IT IS AN ILL WIND...

IT’S AN ILL WIND
A commentary on the golden opportunity
The Canadian Government now has to
Correct a grave injustice and Right
An outrageous Wrong.

By Victor Drummond ©
February 2009

As the saying goes:- “It is an ill wind that blows no good.”

Yet the economic woes currently besetting the worlds industrialized nations provides the Canadian Government, and those that aspire to become our government, a once in a lifetime opportunity.

Apparently as far back as 1964 Canadian taxpayers were being set up for serious abuse and unjustified taxes when financial gurus began to write thesis on the taxation of employees who became beneficiaries of their employer corporation shares and/or share options.

Fancy statistics, theories, averages, and trends were tossed into the pot and stirred vigorously until a desired rationale for levying taxes on any real, potential, theoretical and/or purely imaginary funds could be classified as some kind of taxable income, or, benefit.

Deliberations were taking place in tax areas of several countries, such as, Great Britain, Australia, the United States and Canada.

A typical reference document is the Fisher Black and Myron Scholes study done in 1973.

In 2001 Daniel Sander compiled his own tax document which included a chapter titled:-
“The Tax Treatment of Stock Options: Generous to a fault.”

So far as I can determine, from perusing this composition, Daniel is saying a government is justified in levying taxes on any potential income, that corporate employees might have realized, from stock shares and/or stock options acquired via Employee Share/Option Purchase Plans, (ESPP/ESO), and it is their own fault if they failed to avail themselves of this possible gain which they could have realized by merely selling their equities at the time of taking delivery, i.e. the exercise date. This argument requires an "ASSUMPTION" the taxpayer had ample opportunity to take advantage of the chance to sell their equities at that time. Not always a valid condition.

He then appears to be saying the Canadian government is generous to a fault by allowing such taxes to be deferred until the time of sale.

Perhaps Daniel was under the impression, at the time of writing,the taxes levied would be corrected to the real gain, or loss, the taxpayer actually realizes at the time of sale. If that were the case I might agree with the title statement. But that is not how the Canadian government operates this unjust, unfair tax system.

The tax levied in Canada remains at the theoretical profit level, the equities had, at the time of delivery. And even when a real loss is inevitable, to the taxpayer, it has no influence on the taxes already imposed, whether deferred or not.

Furthermore avenues of relief to have this outrageous tax revoked are limited to beginning with:- Appeals to Revenue Canada’s Chief of Appeals Officer located at various Tax Returns Offices across Canada.

According to the Auditor Generals Report this process is the equivalent of a crap shoot where a favourable decision may depend more on the location of the appeal than it does on the merits of the victim’s circumstances. This situation merely aggravates the situation and introduces an even greater element of unfairness.

Daniel devoted some 60 pages of closely spaced typing, including 7 pages of notes and references, (214 items), to convince himself, and others, that such a taxation operation is fair and justified.

Around the year 2003 Daniel composed another tax document titled:- “The benchmark Income Tax Treatment of Employee Stock Options: A basis for comparison.”

This time it only took 26 pages of typing to arrive at the closing statements:-

“If the value of the stock option were recognized on the vesting date, this amount, (plus the amount, if any, that the employee paid for the option), would be considered the cost of the option to the employee. Going forward, the option would be treated in the same manner as any other option granted by the corporation for it’s own shares. It is highly unlikely that this benchmark treatment will be adopted in Canada in the foreseeable future. Indeed the recent trend has been to increase the favourable tax treatment of employee stock options by deferring tax until the sale of the underlying shares and by reducing the amount of the benefit subject to tax. In any tax expenditure analysis of employee stock options, this favourable treatment should be evaluated against the proposed benchmark treatment for employee stock options.”

When it takes ten thousand words -- or more, including theories, assumptions, averages, and trends -- to create a tax rationale then the rationale is invalid.

It is akin to a base constructed of playing cards which collapses into useless scrap when exposed to the slightest test.

A claim that any government is entitled to extort real money based upon any purely potential amount of money, (phantom money), is a concept that has no validity this side of Hades. No matter how many words and/or arguments written to the contrary.

The ESPP/ESO tax policy may have operated, more or less, satisfactorily during the post WWII economic growth period but when the Hi-tech stock market crash arrived in the year 2001 the flaw in Canada’s ESPP/ESO tax legislation, and the way it was applied, became painfully evident.

Until the world economy decline became a full blown depression Canada’s government, and federal political party leaders may have felt they had good reason to ignore the financial ruin, loss of income and broken homes due to the unfair, unjust and unreasonable taxes levied, and/or held in abeyance, on phantom income.

But now with the massive loss of jobs and financial distress imposed on Canadians by the current depression they find their moral conscience and begin to make noises declaring how appalled they all are about this unbearable distress being felt by many Canadians.

The situation has only changed in magnitude.

Exactly the same distressful conditions were imposed on those honest hard working Canadians who were taxed out of their life’s savings, out of their homes, out of their children’s education funds, etc from the year 2001 to the present time.

Now is the time for the Canadian political leaders to correct – so far as possible – the grave injustice they have stood by and allowed to operate for nearly a decade.

While throwing money in all directions, in an attempt to stabilize and restore Canada’s economy, begin by following the United States government's lead in correcting our defective taxable benefit legislation. Ref:- http://www.fair-iso.org/ http://www.reformAMT.org

Revoke all related taxes, and penalties and compensate those who have already paid the price of this disastrous tax policy.

This action would restore some credibility to the crocodile tears now being shed on behalf of Canadians currently in financial distress and do more to restore Canada’s reputation and economy than twice the number of dollars thrown in any other direction.

There will never be a better time to right this obnoxious wrong. Or a better time to justify asking for victims votes in the next federal elction.

Victor Drummond ©