loss and that would trigger the cancellation of your deferred taxable benefit axes.
Furthermore – so long as this tax remains unpaid you may not move out of Canada – regardless of anything the Canadian Charter of Rights and Freedoms may say.
The taxable benefit tax trap has sprung and you are scuppered.
Although this case history is hypothetical the transactions described herein are typical and there are thousands of honest hard-working Canadians who have found themselves facing taxation on huge amounts of potential ESPP/ESO benefits that they have never actually received.
Many of these tax victims have found it necessary to sell or mortgage their homes, and/or deplete their savings accounts and/or borrow large sums of money in order to pay this unjust, and unwarranted tax levy.
Most victims, who have used the appeal avenues provided, have had their appeals denied on the grounds that they conscientiously elected to gamble in the stock markets at their own risk.
At interesting rationale in view of the fact the government had not supplied any of the money involved in this series of transactions. This logic of having a claim to tax opportunity when no real profit has been realized is rather presumptuous and dangerous to Canadians as a whole.
This applied rationale is not rational and no agency should assume the right to demand a share of anyone’s money that only existed in theory.
How about treating all gambles in the stock market as Capital Investments and only taxing real gains and allowing this tax to be offset by past, (3 year) and/or future Capital Losses.
That is a rational system of taxation.
If you agree the legislation that produces huge taxes on purely potential profit is unfair, unjustified and unethical – then visit web page http://www.cfet.ca and sign the petition for Fair and Equitable taxation.
Furthermore use the link to E-mail your Member of Parliament and demand that they support correcting this legislation and properly compensating those who have already paid tax on purely phantom income.
Victor Drummond ©
Post Scrip:- The form T1212 did not become available until the year 2001 but for sake of illustrating the catch 22 a deferment created it is shown in this hypothetical instance as happening in 1995. That date for deferment beginning may also be valid if the taxpayer had defaulted on payment of taxable benefit taxes from or before that date.
Also the deferred amount of tax:- $168,162.35 is only the tip of the iceberg.
As of July 30th 2002 the P&L Account would be:-
Credits:- Income from ESPP shares sold to date = $54,150.00
Debits:- Capital Gains Taxes paid = $14,947.60
Debits:- Taxable Benefits Taxes,(Total) = $267,361.85 (of which $168,162.35 deferred)
Defecit = 54,150 - (14,947.60 + 267,361.85) = $228,159.45
The total taxes levied are 5.2 times the actual real income realized. Is that rational?
A commentary on a taxable benefit law that severely punishes
Canadians who fail to take a potential gain when the opportunity arises.
By Victor Drummond ©
June 2008
Imagine yourself as an employee of a High Tech Corporation back in 1985.
Your work performance is outstanding and your employer corporation is growing by leaps and bounds.
Demand for your employer’s products far exceed the corporation’s production capacity
and competing corporations are hiring head-hunters to lure key employees to change from one employer to another.
Competing corporations -- Canadian, American and Foreign -- are offering more money; more perks; and fully paid moving expenses to people they want to hire.
To battle this attack -- on their most valued employees -- your corporation is now offering you, among other key employees, the opportunity to acquire corporation stock under an Employee Share Purchase Plan, (ESPP).
In order to illustrate the insidious nature of the defective “taxable benefit” legislation -- applicable to these plans -- this commentary will set real variables -- in this example scenario -- that would not necessarily be found in this combination -- for any one actual ESPP contract and/or applied by any one specific tax victim. Never-the-less each element of this example is valid for the typical events described.
This particular illustrative plan allows participants to vest, (order), 1000 shares per year, over a 15 year term, with paid-up shares to be exercised, (delivered), one year after each vesting.
The basic cost, per share, to plan participants -- is fixed by the Fair Market Value, (FMV), as of the date of the initial vesting, less 15%. In this instance the given FMV -- at the time the initial ESPP contract is signed on July 30th 1985 -- is $1.00 per share.
Therefore the basic cost -- to plan participants -- is fixed at $0.85 per share at the time of each vesting, i.e. each lot of 1000 shares have a basic cost of $850.00, per year, over the 15 year term of this ESPP contract. (1985 through 2000)
The basic cost per share, however, becomes inflated when the buyer is charged a brokerage fee, (commission), for buy and sell orders and/or levied taxes on any increase in the shares. FMV – which is greater than their ACB – at time of exercise.
If you do not sell any shares --at time of exercise -- you are still levied tax on the potential paper profit the shares FMV represent at that time even though you have not yet actually received any monetary return on your investment.
