APPEAL TO REASON..

APPEAL TO REASON – PART 1
Letters and E-Mail messages sent by innocent, hard-working
Canadians that have been legally robbed of property, and money
intended for their children’s education, and/or retirement comfort.

By Victor Drummond © -- April 2009

Preamble

Because several victims, of phantom taxation, have expressed concern that by speaking out against the treatment they have received from the Canadian Government they may find themselves the target of persecution, or at least denial of future government support of the tax relief they have requested and so richly deserve they have asked that I do not provide any information that might identify them.

Whether or not their concerns are justified I have promised to omit all identifying information from their messages and the sparse replies some of them received in return. The lack of the originators identity should in no way diminish the immoral aspect of the government authorities conduct in response.

Messages and replies are in chronological order from earliest to most recent.

The defect in Canada’s taxable benefit legislation was rather obscure while the hi-tech boom was on-going during the years 1980 through 1999 but became painfully apparent when the hi-tech boom went bust in the year 2000.

Canadians employed in the hi-tech communications sector were riding a wave of seemingly endless growth in their industry and could take their pick of the many jobs available and many offered by companies that had engaged head-hunters to entice key people away from their original employer.

To stem the flow of top level scientific personnel from Canadian Corporations to the United States, and to other (off-shore) countries, U.S. and Canadian, hi-tech corporations, with the blessing of the Canadian Government, initiated Employee Share Purchase Plans (ESPP’s) and Employee Share Option (ESO plans.

Employer’s encouraged their key personnel to participate in these plans for two reasons:
(1) to give the employee a sense of ownership and sharing in the corporations success and
(2) to swell the share trading volume on the stock market and thereby make the shares of corporation appear to be in greater demand by investors.

As time went on these plans were often expanded to include every employee of the corporation from the janitors to the CEO. Then many of the people participating in these plans were neither market wise investor/speculators or in a solid financial situation to play the markets.

All the majority of them knew was that their employer wanted them to participate and that the corporate track record implied they would make money by participating.

ESPP and ESO plans usually gave the participating employees an opportunity to acquire their employer corporation shares at a small premium below the average trading price of the shares on the open market.

This premium was usually in the order of a 15% discount from the derived Fair Market Value (FMV) of the shares which was an average value of the shares closing price over a brief period (e.g. 20 trading days) immediately prior to the date of the employee’s ordering of the ESPP/ESO shares.

Depending upon the high and low swings of the corporations shares on the open market the 15% discount may not have been of any advantage to the employee as in many cases the low swing of the shares, in the FMV averaging interval could easily be 15% or more below the average closing price.

Regardless, of that fact, Revenue Canada used the premium discount as a basis for calculating the participating employee’s so-called taxable benefit. Some measure of fairness was applied here as if a tax was levied on the initial purchase discount it was allowed to be included in the adjusted cost base of the shares if further taxes were levied on those same shares later.

What was not taken into account was the trade-off(s) participating employees made which also are a factor in the real cost of those shares to the employee.

Had the employee not participated in the ESPP/ESO plans they could be entitled to more paid vacation credits, and/or increases in basic salary, and/or promotions to higher paid positions.

These are all probable, but intangible, hidden costs to the employee due to participating in their employers ESPP/ESO plans.

ESPP/ESO plans varied in the amount of shares, and the payment plans, and the term between placing an order for their share purchase, (vesting date), and the date the fully paid for shares were scheduled for delivery to the employee’s account, (exercise date).

Plan participants were usually given the option of:-
(1) Selling their ESPP/ESO shares on the date of exercise and were usually guaranteed, by their employer, to receive the FMV, or the closing price of the corporate shares on the open market, whichever was higher, on the date of delivery,
or,
(2) taking delivery of their shares/options and leaving them in their account, with their employer or stock broker, if they had a stock broker account.

The treatment of the ESPP/ESO stock acquisitions, by the Canada Revenue Agency (CRA) was as a being a taxable benefit from the employer to the employees as of the date of exercise regardless of whether or not the employee held or sold their shares/options.

In the years 1980 through 1999, while hi-tech corporations were enjoying a field day of rising share values and shareholders receiving large paper gains due to rising share prices and share splits, and corporate take over’s of one corporation by another, all was well.

During this period employees participating in their employer’s ESPP/ESO plans could meet the taxes levied on the paper gain of their shares/options, as of the date of exercise, by either selling a few of their fast rising stock or by using the shares as collateral to borrow money to pay the tax.

Many honest, hard-working Canadians, not realizing that stock markets have a history of booms going bust, and not anticipating their governments callous attitude towards those who might have made a gain but decided they had a good thing and wanted to keep it, fell into an insidious tax trap.

Practically overnight Canadians who had been millionaires, on paper, became financial paupers and debtors, to their own government for hundreds of thousands of tax dollars they might have actually received but in fact they never actually received.

Although the paper gain that they might have realized, if they had sold their shares on the date of exercise, had vanished like the ghost (phantom) that it actually was, the taxes levied are very real and to many financially devastating.
To many victims of the phantom income tax came as a real shock. Few if any Canadians expected to be taxed on a missed opportunity to receive money which in reality never existed.

Several victims to appeal this tax on phantom income were informed the tax is justified on the basis of the CRA, ASSUMPTION; they made a conscious and deliberate decision to play the markets.

This raises the question: whose stock is it anyway? Did the Canadian government make it illegal for Canadians who paid for their equities, acquired via an ESPP/ESO plan, to play the market with their shares/options? If so when and where was it published?

Or is this a right ASSUMED by the government to punish Canadians who denied the government their pound of flesh by not taking a gain they might have realized IF they had sold their ESPP/ESO equities on the date of exercise?

Furthermore the gain an ESPP/ESO participant MIGHT have realized by selling their equities on the date of exercise can only be determined accurately for those who had a guarantee built into the plan of receiving the higher of the recent average FMV or the closing price of their shares on the date of exercise.

The possible gain of all other participants is dependant upon the market action on the date of exercise and is dependent upon the investors bidding for the volume of shares being offered at the instant of sale and whether or not the sell order was an “at-market” offer. “At Market” sell orders often trade at the low for the day which can be much lower than the mean value, or closing value, of the share trades that day.

Therefore the actual dollar value of the unrealized gain can not be accurately known but that bit of missing data made no difference to the theoretical FMV used to levy the tax.

It follows if taxes are to be levied on income that never actually existed then the unknown real value of the nonexistent transaction doesn’t matter either.

The whole rationale built into the legislation used for taxing corporate shares on anything other than the real selling price less the real adjusted cost base is the equivalent of using any excuse to levy taxes on any missed opportunity to make a gain.

It would be just as fair if the CRA levied taxes on every stock market investor/speculator who could have sold their investment at a profit but failed to do so – because they made a deliberate and conscientious decision to continue to play the market in hope of making an even greater gain.

Those investor/speculators have broken the same unwritten law, or rule, used to levy taxes on ESPP/ESO phantom gains.

This is the end of the “Preamble” to the “Appeal to Reason – Part 1”.

Appeal to Reason – Part 2 will begin a series of Letters of Appeal written by honest, hard-working Canadians, to Revenue Canada, Tax Appeals officer, and to their Members of Parliament, (MP) all the way from the Prime Minister, of the day all the way down to the victims own MP.

When a reply was received, to these letters of appeal, the reply will also be provided but the originator’s ID may be with-held to protect the guilty.

Victor Drummond ©