APPEALS TO REASON..

APPEALS TO REASON – Part 3
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) & Part - 2 for more background information.
By Victor Drummond ©
April 2009
Synopsis of the events to the present

In November 2006 I discovered a member of my family had been levied horrendous taxes on money he never received, e.g. phantom income.

When asking did he know of any other people that had been taxed on money they hadn’t received he told me yes, quite a few. So I obtained the name of a co-worker, Mabel D. Lamb who had fallen victim of Canada’s insidious taxable benefit legislation. (Not the victims real name)

After contacting Mabel, via e-mail, I received an e-mail reply from Mabel’s husband, Arthur, who gave me the beginning of the events leading up to Mabel’s phantom tax and promised to send me copies of some of the correspondence that had taken place between Mabel and members of Canada’s federal government.

(Read Part-2 of this “APPEALS TO REASON” series for previous details of this tax fiasco.)

Arthur was as good as his word.

A copy of the following correspondence arrived a short time later.

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Ottawa xx April 2001

To: Canada Revenue Agency, Tax Appeals Officer
From: Mabel D. Lamb
SIN: ### ### ###

Subject: My year 2000 Tax Return

Dear Appeals Officer:
As an hourly rated employee of the JDSU Corporation in Ottawa my pay level started out at $12.00 plus per hour.
About mid 2000 I received a pay raise to $14.00 plus per hour. At this hourly rate I would have to work at least 40 hrs per week for the entire 52 weeks to receive as much as $28,000 in a full year.

I have completed my tax return in a way that makes sense although it doesn’t fully meet the terms of the Income Tax Return form.

After working diligently for my employer, for a decade, I thought the opportunity to participate in my employer’s Employee Shares Purchase Plans was a well deserved reward for my faithful service.

So on two occasions I received shares allotments, under an ESPP, and took possession of those shares on the date of “exercise”. This seemed at the time an excellent way to build up my retirement fund to help support myself and husband in our retirement years.

Now it appears if I follow the terms of the Income Tax Return form I will be obliged to pay Income Tax on money I never received and I do not have the financial resources to pay.

My year 2000 ESPP transactions have been as follows:

Jan xx 2000 I took delivery (exercised) and sold 148 shares of ESPP stock for which I had an Adjusted Cost Base (ACB) of $10.90 per share. I sold the shares for $300.20 each for a profit of (300.20 – 10.90) = $289.30 per share. The sale netted me a total gain of (289.30 x 148) = $42,816.55

As the Capital Gains inclusion rate for the year 2000 was 75% I reported a Capital Gains tax of (42,816.55 x 0.75) = $32,112.41 on my Tax Return.

On the same date that I exercised the above ESPP shares I exercised another 456 ESPP shares that I had vested at an ACB of $1.888 per share for a total cost of
(1.888 x 456) = $860.75

Hoping to avoid future problems, in reporting ESPP transactions, my husband consulted a tax specialist in your Canada Revenue Agency office at 333 Laurier Avenue, here in Ottawa, regarding the selling of my additional 456 ESPP shares.

My husband was told (that) if I sold these shares, at a profit, before the end of the year that I could report the gain as a “Capital Gain” on my year 2000 tax return.

I sold the 456 shares before the end of December 2000 at a price of $74.60 per share. My actual gain on this transaction was ((456 x 74.6) – 860.75) = $33,156.85

As the Capital Gains inclusion rate had been reduced to 50% I reported another $16,578.43 Capital Gains Tax in my Tax Return.

Jan xx + 4, 2000 I exercised 64 ESPP shares at an average ACB of $33.09 for a total cost of $2,117.54

If I sold those same 64 shares today the proceeds would not likely even cover the amount I paid for them.

On my year 2000 T4 slip my employer reported ESPP taxable benefits of $8,337.78 which was included in box 14, “earned” income.

(Note:- A CRA reply to this letter came back in Sep, 2003 indicating Mabel’s employer had reported a taxable income of more than $181,000 on her year 2000 T4.
This dollar amount appears in the next APPEALS TO REASON _ Part 4.

That would explain the statement in Arthurs’s letter, (APPEALS TO REASON – Part 2) regarding the CRA threat to seize and sell their home to collect the unpaid tax. It would also explain Mabel’s comment above where she states “we do not have the resources to pay.”)