For sake of simplicity -- in this example scenario -- the bottom line Income Tax percentage is set at 38 although the range would actually vary according to the years federal, and provincial rates set, and the level of your taxable income.
For illustrative purposes’ the share FMV increase is fixed at $10.00, per year, and you are going to sell 100 shares each year, from 1988 to the year you taxable benefit tax equals 50% of your gross real income, to offset Taxable Benefit and Capital Gains taxes levied against your real and theoretical gain from year to year.
i.e. July 30th FMV per share:- !986 = $10.00, 1987 = $20.00, 1988 = $30.00 ….. 2000 = $150.00
Then the tech market bubble burst and the shares FMV on July 30th 2001 = $10.00
To clearly reveal the insidious aspect of the taxable benefit legislation – as it is applied to Employee Share Purchase Plans, (ESPP’s) and Employee Options (ESO’s) plans your actual “Earned” income -- and the tax it generates – is not included in this illustration.
Therefore the tax amounts shown here are purely the taxes levied as a product of the ESPP transactions. At the point where your ESPP generated tax depletes your REAL GROSS INCOME by 50% you will begin to apply the tax deferment option by completing form T1212 each year to defer taxes that exceed your real income by 50%.
At this stage you can no longer sell any of your ESPP shares as this would nullify the tax deferments.
In order to identify when that point has been reached in the on-going tax events your initial gross salary in the year 1985 is set at $35,000 with fixed annual increases of 2.5% per year from 1986 through 2000.
When you begin using the tax deferment option the hidden tax trap is set and it is triggered when the tech market crash begins in July of the year 2000.
The cost per share of the first shares exercised was $0.85 and the law states shares transactions must operate on a First In – First Out, (FIFO) basis.
Consequently the shares ACB will remain fixed at $0.85 per share until the first 1000 shares exercised are all sold even though the ACB of each years 1000 share vesting will be altered by the taxes levied and/or broker’s commissions charged.
The corporation, per share price in 1975 per the Initial Public Offering was $0.10.
To arrive at the July 30th 1985 FMV of $1.00 the publicly traded shares -- in your Employers Corporation -- have double in value and even tripled in value since the company became incorporated as a multi-national organization.
You feel comfortable working for your present employer. Your annual salary is adequate and the working conditions are comparable to most other corporations.
You bought a home nearby and this location has shopping, schools, transportation, good neighbours, and entertainment within easy walking distance.
Therefore you are not inclined to change employers if a change of residence would be involved.
Although you have no prior experience -- in stock market transactions and minimal knowledge of stock market operations -- the opportunity to own a part of your employer’s corporation appeals to you and would no doubt enhance your standing with your employer.
Furthermore the corporation’s track record appears to offer a solid guarantee you will make money if you buy the corporations shares. So you sign on.
As the corporation shares have been averaging consistently higher value for years the FMV looks good and the ESPP allows you to purchase your shares at a 15% discount below the calculated FMV. So you are in the money (theoretically), right from the day you vest, (order), your shares.
Not only that -- but you can order your quota of shares under a payroll deduction scheme which facilitates payment without depleting your savings account or paying interest on borrowed money.
There are other peculiar aspects to buying your shares via this ESPP.
For example you can not just go to a broker and pick up the shares you ordered, and paid for. The shares ordered are held in some form of escrow until the plan next delivery date, (exercise date).
In the time between the date of order, (vesting date), and the date you take control of your shares, (exercise date), you have no control over the latest block of shares you have ordered and paid for.
In this case the time between your initial vesting date and first exercise date is one year.
At first exercise date, July 30/86 you receive 1000 shares of your employers stock and the price you paid per share compared to the current trading price gives you a potential gain of $9,150.00, i.e. (1000 x 10) – 850 = $9,150.00
A very nice paper profit for a first go at the stock market. Of course you do not take this profit as the shares have gained $9.00 each in the past year alone and there is no end in sight.
Your 1986 “Income Statement” (T4) -- the year you first received your allotted ESPP shares -- reports your “Earned Income” as being some $4,575.00 greater than you calculated it should be from your pay slips.
This inflated “income” discrepancy is explained to you as being the addition of the taxable benefit portion of the theoretical gain -- you haven’t yet actually realized – created by the difference between the price you actually paid for your vested shares and their FMV at the time of exercising, (delivery).
The math goes like this:- On July 30th 1986 when your initial 1000 shares were exercise you had a paper profit of $9,150.00 as noted above. The Capital Gains inclusion rate for 1986 is 50%
Therefore your employer was obliged -- by law -- to add 50% of your paper gain, (9150 x 0.5) = $4,575.00 to your real income.
