APPEALS TO REASON

APPEALS TO REASON – Part 2
A series of letters and E-mail messages from Canadian victims
of taxes on phantom income to Canadian Government Authorities, at all levels,
appealing for fair treatment and the, often idiotic, replies they received.

Read: Appeals To Reason Part – 1 preamble for more background information.
By Victor Drummond ©
April 2009


In 2005 while I was assisting a family member update his income tax return, for the year 2000, I was astonished to discover he had been levied income tax well in excess of his gross annual salary.

The T4 issued by his employer stated the “earned” income for the year 2000 was several times greater than the approximately $120,000 annual salary he actually earned that year.

I also knew this was money that he had never received as his home was mortgaged to the hilt and he had borrowed a substantial amount of money from the family which had not yet been repaid.

Not only had he not received the so-called income but most of the equities, (shares in his employer corporation), that these outrageous taxes are based upon were still in his stock market broker account.

So I asked him: how was this horrendous tax levy generated?

He explained that while he was still an employee of the JDSU corporation he was offered the opportunity to participate in the corporation’s “Employee Share Purchase Plans” (ESPP’s) which gave him the privilege of buying corporate stock at a 15% discount from a, calculated, current Fair Market Value (FMV).

The ESPP and Employee Share Option (ESO) plans operated in the following way. When the corporation announced a plan start date participating employees could apply to purchase corporate shares, up to a fixed upper limit such as 5000 shares, at the FMV discounted price. The date the employee’s purchase order became effective was called the date of “vesting”.

Shares vested could be paid for in several ways: such as payroll deduction, all cash if the buyer had that kind of cash on hand, or by borrowing the cash from a lender.

Many participating employees borrowed money to buy their maximum allotment of shares, at each opportunity because the corporation’s shares had an almost unbroken series of price increases over the previous fifteen years.

Furthermore share splits of two new shares for one old share and even one split of three new for one old had been taking place periodically. The new shares quickly reached, and often exceeding, the pre-split share price.

In other words a dollar invested in ESPP shares today soon doubled to become two dollars and doubled again to become four dollars and tripled to become twelve dollars etc.

As of January 2000 there was no reason to suspect this hi-tech boom would not keep on going into the foreseeable future. It looked as though holders of shares in corporations such as JDSU and Nortel Networks would continue to receive outstanding real, and/or paper, profits from their share holdings indefinitely.

My family member had opted for the borrow and buy option to build up his holdings in JDSU shares and at one time, had he cashed in his equities, at their peak trading value, he would have been a real millionaire instead of being taxed into financial devastation.

Hindsight however is 20/20 and few, if any, participating employees actually cashed in their stock holdings at anything like the peak of the hi-tech boom or at a profit of any kind.

Even when the hi-tech stock market began to turn down, in mid July of the year 2000, few people, market advisors included, suggested it might become a complete crash in hi-tech stock values and holders of these equities should quickly take their profit and run.

Actually a rush to sell high volumes of Hi-tech corporation shares as of July 1, 2000 when the hi-tech market peaked would only have accelerated the market crash and few sellers would actually be able to walk away with real gains.

OK, I said, what happened in your case? Your ESPP shares are mostly still in your broker account so how could you be levied taxes on them?

He replied, do a search of the Canadian Government publications dealing with “Taxable Benefits” and you will discover that shares acquired via an ESPP and/or an ESO plan that shows a paper FMV, as of their date of “exercise” greater than their ACB then the paper value difference is reported as real “Earned Income” and a taxable benefit regardless of whether or not the shares have been sold or produced a real gain of any kind.

Fine if the ESPP/ESO equities are a “taxable benefit” from your employer and added to your “earned income” at the time you received them then by the same logic they are an employer’s penalty on your “Earned Income” when you actually suffer a loss when you sell them.

