IF YOU CAN AFFORD IT...

IF YOU CAN AFFORD IT – IT’S FAIR
A commentary on the logic used by the Canadian Government(s)
to justify taxing honest, hard-working Candains on money that
never existed – “Phantom Income”

by Victor Drummond ©
August 2009

All anyone needs to do to assess the fairness of the Canadian government(s) policy of taxing employees, who purchase shares and/or share options via their employer’s incentive/performance reward plans is to look at the criteria and factors whereby tax relief will be granted.

Any Canadian who feels their tax assessment is incorrect has the first option of submitting a written appeal to their local Chief of Appeals Officer located in one of the 40 Canada Revenue offices across Canada.

The Chief of Appeals Officer may grant a reassessment of the appellants tax levy if there were errors in the made in the original tax return or the taxpayer falls under the “hardship case” classification.

According to a 2008 report by the Auditor General the prospect of an appellant being granted a favourable ruling by a Chief of Appeals Officer depends as much, or more, upon the location where the appeal is submitted as it does upon the merits of the taxpayers case.

If the appellant fails to obtain tax relief by way of the Chief of Appeals Officer the taxpayer may then apply to the Tax Court of Canada. The tax court of Canada does not require an appellant to hire a lawyer to represent them BUT hiring a good tax lawyer greatly improves the chances of the appellant receiving a favourable ruling.

Under normal circumstances the Tax Court of Canada judges look at the facts of the appellants case and rule according to whether, or not, the appellants rights have been violated or any tax laws have been broken. The majority of Tax Court of Canada tax cases are not won by the appellants as the court rules Canada’s tax laws have not been broken even if a few of the taxpayers rights have been denied.

Among the factors the Tax Court of Canada can take into consideration is the financial state of the appellant(s). If the judge hearing the case rules the taxpayer is a financial “hardship case” then the appellant may obtain tax relief on this basis.

If the appellant fails to win a favourable ruling from the Tax Court of Canada judge he, or she, may then apply to have their case heard by the Supreme Court of Canada. Again the appellants chances of obtaining a favourable decision are greatly increased by hiring a top level tax lawyer to present your case.

The Supreme Court Judges may find the legislation, used to apply the appellant’s tax levy, is flawed and strike the law down. Even though the law may violate, or at the very least compromise, the taxpayers “RIGHTS” as provided under the Canadian Charter of Rights and Freedoms, and/or under the upgraded “Taxpayers Bill of Rights” it is most unlikely the Supreme Court judges would strike down the flawed legislation as it has withstood numerous challenges in the past.

In summary then: An honest, hard-working Canadian, who has been levied horrendous taxes on the basis of ESPP/ESO shares that are deemed by the Canada Revenue Agency (CRA) to have been “a taxable benefit” at the time the taxpayer received them but which never produced one cent of tangible income is not likely to obtain fair treatment under Canadian Tax Law and application policy unless the taxpayer is deemed to be a hardship case.

Otherwise if the victim can afford the loss – even if they must deplete their life’s savings -- then the taxes stand as they were originally levied.

If you can afford it – the tax is “fair” according to our elected government. It is a blatant whack at those that can afford it and it only provides fair taxation to those who can make a “hardship case”.

Are you prepared to elect, or re-elect, anyone who wants to preserve this outrageously unfair system of taxation?

Especially when the United States has already deemed taxing phantom income is "unfair" and have corrected their defective tax legislation. Ref. www.reformamt.org

All that is required for Canada's lawmakers to fix this problem is to revise Canada’s Income Tax Act "taxable benefit legislation" to exclude publicly traded shares from the taxable benefit classification and classify them as "Capital" equites no matter how the shares were acquired.

When that is done then, and only then, will the statement made by our Hon. James Flaherty, Minister of Finance, “Canada’s tax system is “Fair” because those who hold their ESPP/ESO shares are treated the same as all other Canadian investors.”, will be even close to being factual.

In the meantime if you want “Fairness” to be restored to those Canadians taxed on pretend “phantom” income then contact your local federal Member of Parliament and demand they take action to correct this outrage -- if they want your vote.

