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 ©