APPEALS TO REASON ..

APPEALS TO REASON – Part 4
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) & Parts – 2 & 3 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 victim’s 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.

Mabel’s Letter to the CRA and members of Canada’s Government is presented in Part 3 of the APPEALS TO REASON series.

Part 4 begins with examples of the incorrect, and incomplete information given to ESPP participating employees of the JDS Optics Inc. Company as it evolved to become the JDSU Corporation in 1999.
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For example here is an excerpt from a document issued to employees of the JDS Fitel Corporation in March of the year 1996,

JDS FITEL INC.
STOCK OPTION PLAN

PLAN DESCRIPTION
1. Purpose of the Plan

The purpose of the Stock Option Plan is to develop the interest and incentive of eligible employees and directors of JDS FITEL Inc. and its subsidiaries (the “Company”) in the Company’s growth and development by giving eligible employees and directors an opportunity to purchase common shares on a favourable basis, thereby advancing the interests of the Company, enhancing the value of the Common shares for the benefit of all shareholders and increasing the ability of the Company to attract and retain skilled and motivated individuals in the service of the Company.

(articles 2 through 14 are not listed here as they are not relevant to this report)

15. Administration Of The Plan

The Plan shall be administered by the committee. The Committee shall have the power to interpret and construe the terms and conditions of the Plan and the options. Any determination by the Committee shall be final and conclusive on all persons affected thereby unless otherwise determined by the Board of Directors. The day-to-day administration of the Plan may be delegated to such officers and employees of the Company or any subsidiary of the Company as the Committee shall determine.

(articles 16 through 22 are not listed as they are not relevant to this report.)

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In 1999 the JDS Fitel Corporation completed their Initial Public Offering (IPO) and proceeded to merge with the Uniphase Corporation of San Jose California to form the JDS Uniphase Corporation with stock market ID JDSU.

Upon the merger the administration of JDSU ESPP/ESO plans were transferred from the foregoing internal JDS Fitel Corporation COMMITTEE to an independent U.S. Plan administration company named AST StockPlan, 250 Broadway, 14th Floor, New York, NY, USA (address at that time.)

Also around that time JDSU participating employees were provided the following document:
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An Introduction to AST StockPlan

(Skip to Page 7, What Happens If You Keep Your Shares.)

If you keep your shares, the current federal budget proposed will allow you to defer including the taxable portion of the stock option benefits in your income until you sell the shares.

You may realize a capital gain or loss on a subsequent sale. Generally the cost base for determining any future capital gain or loss will be the fair market value of the shares on the day they were acquired. For sales after February 27 2000, two thirds of any capital gain is generally included in income whereas two thirds of any capital loss is deductable only against taxable capital gains.

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From the foregoing guideline, for ESPP/ESO participating employees, just what would you expect to happen if you held on to your shares after the day they were acquired?

Is there any mention of a difference between the “future capital gain or loss” and the inability to deduct a real future “capital loss” from the tax levied on the FMV capital gain as of the day they were acquired. No.

The term “taxable benefit” is never mentioned so how is a participating employee going to realized they will be taxed on phantom income against which there is no recovery?

To further complicate the situation the following document was also made available to JDSU participating employees:

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QUESTIONS AND ANSWERS ON INCOME TAX CONSEQUENCES

FOR CANADIAN EMPLOYEES

(Skip to Item T4. on Page 2)

T4. How is my Income tax liability determined?
Your income tax liability will be determined based upon the fair market value of the shares at the time purchased and at the time disposed of.

Example 1:

Fair Market
Value of a Share
Start of Purchase Period $10.00
Purchase Date $12.00
Date of Disposition $15.00

You will pay $8.50 ($10.00 x 85%) for each share and will pay tax in the year of purchase on $3.50 which is the difference between the $8.50 paid and the $12.00 fair market value at the time of purchase. When you sell the share you will pay tax in the year of disposition on the difference between the $12.00 fair market value at the time of purchase and the $15.00 fair market value at the time of disposition, usually on a capital gains basis (i.e. ¾ of the amount is included in income). For capital gains purposes, the cost of all shares of the Company you own (whether or not purchased pursuant to the Plan) will be averaged.

Example 2:

Fair Market
Value of a Share
Start of Purchase Period $12.00
Purchase Date $10.00
Date of Disposition $8.00

You will pay $8.50 ($10.00 x 85%) for each share and will pay tax in the year of purchase on $1.50 which is the difference between the $8.50 paid and the $10.00 fair market value at the time of purchase. When you sell the share you will have a loss (usually on a capital loss basis) on the difference between the $10.00 fair market value at the time of purchase and the fair market value at the time of disposition.
A capital loss can be applied against capital gains realized in the year of disposition, carried back against capital gains realized in the previous 3 year or carried forward indefinitely against capital gains realized in a future year.

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From the above examples, and text, what would you expect to happen if you held your ESPP/ESO shares after the date of acquisition? Would you expect to be taxed out of your home and/or life’s savings on money that you never received? Not very likely.

No wonder Mabel D. was confused and misled into believing she should, and could, submit her actual gains and losses per her letter in APPEALS TO REASON Part 3.

The text in example 1 above also states the shares you acquired outside of the Plan would be lumped together with your shares acquired inside the plan and all would be calculated together to determine the tax liability.

That is not true. Shares an employee, or anyone else, acquires through a broker are a capital investment and not a taxable benefit. Therefore when it comes to “capital gains” the tax treatment is entirely different.

It is clear that employees who were enticed into participating in employer’s ESPP/ESO share/option plans back in the year 2000 were not properly informed of the booby-trap set for them and therefore most are innocent victims of an unjust, unfair abusive, financially destructive plan of legalized robbery.

So when Mabel’s Tax Return and letter arrived at the CRA and the office of the Hon Paul Martin, Minister of Finance and the office of Canada’s Minister of National Revenue, when and how, did they respond?

Read APPEALS TO REASON – Part 5 for the answers.

Victor Drummond ©