Our past and present representative Members of the House of Commons, with very few exceptions, have taken no action to correct this problem and most have ignored their constituents appeals for fair taxation.

See you at the voting polls of the next Federal Election O’Grady.

Victor Drummond ©

CANADIANS HAVE AN AXE...

CANADIANS HAVE AN AXE TO GRIND
An age old expression that has meaning, today, for all Canadians.

By Victor Drummond ©
August 2009

When European settlers first arrived in North America they found most of the East coast, and as for hundreds of miles to the west, the land was covered by trees.

From this state of affairs the expression, “I have an axe to grind.”, which was originally a literal statement, eventually became synonymous with the meaning “I have an issue to settle.”.

Within a few generations of honest hard-working Canadians the forest gave way to grand cities, paved highways, parklands and farms.

These were the mainstays of Canada’s economic rise to international greatness.

A land of opportunity governed, for the most part, by a democratically elected body of honest, fair-minded, compassionate, and decent people.

Within the past decade, however, a new forest, has taken over in Canada which once more threatens to downgrade the progress Canadians have made over the past 250 years.

This new forest does not consist of living plants, such as the original trees but is nonetheless present and effectively blocking Canadians from realizing their true worth and potential.

The new forest consists of mental images, used to convince people things that are false are actually true and vice-versa. While being deceived people are convinced they are getting the real picture and true facts. They falsely believe they are being kept well informed and are in control.

That is the way most of the German population felt during the 1930’s while Joseph Goebbels and Adolf Hitler were selling them on the story they were a superior race destined to rule the world.

These two spin doctors made their claims of the German Master Race sound authentic. Claims that were even supported by intellectual members of the highly regarded German universities.

Of course everyone wants to believe they are best at something. So the warnings put forward by people of clearer insight – that the German citizens had an axe to grind -- to clear away these false doctrines – went unheeded.

Just imagine the death and devastation that would have been avoided if the German people had recognized the deception and took an axe – figuratively speaking – to clear away the whole master race façade.

Canadian politicians haven’t quite reached that low, in their schemes to deceive Canadians, but they are on track to arrive there -- if Canadian’s do not realize: “We now have an axe to grind.”

No intelligent adult really believes it is fair, reasonable, decent, compassionate, or proper to deprive honest, hard-working citizens of their after tax income and give nothing in return.

The fact is the Canadian Government has been doing exactly that for nearly a decade on the flimsiest of excuses.

Thousands of such victimized Canadians have been decimated financially over most of the past decade while, all but a few, of their |House of Commons representatives, elected to serve the best interests of all Canadians, have remained silent and indifferent to constituents appeals for equal treatment under the law and fair tax treatment.

Is this indifference, to the distress of others, typical of Canadians in general?

My answer to that question is a loud and clear “NO IT IS NOT”. So why is this happening?

The answer lies with the political use of spin doctors, such as Joseph Goebbels, who tell things the way their bosses want the truth to appear. They declare Canadian tax laws are fair and are applied equally. A check of the facts reveals this is not true.

In order to make it appear reasonable to extort money from someone, without giving anything in return, the public must believe the extortion is justified. That those honest, hard-working Canadians, that have been taxed into financial ruin, are the architects of their own misfortune.

So lets begin to expose this elusion by following events when an employee is provided an incentive performance award by their employer, in the form of subsidized company share purchases.

The spin doctors say the Fair Market Value (FMV) of those shares is a taxable benefit to the extent the FMV exceeds the Adjusted Cost Base (ACB). This sounds reasonable, and fair, so far.

Next: no one will object when we say: when an employee, who has been allowed to purchase employer’s shares, at a discount, actually receives those shares then the employee has received (on paper) the benefit of any gain in the FMV of those shares to the extent the current FMV now exceeds the ACB of those shares. Therefore it is fair and proper to demand the employee pay the government income tax on the paper gain the employee might have realized at the time of delivery, i.e. the exercise date. This step also sounds reasonable and fair.

After all hasn’t the employee actually received a benefit equal to this difference?
On paper “YES” but in tangible, taxable, “income” money “NO”.

