LOST IN...

LOST IN TRANSLATION
A commentary on Canadian Government Laws
that allow the Canada Revenue Agency to Issue
their own IT’s -- Interpretive Documents and
then apply, or ignore, them with impunity.

By Victor Drummond ©
September 2009

A few years back I attended a means and ways conference on making Canada a truly bi-lingual country.

A land where French and English would have equal status.

One of the Anglophones at that conference told a joke to illustrate that some things just do not translate with equal effect.

He told the story about three Englishmen, who were all hard of hearing, and had started an automobile journey together from London to another town called Wembley.

The Story:

"After a hot dusty hour of driving they were approaching an urban area when one of the travellers asked: “Is this Wembley?"
One of his companions replied: “No this is Thursday”. To which the third traveller added: “Yes, me too - let’s stop for a drink.”

Due to the phonetic similarity of the words Wembley, Wednesday, Thirsty and Thursday in the English language the story is funny. The same story translated into another language loses its humorous aspect and might not make any sense what-so-ever.

A person would not expect to encounter difficulty in relating this joke in the English language but supposing the laws of joke telling were written in legalize language with an Interpretation Bulletin, IT-000R0, containing wording such as: “under circumstances where a joke includes calendar references such as the names of months, or groups of months, or the names of days, or groups of days and/or a geographical location such as a village, town or city the person telling the joke may substitute astrological titles that apply to the groups of months, or groups of days and may use longitude and/or latitude values that equate to the geographical location(s).

Furthermore jokes that refer to personal attributes such as racial origin, personal health situations, height or weight, where a description of these characteristics might be considered detrimental to the person(s) described these details are not to be included in the joke.

So now the joke is reduced to: “Three Englishmen were travelling together on a hot dusty day from 51n43 :0w18 to 51n33:0w18.
After a dusty hot hour of driving they were approaching an urban area and one of the travelers asked: "Is this place 51n33:0w18"?

One of his companions replied: “No this the first day in the astrological sign of Virgo.” To which the third traveller replied: “I wish you two would stop talking about sex.”

While the story -- related in conformance with the laws applying to the telling of jokes, using legalize language, in keeping with Interpretation Bulletin IT-000R0 -- may strike some people as hilarious the humorous aspect of the original joke has been totally lost in the legalized language translation.

The point of the foregoing is to illustrate that when a piece of legislation is written in legalize language with numerous optional meanings being left to the whim of the applicable government/judicial agency -- then the original intent and purpose of the legislation may be totally lost and the law enforcement agency left to apply their own Interpretation of the law as they see fit.

This situation allows the enforcement agency to apply whatever definition they want to the original legislation and may issue vague and contradictory Interpretation bulletins in support of their chosen definition(s) – thereby in effect creating a law of their own. A law that may contain features never intended by the authors of the original legislation.

For example a review of the Canada Revenue Agency, (CRA), Interpretation Bulletins will reveal the statement: “Interpretation Bulletins are for guidelines only and do not carry the force of law.” Or words to that effect.

Furthermore although the CRA writes and publishes many of these IT Bulletins they are not bound to observe them.

So when a CRA ruling is applied to a taxpayer and an IT Bulletin is quoted as the legal basis for this ruling the IT Bulletin quoted may be nothing more than a tool used to intimidate the taxpayer into accepting the translation the CRA has chosen to apply in that instance.

A classic example of this phenomenon is the CRA Document T4130(E) Rev. 08 titled “Employers Guide to Taxable Benefits”.

This document is intended to clarify the section of the Canadian Income Tax Act dealing with perks supplied by employers to their employees and when such a perk is taxable and/or subject to Employment Insurance deduction etc.

On page 14 of this document the following guideline appears:

Gifts and awards

A gift or award that you give an employee is a taxable benefit from employment, whether it is cash, near-cash, or non-cash.

A near-cash item is one that can be easily converted to cash such as a gift certificate, gift card, gold nuggets, securities, or stocks.

Cash and near-cash gifts or awards are always a taxable benefit to the employee. Non-cash gifts or non-cash awards, on the other hand, may not be considered a taxable benefit under certain circumstances.

Then on document page No. 23 we find the following guidelines:

Security options

When a corporation agrees to sell or issue its shares to an employee, or when a mutual fund trust grants options to an employee to acquire trust units, the employee may receive a taxable benefit. The taxable benefit is the difference
between the fair market value of the shares or units when the employee acquired them and the amount paid, or to be
paid, for them, including any amount paid for the rights to acquire the shares or units. In addition, a benefit can accrue to the employee if his or her rights under the agreement become vested in another person, or if they transfer or sell the rights.