You then paid an additional “income tax of:- 4575 x 0.38 = $1,738.50
(What? Taxes on a purely paper gain?) (Yes, and you haven’t yet realized one cent of that paper profit.)
This tax is a real cost of acquiring the next 1000 shares and consequently the Adjusted Cost Base, (ACB) of the 1000 shares exercised, (delivered) on July 30th 1987 is: - (850 + 1738.50) / 1000 = $2.5885 per share.
But you can not claim this higher cost against the shares you sell until the initial 1000 shares exercised have all been sold.
So on July 31 1987 you sell 100 of the first 1000 shares, to offset the taxable benefit tax levied on the shares delivered on July 30th 1986.
Consequently you incur a Capital Gain on July 31/1987 of:- (100 x 20) – (100 x 0.85) = $1,915.00 which you will report on your 1987 tax return in April 1988.
As the CG inclusion rate in 1987 is again 50% you will be taxed another (1915 x 0.38) = $727.70 on those same shares.
Because a CG tax may be offset by past and/or future CG losses this tax does not inflate your ESPP shares ACB.
Your second order of 1000 shares, (vested July 30th 1986), is exercised on July 30th 1987.
The paper profit on this date is:- (1000 x 20) – (1000 x 2.5885) = 20,000 – 2,588.5 =
$17,411.50
The Capital Gains inclusion rate for 1987 is still 50 percent. Therefore your “Earned Income” is inflated by (17411.5 x .500) = $8,705.75 which at the bottom line tax rate of 38% produces a taxable benefit tax of:- $3,308.19
This tax increases the ACB of the shares vested in 1988 to:- (850 + 3,308.19)/1000 = $4.1582 per share.
The Capital Gains Tax on the 100 shares sold in 1988 is:- (1915 x 0.5000)x 0.38 = $363.85 which can only be offset by past, or future, Capital losses.
It appears that holding your shares past their date of exercise is the wise thing to do because the shares in your employer’s corporation are averaging a higher and higher price every week.
If things keep going -- the way they have in the past two years -- you will be a multi-millionaire by the time your initial ESPP contract expires on July 30 2000.
Things really look rosy as of July 31st 1988 as you are currently holding 2,700 shares which are now trading at $30.00 per share -- producing a gross paper value of $81,000.00
Along the way, however, you have paid out real expenses to build this $81,000 paper castle in the air, i.e.
(1) You have paid $850 shares cost per year for 3 years for a total basic outlay of: $2,550.00
(2) You have paid real taxable benefit taxes for two years, and are set-up to pay for year three * in April 1989.
(3) You have paid $363.85 in Capital Gains Tax, (1988)
Therefore your total real cost, to date, is:- 2,550.00 + 1,738.50 + 3,308.19 + * 6,545.93 + 363.85 = $14,506.47 by the time the 1988 Income * taxable benefit tax is paid.
*i.e. (1988 ESPP tax.) = ((1000 x 30) – (1000 x 4.1582) x 0.666) x 0.38) = ((30,000 – 5,257.90) x 0.666) x 0.38 = $6,545.93
You have sold 300 shares, to date, to realize a gross CG of:- (100 x 10) + (100 x 20) + (100 x 30) = (1000 + 2000 + 3000) = $6,000.00
Your actual, ESPP operations, tangible Profit/Loss balance, as of July 31 1988 is:-
Credits = $6,000.00 and Debits = $14,,506.47 for a net deficit of $8,506.47
Based upon a database spreadsheet – with the ESPP parameters from 1985 through 2003
-- your Taxable benefit tax exceeds 50% of your real gross income in the year 1995.
Therefore on July 31 1995 you sell the last 100 shares of your initial vested 1000 share allotment and begin to apply the T1212 request to defer the 1995 and future years taxable benefit taxes. (The trap is now set.)
To this point you have paid a total of:- $121,681.38 in accumulated Taxable Benefits tax and $$14,947.60 in accumulated Capital Gains Tax but have only actually received $54,150.00 in real accumulated returns from the sale of your first 1000 ESPP shares.
At this stage your ESPP -- P&L Balance sheet is:- Credits = $54,150.00 and Debits = $121,681.38 for a net deficit of $67,531.38
By July 30th 2000 the tech market boom has peaked and shares in your ESPP which had been trading at $150.00 each are losing value almost daily. No one seems to know if the market will recover, stabilize or continue it’s downward trend.