Until the shares received are actually converted to cash the employee has not received so much as one cent of real income. There is only the potential to acquire real income. But until that actually happens we are dealing with: “phantom” income.

Well after all hasn’t the net worth of the employee gone up in proportion to the added value of the shares they now hold? The answer to this question is “Yes”.

“IF” the employee were to convert their assets into cash at the moment they received their the shares they have gained in FMV. OK so isn’t reasonable then to tax the employee on this net gain?

“YES” “IF” the employee actually converted their shares into a cash profit at the time they actually receive “exercise” their shares purchased. Then it is reasonable and fair to levy a “Capital Gains” tax on that real profit.

“NO” “IF” the employee does not sell or convert their shares to actually realize a gain of any kind. The fact they might have made a gain if the buyer acted at the right time is totally irrelevant.

Our tax spin doctors would have you believe our government is entitled to tax any profit that might have been realized on those shares simply because the buyer of the shares is an employee of the business that issued them.

Where the employee works and what shares they purchased and how he/she acquired those shares is also irrelevant. Shares provided by an employer at a discount, in exchange for outstanding performance and or other factors such as vacation time or pay raises, are neither a gift nor a benefit to the employee.

Among the confusion of terms and definitions, which imply different things when used in connection with ESPP/ESO shares, as compared to the same words used in the world’s stock exchanges is the key word “exercised”

In the general definition the expression “to exercise shares” comes across to the average person as meaning “SOLD”.

When used in connection with shares acquired via an ESPP or ESO plans the term “to exercise shares” does not mean they have been sold -- it only means the shares have been delivered to the buyers account. This may give the buyer a profit potential but nothing more.

There is a huge difference between actual profit and potential profit. But the difference is not made clear by the government tax authorities and this misconception has very likely been deliberately exploited by, government spin doctors to allow the general public to think the employee has a real hands-on gain which the government is entitled to tax. This is a misconception.

The spin doctors encourage this general misconception as it then leads directly into the next misleading interpretation of the situation.

The general public is then encouraged to believe employees, who are allowed to participate in their employers shares incentive and rewards plans, such as the Employee Shares Purchase Plans (ESPP’s) and/or the Employee Share Option (ESO) agreements are all highly paid, senior level executives or highly paid scientific or technical staff. This is definitely not the case.

Furthermore the general public is lead to believe these affluent executive people, who complain about being taxed on phantom income, are unethical individuals who are merely attempting to avoid paying taxes on their ill-gotten gains. Again this is definitely not the average case.

Nothing could be further from the truth. By far the greater majority of those taxed into financial ruin through being taxed on money they never saw, are ordinary clerks, production level employees, who found themselves suddenly caught in a tax trap that no one warned them about and which didn’t become obvious until the trap was sprung.

The tax trap activating mechanism was the sudden, unexpected, crash of the decades long Hi-Tech stock market boom in the year 2000.

Even after the Hi-Tech stocks began to crash in July 2000 market advisors were telling investors to keep buying shares and to hold the shares they had.

So instead of those vilified highly paid tax evaders, the public was warned about, the victims of this fiasco are mostly ordinary production workers, clerks and maintenance people who had to deplete their savings accounts and even sell or remortgage their homes to pay this unfair, unjustified, unreasonable tax with whatever after tax dollars they could scrape together.

When the Conservative government was elected in 2005 the brand new first time Prime Minister the Right Honourable Stephen Harper, with his ideals still intact, acted on the advice of Mr. Gary Lunn CP MP for the riding of Saanich Gulf-Islands, British Columbia to provide the “fair Taxation” promised during the Conservative Party pre-election campaign.

Recognizing the gross unfairness of taxing the SDL Optics Inc./JDS Uniphase former employees on money that never existed, “phantom income” Prime Minister Harper signed a Tax Remission Order (TRO) which cancelled the taxes and related penalties levied the phantom income of 37 victimized Canadians.

He did this in spite of the warnings given by senior bureaucrats in the department of finance that by doing so he was setting a dangerous precedent. What should be dangerous about restoring extorted money to its rightful owners?

