JUST WHAT WOULD YOU DO...

JUST WHAT WOULD YOU EXPECT
When you find yourself facing an income tax levy
that is 200% larger than your gross income that year:
(1) what would you do? And (2) what would you expect?

A commentary by Victor Drummond ©
December 2009

Gainfully employed Canadians soon become familiar with the Income Tax System used in this country. The process is simple. As the deadline to pay your income tax approaches your employer provides you with a statement of your previous year’s gross income – on a T4 slip – which also contains a list of payroll deductions and your net income for the year.

Employees who receive taxable gifts or awards from their employer will find their T4 slip also contains dollar values, in additional panels, which the employee is instructed to report on specified lines of their T1 General Tax Return. Depending upon the nature of the taxable benefit the employee receives -- the tax levied and deductions applied will vary.

For example the use of company car for both business and personal use will generate a taxable benefit that is based on the percent split of personal versus business of the total distance travelled during the year. The operating and maintenance cost would be split along the same percentage.

Regardless -- of the personal percent use of the car -- the tax generated would never equal or exceed the employees real earned income.

The first time your income tax levy exceeds your gross income you might think there has been an error made somewhere so you visit your nearest Canada Revenue Agency (CRA) tax office to speak with an appeals officer.

After checking your employment records the appeals officer explains your reported “earned” income for the previous year includes a “DEEMED” taxable benefit derived when the shares you received from your employer -- per an Employee Shares Purchase Plan (ESPP) -- were delivered to you.

“What about those shares you ask?” I signed up to purchase 2000 shares a year ago at an employee cost of $2.50 per share.” “I paid for those shares, in cash, out of my savings account.” “In July last year my employer notified me that my shares had been delivered and would be held in my employee account until I decided what to do with them.” “So what’s the problem?”

The appeals officer explains that on the day your shares were transferred to your account they were trading at $250.00 per share which gave you a DEEMED gain of: ((250x2000) – (2.50x2000)) = (500,000 – 5,000) = $450,000.00

This $450,000 gain is “DEEMED”, by the CRA, to be a “taxable benefit” and is added to your “earned” income at the “Capital Gains” inclusion rate of 50% for last year. i.e. $225,000.00 plus your normal $40,500.00 annual salary.

This brought your gross earned income for the year to $265,500 which after the usual exemptions and deductions left you a taxable income of $238,200.00 Your bottom line tax rate, provincial and federal works out to 36% which produced a tax of $85,752.00

You are shocked. You say to the appeals officer: “I never received one red cent – so far – from those shares – they are still sitting in the account with my employer.” “And for your information I would be lucky to be able to sell them today for the money I paid for them.”

The appeals officer informs you of the good news: “As you paid less than a total of $100,000 for your ESPP shares you don’t have to pay the tax immediately.” “You may apply for a tax deferment now, and every year, until you sell your shares, or you move out of Canada, or your employer corporation goes out of business.”

That is good news you say! “So I won’t pay tax on the deemed gain of $450,000 I will only pay tax on the money I receive when I sell my shares.” “That’s fair enough.”

The tax appeals officer replies: “That is not quite the way it works – You pay tax on the deemed gain as of the date of exercise regardless of whether or not you lose or gain at the time of sale.”

You think this over for a moment then say: “What’s good about that arrangement?” “As long as I have that tax hanging over my head I won’t have a worry free moment.”

“So what happens if I sell my shares now for the $5,000.00 I paid for them and declare a zero taxable benefit?”

Again the appeals officer informs you: “that is not the way it works.” “The taxable benefit legislation “ASSUMES” you have received a taxable benefit at the moment you take possession of equities acquired via an ESPP or ESO. If you sell your ESPP shares now it will generate an immediate payment demand of the taxes levied even though you have actually have a zero gain situation.

“That is outrageous”, you reply, “How can anyone in their right mind expect people to pay “income tax” on money that never existed?” “I’m going straight to my Member of Parliament about this ridiculous tax and we will see about this tax on zero income.”

So you make an appointment to meet with your MP and when you arrive you are treated with courtesy and made welcome. After explaining your phantom income tax situation and your discussion with the CRA Tax Appeals Officer you MP appears shocked.

Your MP assures you he will send a letter immediately to the Hon Minister of Finance (MOF) informing him of this ridiculous tax situation and he also assures you the Minister of Finance will take prompt action to address the problem.

Now that is the kind of representation you have a right to expect from your MP.

A few months pass by and you begin to receive notice letters from the CRA reminding you your tax return has not been received and that penalties are pending if you do not submit your tax return promptly.

Confident your MP will take care of this problem you wait to hear that your tax assessment has been amended at the request of the MOF.

A month or so later you receive the following reply directly from the office of the MOF.

It reads as follows:- “Thank you for bringing your tax concerns to my attention.” “Your income tax assessment for the year 2001 has been carefully reviewed and found to be in full compliance with the terms of Canada’s income tax legislation.” “Therefore you are advised to submit taxes levied in accordance with your present tax assessment to avoid incurring additional penalty.”
“You may apply for deferment of taxes levied on the taxable benefit portion of your tax assessment by completing form T1212 and submitting the form with your tax return.”