Based upon faith in the management skills of your employer plus hope and past market performance you decide to hold your ESPP shares for one more year. You decide not to order (vest) your year 2001 shares allotment and stand pat with the 2001, 1000 shares delivery.
As of July 30th 2001 You now have accumulated ESPP deferred taxes of:- $$168,162.35 which will lose deferment status as soon as you sell, trade or dispose of any of your 15,000 ESPP shares.
Or if your employer corporation ceases operations, due to bankruptcy and/or take-over by another company.
Furthermore the FMV of those shares has now fallen to $10.00 per share which you would be very fortunate to receive if you placed a sell order for that many shares. Even so the total proceeds of the sale would only return $150,000 which is $18,162.35 short of retiring the deferred taxes.
Surely the stock market has bottomed and there is nowhere for your ESPP shares to go but up – if you wait a bit longer. As the ACB of your ESPP shares now exceeds the FMV you will not incur additional taxable benefit taxes this year.
The hidden trap is now sprung and the noose around your neck is drawing tighter.
By July 30th 2002 the -- per share -- FMV has fallen to $5.00. This reduces the theoretical return on the sale of your 15,000 shares to $75,000 which is now short $93,162.35 of retiring your outstanding deferred taxes.
Your employer corporation is now beginning to reduce production costs by closing some production departments – consolidating other departments and retiring some senior employees.
For now your employment position appears safe and all should turn out well if the stock market would only recover some of its past glory.
On July 30th 2003 you receive the really bad news.
Your position has been removed from the corporate organization chart and you are being dehired effective August 30th 2003. Your separation package consists of 13 months pay including one month of unused annual vacation. Your total separation benefit will be $60,000.
To add insult to injury the FMV of your ESPP shares has dropped to its 1985 level of $1.00 per share. If you sold your 15,000 shares now – and added your separation package you could only compile a total of $75,000 which is still $93,162.35 short of retiring the deferred tax on money you have never actually received.
You have a $14,947.60 balance of accumulated CG taxes already paid but you can not recover any of that money unless you sell ESPP shares at a Loss and that would trigger the cancellation of your deferred taxable benefit axes.
Furthermore – so long as this tax remains unpaid you may not move out of Canada – regardless of anything the Canadian Charter of Rights and Freedoms may say.
The taxable benefit tax trap has sprung and you are scuppered.
Although this case history is hypothetical the transactions described herein are typical and there are thousands of honest hard-working Canadians who have found themselves facing taxation on huge amounts of potential ESPP/ESO benefits that they have never actually received.
Many of these tax victims have found it necessary to sell or mortgage their homes, and/or deplete their savings accounts and/or borrow large sums of money in order to pay this unjust, and unwarranted tax levy.
Most victims, who have used the appeal avenues provided, have had their appeals denied on the grounds that they conscientiously elected to gamble in the stock markets at their own risk.
At interesting rationale in view of the fact the government had not supplied any of the money involved in this series of transactions. This logic of having a claim to tax opportunity when no real profit has been realized is rather presumptuous and dangerous to Canadians as a whole.
This applied rationale is not rational and no agency should assume the right to demand a share of anyone’s money that only existed in theory.
How about treating all gambles in the stock market as Capital Investments and only taxing real gains and allowing this tax to be offset by past, (3 year) and/or future Capital Losses.
That is a rational system of taxation.
If you agree the legislation that produces huge taxes on purely potential profit is unfair, unjustified and unethical – then visit web page http://www.cfet.ca and sign the petition for Fair and Equitable taxation.
Furthermore use the link to E-mail your Member of Parliament and demand that they support correcting this legislation and properly compensating those who have already paid tax on purely phantom income.
Victor Drummond ©
Post Scrip:- The form T1212 did not become available until the year 2001 but for sake of illustrating the catch 22 a deferment created it is shown in this hypothetical instance as happening in 1995. That date for deferment beginning may also be valid if the taxpayer had defaulted on payment of taxable benefit taxes from or before that date.
Also the deferred amount of tax:- $168,162.35 is only the tip of the iceberg.
As of July 30th 2002 the P&L Account would be:-
Credits:- Income from ESPP shares sold to date = $54,150.00
Debits:- Capital Gains Taxes paid = $14,947.60
Debits:- Taxable Benefits Taxes,(Total) = $267,361.85 (of which $168,162.35 deferred)
Defecit = 54,150 - (14,947.60 + 267,361.85) = $228,159.45
The total taxes levied are 5.2 times the actual real income realized. Is that rational?
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