It is obvious from the events that then took place the Prime Minister and most of his advisors recognized that taxing honest, hard-working Canadians out of their savings, homes, and possessions was really unjust, and unfair – but the spin doctors won out and the Honourable Jim Flaherty, Canada’s Minister of Finance went back on the bandwagon telling all and sundry that Canada’s tax laws are fair because those that elected to hold on to shares they acquired via an ESO/ESPP plan are treated the same as all other Canadian investors/speculators.

If you believe that statement by Jim Flaherty is true and that those who complain about being taxed into poverty, on phantom income, are unethical fat-cat executives who are only trying to evade paying their taxes – it is no wonder the victims receive no support from their elected representatives in the house of commons and the average Canadian has no compassion for them.

Canada’s spin doctors are doing a great job – but beware – you are being misled.

There is nothing fair or justifiable about taxing Canadians on income that never existed in actual hard cash.

The United States government acknowledged this fact when their Congress passed bills in October 2008 putting an end to taxing Americans on phantom income. Ref: www.reformamt.org

It is time for all Canadian voters to start grinding our axes to clear away the façade of deception that on the front depicts truth, equal treatment, and fairness relating to victims of phantom income taxation while behind the scene is tax induced poverty, anxiety and financial ruin due to unjust and unfair tax treatment. Ref: www.cfet.ca

Our government should extend the token fair treatment, provide the SDL Optics Inc/JDS Uniphase employees via the TRO and provide this fair tax treatment to all Canadians who have been caught in the same tax booby trap.

The only effective way to effectively correct this problem is to follow the U.S. government example and amend Canada’s income tax legislation to reclassify all publicly traded shares as “Capital” investments regardless of the manner in which they are acquired and to fairly compensate Canadians, who have already been victimized by this defective tax policy, from the time of the Hi-Tech market crash beginning in the year 2000 to the present time.

It is time for all Canadians of voting age to select an axe to grind and notify their riding Members of Parliament they will get the chop, figuratively speaking, in the next federal election if they do not take action now to have Canada’s phantom tax policy abolished and those already victimized given fair compensation.

See you at the next federal election voting polls O’Grady.

Victor Drummond ©

IT IS NOT THEIR...

IT IS NOT THEIR FAULT
A commentary on two published articles by American journalists
on responsibility for Government performance that is
unpopular, unfair, unjust, and/or outrageous.

By Victor Drummond ©
August 2009

Although the following excerpts are from articles written by American authors about U.S. government deficiencies and who is to blame for the socially damaging flaws that are on-going in the U.S.A.unfortunately the quotes selected apply equally to Canada’s political system and abuse of Canadian taxpayers.

The first article is by journalist Charley Reese, a journalist for the past 49 years, formely a columnist with the Orlando Sentinel Newspaper.

This article is titled: 545 vs 300,000,000 and the numbers represent 545 Congress and politicians who make government policy as compared to the 300,000,000 U.S. citizens they govern.

In Canada the numbers change to 308 House of Commons law makers plus another 105 Senators. Although members of Canada’s Senate do influence the creation and change to Canadian Laws they can not, as yet, be voted out of office so for purposes of illustration I will use 308 vs 33,000,000 as the Canadian version of the article.

The first relevant quote from Mr. Reese’s article – converted to Canadian format is: “You and I do not write the tax code – our government does.”

Then: “It seems inconceivable to me that a nation of 33,000,000 can not replace 308 people who stand convicted – by present facts – of incompetence and irresponsibility.”

Next: “Do not let these 308 people shift the blame to bureaucrats, whom they hire and whose jobs they can abolish; to lobbyists, whose gifts and advice they can reject; to regulators, to whom they give the power to regulate and from whom they can take this power.

"Above all, do not let them con you into the belief that their exists disembodied mystical forces like “the economy,” “inflation”, or “politics” that prevent them from doing what they take an oath to do.”

“These 308 people, and they alone, are responsible.”

“They, and they alone, have the power.”

“They, and they alone, should be held accountable by the people, who are their
bosses.”