He answered, you might think so but that is not the way the taxable benefit law operates. Even though you are levied income tax on the calculated FMV paper profit of those shares if you later sell them, below the level you have been taxed for, they are no longer classified as a “taxable benefit”. The government then changes their classification to a “Capital equity” and any real loss you suffer is classed as a capital loss and is not allowed to offset any of the theoretical, unrealized gain, you paid taxes on when they were classed as a taxable benefit.

Capital losses are only allowed to be applied to offset capital gains he said in conclusion

When it finally sank in that he was telling me like it really is I asked: “What kind of Machiavellian logic is that?” “By what magic does an inanimate object be one thing one moment and something else a moment later?”

“If it is capital equity when you sell it then it was capital equity when you bought it.” “Period, full stop.”

“It is nothing short of legal extortion for the government to rule any unrealized gain is real and taxable while a real, loss produced by the very same object, is not applicable to offset the imaginary gain.”

I had a difficult time believing the government of Canada would deliberately cheat taxpayers on such a lame excuse. So I ask him: Are there any other of your former co-workers at JDSU who have been taxed on fictitious “earned income” like yours? Money that was neither “earned”, nor, “income” of any kind.

His answer again surprised me. He said “yes there are quite a few of my co-workers who have been taxed this way.”

So I asked for some names: as I wanted to find out just how widespread this outrageous money grab had been applied.

The first former co-worker’s name I received was that of a young married woman who I will call Mabel D. Lamb. (Not her real name).

I contacted Mabel via e-mail and asked her about her situation relative to being taxed on money she never received.

A short while later Mabel’s husband, who I have renamed Arthur, sent me a copy of correspondence that had taken place between Mabel and various Canadian government authorities.

Following is the gist of the e-mail Arthur sent: (Names have been changed and dates omitted to protect the writers ID)

Appeal document No 1 in my files:-
===============================================

Ottawa November xx 2006

Hi Vic,
I am Arthur, Mabel’s husband. Ssorry for the delay on replying to you but I wanted to refresh my memory of what had happened, this is something I am not very proud of.

Mabel bought shares under the Employee Stock Purchase Plan (ESPP) and when her shares were delivered (exercised) I advised to just keep them until old age as I am not a very greedy individual... ...well the CRA did not consider this as a share purchase.

As a purchase it would have been considered an investment and as such tax would had been calculated on a difference between the initial cost and the final sale value. Taxes would have been calculated and levied after the sale had been completed.

For Canada Revenue Agency (CRA) this was a taxable employee benefit so tax was due on the difference between the actual cost and what Mabel might have received if the shares purchased had been sold on the date of delivery (exercise date) in the stock market.

Her offer to donate the shares to the government of Canada was not accepted, her appeal was unsuccessful, her objection was unsuccessful. Finally under duress and after being threatened to have our house (which is in both our names) seized and liquidated we got a bank loan and paid the taxes with interest.

We wrote to the Prime Minister, the Minister of Finance and the Minister of Natural Revenue to no avail, all responded that the CRA had followed the Income Tax Act.

Anything you can do to help would be appreciated.

I shall send you related correspondence by separate email

Arthur Lamb
==============================================

Arthur was as good as his word and I received copies of some messages exchanged between Mabel and various Canadian Government authorities.

To read these messages watch for the next issue of the series: “APPEALS TO REASON” - Part 3.

It should be clear to everyone who has read APPEALS TO REASON Parts 1, and 2, that the Canadian Government treatment of shares acquired via ESPP/ESO programs was not made clear to:

(1) Employees who were eligible to participate in these plans, and

(2) Corporate payroll employees who were administering these plans and advising participating employee’s and

(3) Possibly even the Revenue Canada Income Tax Counselors who gave advice to taxpayers.

Read APPEALS TO REASON -- Part 3 to see how confused Arthur was after asking the advice of a Revenue Canada Tax Counselor regarding Mabel’s final ESPP transactions in the year 2000.

This is only the beginning of a series of eye opening events revealing the failure, of Canada’s elected representatives to Canada’s House of Commons, to actually represent and protect the best interests of all Canadians especially the best interests of their constituents.


Victor Drummond ©