All that is necessary, according to the above interpretation of the Canadian Income Tax Act, for the CRA to declare that shares an employer agrees to sell or issue to an employee are a taxable benefit is to say that stock (shares) are: a near-cash item.

Declaring stocks (shares) to be a “near-cash” item -- when that item has no guaranteed value, and has no face value, and can only be sold, if and when, there are investors willing to bid something for them, and can not be taken to just any financial organization and exchanged for cash -- is a bit of a stretch of credibility.

When employees were initially enticed into participating in their employer’s shares purchase plans such as ESPP’s and/or ESO’s what were the employee’s told by their employer’s and by the Canadian Government, regarding the intent and purpose of these plans?

According to the CRA Interpretation Bulletin No. IT-113R4 (opening paragraph) here is the Canadian government’s description of these plans:-

Canada Customs and Revenue Agency INTERPRETATION BULLETIN NUMBER: IT-113R4

DATE: August 7, 1996

SUBJECT: INCOME TAX ACT Benefits to Employees - Stock Options

Summary

"This bulletin discusses the rules in the Act relating to the taxation of employment-related stock options (stock options). Stock options, as discussed in this bulletin, refer to certain rights that a corporation may grant to its employees or to the employees of a non-arm's length corporation that allows the employee to acquire shares of either of those corporations.
The rules in the Act relating to stock options are intended to encourage greater employee involvement in the granting corporation and to allow corporations to offer their employees financial incentives in lieu of higher salaries."

Then what did the employer’s tell their employees is the intent of the plans they were offering?

An example of the declared purpose of these plans is well demonstrated in the following excerpt from the JDS Fitel Corporation brochure distributed to their employees in March 1996.

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.

Also the government IT-113R4 plainly states:- The rules in the Act relating to stock options are intended to: "encourage greater employee involvement in the granting corporation and to allow corporations to offer their employees financial incentives in lieu of higher salaries."

Then by what form of translation do shares acquired under these plans become a form of a taxable benefit?

According to the CRA’s own IT-113R4 employees who participated in these plans may have worked harder and took lesser salaries. Plus these shares were not: “Gifts” or “Awards” the employees were obliged to pay for shares they purchased with their own after tax dollars.

There is no justification what-so-ever for the Canadian government to add insult to injury by taxing honest, hard working Canadians on any unrealized potential gain they might have had – but never received -- and then blocking all real losses the taxpayers suffer that were caused by the very same shares which they still hold.

Here is a review of the things “Lost in Translation” when the CRA decided to deem (ASSUME) shares sold, Not Given or Awarded, to their employees, are a taxable benefit at the time of delivery (if trading at a price greater than the Accumulated Cost Base (ACB) of those shares) but a “Capital” equity thereafter.

(1) Every Canadian has lost the RIGHT to equal treatment under the laws of Canada.

(2) Individual victims have lost their savings and/or other personal property sometimes to the point of becoming a hardship case.

(3)Victims who have utilized the Tax Deferral option, of CRA Form T1212, have lost peace of mind and are under constant threat their tax deferral may be terminated under circumstances over which they have no control.

(4) Victims who are living under the terms of a T1212 Tax deferral have lost the right to leave Canada to live in another country until the tax is paid.

(5) Victims who are living with a T1212 tax deferral have lost the right to sell or trade their remaining ESPP/ESO Shares until the tax is paid, or payable.

(6) Many victims have appealed to their elected federal Members in Canada’s Parliament and have mostly been denied representation.

All the above items are lost to Canadian citizens due to the CRA Translation of stocks (shares) being a “near-cash” item and shares acquired by way of an employer’s ESPP/ESO agreement are a stand-alone taxable item immune to any losses those same shares may generate.

And those: “Losses in Translation” are no Joke – or even a joking matter.

Appeals by victims, of this tax fiasco, have been and are still being ignored by Canada’s House of Commons members who have ostensibly been elected to represent the best interest of all Canadians.

If our elected representatives are not up to the job of defending their constituents from bullying and abuse, by our own government, then it is time for the voters to remind those who wish to take their pay and benefits out of our tax dollars – just who they really work for.

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

Victor Drummond ©