“Provided the voters have the gumption to manage their own employees, We should
vote every one of them out of office and clean up their mess.”

Note:- In Canada there have been a very few Members of Parliament who have supported appeals by honest, hard-working Canadians victimized by Canada’s tax on pretend (phantom) income. When the next federal election is pending I will identify those MP’s who have acted in the best interest of their constituents, and therefore the best interest of all Canadians, and deserve to be re-elected.

================== 30 ==================


The second source document is a speech, made by a black man, Dr. Donald May, speaking from the courthouse steps in the town of Lubbock Texas, U.S.A. on April 15 2009.

The Title of Dr. May’s address is: “This is A time For Courage.”

The first excerpt from his speech that applies equally to Canada is:

“We the People are still in charge, and our government is still our servant and not our master.”

Next: “Our Prime Minister tells (those of us who held ESPP/ESO equities past their exercise date and lost money but were still taxed on the phantom income that never materialized that) we do not deserve to keep the (after tax) money we have earned.”

Then: “Our government will now make more of our decisions for us.”

“Demand that they stop stealing our money…”

“Talk with all of the young people you can find.” “They are our future.”

“Many do not understand what they have and that their future is being destroyed.”

“Our (Prime Minister and Members of our House of Commons) were elected to be Our servants and not our masters.”

============== 30 ==============

Politicians are all cut from the same cloth. They make promises they have no intention of fulfilling and they perform useless actions that have no purpose other than to lull the voters into a false sense of security and confidence.

For example anyone reading the Canadian government document: “Serving Canadians – Canada’s System of Justice” is led to believe Canadians are protected from injustice and financial abuse by our justice system, our “Canadian Charter of Rights and Freedoms”, our updated “Taxpayers Bill of Rights” and the puppet “Taxpayers Ombudsman” whose department is financed out of the Canada Revenue Agency’s budget, and last of all the "integrity" of out elected federal Members of the House of Commons.

These articles of Canadian citizen protection are violated every day by our own government, i.e. when they allow the Canada Revenue Agency (CRA) to demand payment of taxes from some victims of taxes, levied on pretend income, – but not others.

Your so-called right to "presumed innocence" is abrogated every time the CRA levies taxes on pretend income using the unproven assumption the victim knowingly and deliberately decided to play the markets with equities they purchased via an Employee Shares Option (ESO) agreement. Equities that they paid for with their own after tax dollars.

Once victimized then unless you are prepared to buy your way, through the Canadian Court system, no one is going to take any notice of the fact: your “RIGHTS”, as provided in all of the foregoing documents and government agencies, have been violated and you have been unjustly separated from your hard earned income, after tax savings, possibly even your home and other possessions.

BUT DO NOT BLAME OUR GOVERNMENT FOR THIS OUTRAGEOUS SITUATION.

“IT IS NOT THEIR FAULT” – “IT IS MY FAULT AND YOUR FAULT FOR NOT DEMANDING THEY DO THE JOB YOU WE ARE PAYING THEM TO DO.

THEY ARE VOTED INTO OFFICE TO SERVE THE BEST INTERESTS OF ALL CANADIANS.

I have contacted my local Member of Parliament on several occasions – both in person and by e-mail – and made it clear to him -- if he does not commit to correcting Canada’s flawed taxable benefit legislation and fairly compensating those Canadian taxpayers already victimized by it – then he will not get my support – or the support of anyone I can influence – when he runs for office in the next federal election.

And I request every reader do the same.

As both Dr, Donald May and Charles Reese stated in their articles: “Our politicians were elected to be our servants and not our masters.”

To be properly served we need to keep control of our servants – otherwise we become the servants and we are paying our politicians an extravagant salary to be our masters.

See you at the voting polls in the next federal election O’Grady.
(See earlier posting “What O’Grady sez”)

Victor Drummond ©

FAMOUS LAST...

FAMOUS LAST WORDS
A commentary on the token actions by the Conservative Government
to create the impression they are Delivering on their commitment
of Fair Taxation For All Honest, Hard-Working Canadians.
By Victor Drummond ©
August 2009

“LOOK MA – NO HANDS” – Original deceased cyclist spokesperson – unknown.