I have already submitted the “Capital Gains” tax on those ESPP share transactions. This amounts to double taxation if I have to pay tax again on the ESPP taxable benefit reported by my employer.

I requested permission to use Form T1212 to defer payment of some of the taxes levied on my ESPP shares transactions. My request was essentially denied when my employer informed me I am not eligible to use this tax deferment option.

It might be to my advantage to donate the shares I have left to the government of Canada.

Please advise as to the action I should take. It is my belief the government of Canada is not intentionally taxing citizens unfairly. There is no better time to exercise good judgment than right now.

A copy of this letter has been sent to:- The Hon Paul Martin, Minister of Finance, and to my Member of Parliament, and to Canada’s Minister of National Revenue.

Your attention to this matter would be greatly appreciated.

signed

Mabel D. Lamb
(with street address)
(with Postal Code)
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Note:- Some of the currency values in the original letter were given in U.S. dollars.
The U.S. dollar values have all been converted to Canadian currency at the year 2000 average conversion rate of 1.452

Also some alternative, but equivalent, wording has been used to make it more difficult for anyone to identify the original writers: who wish to remain anonymous for the present.

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The above letter should make it clear, to the reader, that this taxpayer had no idea of the way the government taxable benefit legislation actually operated.

Also judging by the advice she received from her employer’s ESPP administration personnel and the advice her husband received from the Canada Revenue Agency tax counselor, right there in Ottawa, it looks as though neither the plan administrator nor the CRA Tax counselor had a clear understanding of the taxable benefit legislation and application policy.

It is very obvious (that) in the year 2000 confusion reigned supreme in the area of taxing ESPP/ESO transactions and the advice provided by the CGA tax counselor was either totally wrong or at least not made clear to this taxpayer’s husband.

Many other taxpayers’ levied taxes on money they never received were just as surprised and just as shocked as Mabel Lamb, and for the same reason.

Background information provided in APPEALS TO REASON – Part 4 would help everyone to understand how this might come about.

The JDSU Corporation was the end result of mergers and takeovers beginning with the founding of the JDS Optics Company in 1981 by, former Bell-Northern Research Ltd and Northern Telecom, scientists Jozef Straus, Philip Garel-Jones, Gary Duck, and Bill Sinclair.

Almost from day-one there were inside contracts and agreements made to generate Company operating funds and establish profit sharing arrangements.

Initially JDS Optics’ was a Canadian-Controlled Private Corporation (CCPC) with specific tax legislation pertaining to CCPC organizations relative to internal profit sharing and shares profit and loss transactions none of which were classified as a “Taxable Benefit”.

Following a series of company take-over’s and mergers JDS Optics arranged an Initial Public Offering (IPO) and changed the organization name from JDS Optics to JDS Fitel, in June 1990.

JDS Fitel, having experienced a strong period of growth was looking for a strategic partner through which they could expand their access to fiberoptic markets technologies and applications.

In 1990 the Furukawa Electric Company of Tokyo Japan was one of Japan’s largest producers of fiberoptic cable and installation equipment. Also in 1990 Furukawa acquired a 50% equity position in JDS Fitel which they soon increased to over 75% resulting in JDS Fitel losing its CCPC classification.

Now, as a Corporation with majority foreign ownership, the Canadian income tax rules relating to employer to employee shares and shares-option purchase plans changed.

Then JDS Fitel employees who acquired shares via an ESPP/ESO plan were going to be taxed according to Canadian taxable benefits legislation which few people knew about and/or recognized the insidious aspects of this defective bit of legislation.

Later in 1999 JDS Fitel completed an Initial Public Offering (IPO) and then merged with the Uniphase Corporation of San Jose, California to form the JDS Uniphase (JDSU) Corporation.

Although profit sharing incentive plans had been coming and going, all the while the JDS Optics Inc. company was evolving to become the JDSU Corporation, few people in the organization(s) had a clue as to the how the ESPP/ESO tax rules were changed or recognized the tax booby-trap that was then coming into play.

To make this ridiculous situation clear, to all readers, a sample of the early ESPP documents and information supplied to participating employees will be presented in the Part 4 of this: “APPEALS TO REASON” series.

Victor Drummond ©