“Should you have other concerns in this regard I would welcome your further communication.”

Sincerely

(signed) John Bull, No. 1 Executive Assistant to the Minister of Finance.

So you bite the bullet, clean out your savings account and pay the taxes demanded.

A few years later you begin to see pre-election brochures and TV ads proclaiming: “STAND UP FOR CANADA” and that if elected the federal Conservative Party will introduce legislation to provide “Fair Taxation for All Canadians.”

So you “STAND UP FOR CANADA” and vote for the Conservative party in the 2006 federal election.

True to their pre-election promise the Conservatives delivered “Fair” taxation for 37 Canadians victimized by taxes -- levied on phantom income -- just the way you were.

Furthermore when asked by a journalist from the Victoria Times Colonist Newspaper if this “fair tax” action would be extended to other victimized taxpayers the Right Honourable Stephen Harper is quoted as saying: “We’ll get it resolved – it will take a change of code.”

When nothing happened by the year 2008 you decide to take your appeal -- for the promised “fair taxation” and justice -- to the “Tax Court of Canada” (TCC). And -- as advised in the TCC client information pages –- you hire a tax lawyer to present your appeal to the court.

In due course your case comes up and your lawyer does an outstanding job of describing the details of your past efforts to obtain fair taxation and he highlights the case of the 37 similar victims who had their taxes on phantom income, penalties and all cancelled by way of a Tax Remission Order (TRO).

The TCC justice hearing your appeal defers issuing his ruling for a few weeks and sets a future date at which time he will render his decision.

You have every right to expect your taxes levied on phantom income will also be cancelled and your money refunded in view of the fact the Conservative party has made a promise of “Fair” taxation for All Canadians and has set a precedent by already delivering on this promise to 37 victimized, honest, hard-working Canadains.

Finally the day of decision arrives. Accompanied by your lawyer you return to the Tax Court of Canada to receive the courts decision. You have already purchased a bottle of vintage Champaign to celebrate the end of your tax nightmare. Your lawyer assures you a favourable decision is almost a guaranteed certainty. The bottle of champagne may be all you have left to show for your efforts, after paying your legal fees, but you feel it is worth it to finally obtain justice and fair treatment.

The court justice begins handing down his decision with the words: “After careful review of the details of your appeal and consultation of similar rulings in similar cases I find that the Canada Revenue Agency has acted in full conformance of the law and therefore your appeal is denied.” “Case Closed.”

You and your lawyer stare in disbelief. How can you lose this appeal in view of the promises made by your elected government and the tax relief they have already delivered to other similar victims?

The answer is provided in the following report by Taxation Law@Gowlings, which can be viewed at:

http://www.gowlings.com/resources/enewsletters/taxationlaw/Htmfiles/V1N97_20070208.en.html

The following statements were made by TCC Chief Justice The Hon. Donald Bowman.

"In the wake of political pressure, the CRA has apparently relented from its initial refusal to grant relief to the affected JDS workers, and agreed to refund all taxes and interest paid. The natural reaction to this is, of course, "what about the rest of us?". A spokesperson for CRA has indicated that the CRA will not be granting such relief to other taxpayers who may find themselves in similar circumstances.
Most taxpayers would consider the CRA's stance on this issue to be patently unfair. However, absent further political pressure, or legislative amendment, taxpayers would probably be surprised to learn that Canadian courts have generally refused to recognize a duty of consistency on the part of the CRA in the course of administering and enforcing the Income Tax Act, and have expressly held that the CRA has no positive legal obligation to treat similarly situated taxpayers consistently.1 As stated by now Chief Justice Bowman of the Tax Court in Harvey v. The Queen:
The Minister's obligation is to assess in accordance with the law. It would throw the administration of taxation in this country into chaos if the Minister were bound by every private deal he made, whether in accordance with the law or not.2

Is immunity to the laws of Canada and freedom from personal attribute such as Honesty, Decency, Fairness, Integrity, Compassion, Dependability etc what you expect from your government?

If you are not happy to be lied to, deceived, and/or exposed to legalized extortion then you must take action.

Contact every Member of Parliament in your riding, including opposition MP’s and notify them in definite terms: “Commit to correcting Canada’s defective taxable benefit legislation to put an end to taxing honest, hard-working Canadians on money that never existed.” “And include provision to fairly compensate Canadians who have already been victimized in this way.” “The U.S.A. government has already corrected their defective “Alternative Minimum Tax (AMT) legislation and included provision to treat those victimized fairly.” Ref: www.reformamt.org

If the U.S.A. can take corrective “phantom income tax” action at this time – when their economy is much worse than Canada’s -- then what excuse does Canada have to perpetuate this unfair, unjust, outrageous tax policy?

Who needs a government staffed by elected individuals who have no sense of responsibility to their constituents and who blindly follow party policy that grossly abuses those who elected them?

I do not – and neither do you.

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

Victor Drummond ©