“IF THEY HAVE NO BREAD – LET THEM EAT CAKE” – Marie Antoinette.

“PROMISE ANYTHING – YOU WONT HAVE TO DELIVER” – General Political Policy

“HONESTY, FAIR PLAY, INTEGRITY – FOR THOSE THAT CAN AFFORD IT”
General Political Practice.

“FAIR TAXATION FOR ALL HONEST HARD-WORKING CANADIANS” Jim Flaherty

“THAT MEANS LOWERING TAXES FOR EVERYBODY – EMPLOYEES… WE'LL GET IT RESOLVED.” -- Stephen Harper

“DEFECTIVE TAXABLE BENEFIT LEGISLATION HAS BEEN CORRECTED IN BOTH CANADA AND THE USA.” -- Still waiting for that announcement.

“UNFAIR AND UNJUST TAX ON PHANTOM INCOME HAS BEEN REVOKED” -- Still waiting for that announcement.

“VICTIMS OF TAXATION ON PHANTOM INCOME TO BE FAIRLY COMPENSATED” -- Still waiting for that announcement.

“AFTER DELIVERING ON FAIR TAX COMMITMENT –ELECTED WITH A MAJORITY” -- Start earning that announcement?

“CANADIAN VOTERS HAVE LAST WORD” – What O’Grady sez. (See prior article)
Get busy and talk to your MP -- then expect this announcement.

=============================================

Canadians of voting age. – You owe it to yourselves, your family, friends and fellow Canadians to stand up for the restoration of everyone’s RIGHT to fair and equalized taxation.

The “LET THEM EAT CAKE” attitude of our federal government(s) that have stood by while Canadians were levied abusive taxes -- on "INCOME" money they never received – is outrageous and should never have been tolerated, by Canadian voters, for one minute.

If you were not aware of this insidious tax trap – and voted for those who should have corrected the problem – then you were duped as well.

Now that you are aware – stand up for yourself and all honest, hard-working Canadians by notifying your Member of Parliament – “Commit to correcting this abuse of my RIGHTS and the RIGHTS of all Canadians – or no vote.”

An easy way to launch an E-mail letter to the Prime Minister – The Right Honourable Stephen Harper and/or several other Ministers with adequate authority to get the wheels in motion – is to click on the following link – and send the prepared message over your E-mail Identity.

http://cfet.ca/EmailMP.html

See you at the voting polls for the next federal election – O’Grady

Victor Drummond ©

A LAW OF DIMINISHING..

A LAW OF DIMINISHING RETURNS
A commentary on how more produces less for
honest, hard-working Canadian Taxpayers.

by Victor Drummond ©
August 2009

As a Canadian Corporate employer when I pay my employees a respectable salary for their time and contribution to the corporations success the better off they should become financially.

When their salary income, for the year, exceeds their income tax exemptions threshold they are levied reasonable taxes on that excessive income and they should have enough discretionary income left to contribute to a retirement fund, a personal savings account, an education fund for their children and buy their own home. That is what every honest, hard working Canadian has a right to expect.

How could it be then that as a compassionate, appreciative employer, the more incentive rewards I provide for my best performing employees the closer they may be to becoming a hardship case or even a poverty case?

Is that situation possible in a so-called decent democracy with a government elected by and for the people? The answer is a resounding “Yes”.

It is not only possible but it is happening right now -- and has been happening for most of the past decade with the full knowledge of our elected government representatives – from the Prime minister all the way down to the Parliamentary back benchers.

Not only are our elected representatives aware of this outrageous tax situation our Honourable James Flaherty, Minister of Finance, declares this tax system is fair and all Canadians who hold their ESO/ESPP incentive rewards, beyond their exercise date, are treated the same as all other Canadian investors.

The fact of the matter being none of the Canadians who hold their ESO/ESPP acquired equities past their date of delivery, “exercise date”, are treated the same as all other Canadian investors.

Judge the validity if his claim of equal and fair tax treatment is even close to factual.

You and I work for the same corporate employer. Our family situations, tax exemption levels and annual salary, total income etc. are identical.

Our employer invites us both to participate in an incentive rewards plan whereby we can purchase shares of our employer corporation at a premium cost and pay for them by way of a salary deduction plan i.e. an Employee Shares Option (ESO) deal.

You like the offer but I hesitate but feel I would like to hold shares in our corporation as they have been increasing in value every year over the past five years.

So you sign on to the ESO offer which will give you the right to buy 10,000 shares of our employer corporation at a strike price equal to today’s share price on the stock market when you ESO agreement matures in 24 months time.

Having a few discretionary dollars in my broker account I buy a conventional leap option that has the same strike price and 24 month life term. You and I pay the same amount for our options.

When our options near their expiry date we are both in a position to make a $250,000 dollar gain so we decide to exercise our rights and take the underlying shares into our account.

At the end of the taxation year we are both holding our 10,000 shares which have crashed in value and are now worth less than we paid for them.

When the tax man comes calling you are being taxed on a mythical $125,000 deemed “employment income” produced by those 10,000 shares at the time of exercise even though you didn’t receive one cent of that so called “taxable benefit”.

By comparison, although I had the exact same potential profit I claim a “Capital Loss” which instead of paying horrendous taxes I may actually get a tax rebate on past and/or future capital gains.

According to the Honourable James Flaherty we are both treated the same by Canada’s tax laws and your financial tax penalty is fair as we are both being treated the same.

It matters not that you have no resources to pay this outrageous tax and may end up losing your home and life’s savings. It is fair don’t you agree?

To put and end to this travesty of justice – contact your federal riding Member of Parlaiment and demand they take action to correct this outrageous tax policy and compensate those who have been victimized by it since the year 2000.

See you at the next federal election voting polls O’Grady.

Victor Drummond ©

TO BE OR NOT TO BE..

TO BE OR NOT TO BE “INCOME”
In what mysterious way does a corporation share change from
a capital investment to a taxable “benefit” income and back again to a Capital Loss?

A commentary on the Canadian government policy of declaring
the same equity to be morphed from not income, to taxable income, to a capital loss.
By Ken Thompson and Ragui Kamel with editing support by K.H. and G.H. CFET Members.
August 2009

Canadian Business Magazine On-Line , current as of August 1 2009, carries an interesting article by journalist Larry MacDonald titled: “Caught in a tax nightmare.” The article with comments may be viewed at:
http://blog.canadianbusiness.com/caught-in-a-tax-nightmare/comment-page-1/#comment-32962

It is a report about a Mr. Roy, (not his real name), a retired manager in the soon to be defunct Nortel, who was a participant in a Nortel’s Employee Shares Option Plan (ESO). When the option agreement he was holding was about to expire he elected to receive the underlying shares. To do so, he used his own after-tax dollars to exercise the options at the strike price of those options

By exercising the options and keeping the shares, Mr. Roy had a deemed paper profit of $250,000 which his employer added to his T4 Income reporting document, as “Earned Income”, in the “Taxable Benefit” category.

Mr. Roy had not sold any shares and had not realized one cent of tangible benefit from the purchase of those shares. Regardless, he was levied taxes on the “Earned Income” at the capital gains inclusion rate for that year.

This action brought Mr. Roy’s total “income tax” to a level exceeding his real, gross salary, for the entire year, by a wide margin. As the ESO transaction had not provided any real hands-on income Mr. Roy applied for a tax deferment per the conditions and restrictions provided by Canada Revenue Agency (CRA) form T1212.

Now that Nortel is disappearing, CRA is deeming Mr. Roy to have disposed of those shares (which are now valueless) and will come calling for the tax on the $250,000 paper profit, a profit Mr. Roy never materially received. To pay this tax, Mr. Roy will have to cash his RRSPs and perhaps sell the family home.

The excuse for taxing Mr. Roy into financial ruin is based on the CRA rationale that Mr. Roy, at the moment of exercising the options under his ESO agreement, had in reality received a taxable benefit equal to the calculated “Fair Market Value” (FMV) of those shares less their “Adjusted Cost Base” (ACB).

Although this rationale may sound plausible in isolation, it is not factually reasonable, consistent or fair minded. It is not in accordance with tax policy applied to all other Canadians who buy, sell, or hold corporation shares acquired apart from an ESO or an Employee Shares Purchase Plan (ESPP).

Using long established Canadian tax policy relating to an ordinary honest, hard-working Canadian who invests, speculates and trades all kinds of shares, shares options and Investment Certificates let us follow a typical equivalent pair of options transaction, executed by Mr. Roy and a fictitious Canadian a Mr. Jones.

Two years back Mr. Roy and Mr. Jones each acquired the ability, via an options contract to purchase 10,000 shares of company X in 24 months time at a fixed shares purchase (strike) price. As option holders they each have the right to acquire the underlying Company X shares at the fixed price before the option contract is about to expire. Or, if there is no profit, in acquiring the stock then they can allow the options to expire.

The only difference between Mr. Roy and Mr. Jones is that Mr. Roy received his contract from his employer via an ESO agreement whereas Mr. Jones, for a modest fee, bought a 24 month leap option from his broker.


Eventually the great day arrives: The shares of Company X are now trading at a level that could give each of them a $250,000 gain. Both men decide to exercise their option agreements … and both men decide to hold onto the shares acquired through that exercise

However, when the time comes to report tax, there is one colossal difference between the two and this is where the unfair tax policy kicks in. Although he has not sold the shares, Mr. Roy is deemed to have made $250,000 profit as employment benefit whereas Mr. Jones, who also has not sold his shares is deemed not to have made any money.

A while later, due to deteriorating market conditions, the stock value of Company X is reduced to half of what it was and both Mr. Roy and Mr. Jones sell.

Mr. Jones transaction is classed as “Capital” trading and he is only levied a tax if he actually took home a real gain. In spite of the $250,000 paper gain he made when he exercised his Company X options, he only ends up paying tax on the real $125,000 he received. Further, that gain is offset by any other capital losses Mr. Jones made that year, conceivably, he could end up paying no tax at all.

Mr. Roy, on the other hand, is taxed on the “employment benefit” of the deemed $250,000 profit he theoretically had at the moment of exercise. Since, unlike Mr. Jones, his benefit is not treated as capital gain, this tax is applied regardless of the fact that, in the end, he only made $125,000 and regardless of whether, overall, Mr. Roy’s bottom line investment transactions produced a loss for the year.

In addition Mr. Roy’s one ESO transaction is isolated, by the CRA tax policy on ESPP and ESO trades, so that it is “employment benefit” and immune from consolidation with any other investment transactions Mr. Roy may have completed during the tax year.

The crux of the difference is that Mr. Roy’s shares are taxed as a “employment benefit” and even if the shares are later sold at a loss, the CRA policy prevents him from applying this “capital loss” on the same equities against the so-called “taxable benefit” he never actually realized.

Although both Mr. Roy and Mr. Jones made a paper gain of $250,000 at option exercise, only Mr. Roy’s is taxed on that paper gain, regardless of his bottom line investment dealings for the year.

Sound Fair and reasonable to you? Is there any justification for classing one of these $250,000 paper gains as “employment income” and not the other?

To be justifiable and fair they should both be treated alike, i.e. as “capital” gains and each taxed only on the bottom line profit, if any, at the end of the trading year.

The Honourable James Flaherty, Canada’s Minister of Finance, has declared, on several occasions, that Canada’s tax laws are “fair” because all investors are treated alike. Not so, Mr. Flaherty and when they are treated alike you will have come much closer fulfilling your commitment to “fair” taxation.

Until Canada’s defective taxable benefit legislation has been corrected, as the U.S. Government has done (Ref: www.reformAMT.org), to put an end to taxing this phantom income, Canadians are not getting the fair and justifiable taxation they were promised and to which they are entitled.

Contact your local federal Member of Parliament and inform them you demand this outrageous tax on phantom income be corrected. Canadians are not second class Americans and are entitled to the same fair treatment regarding the taxing of phantom income.

Ken Thompson and Ragui Kamel (CFET members)