WHY SOME HEALTHY CANADIANS...

WHY SOME HEALTHY CANADIANS HOPE TO DIE
A commentary on the impact of Canada’s defective Income Tax Act relating to taxing of phantom income with tax deferral as an alternative to instant bankruptcy.

By Victor Drummond ©
December 2009

Within the few hundred honest, hard-working Canadians, who have contacted the group: “Canadians for Fair and Equitable Taxation” (CFET) I can name two that have crashed and burned financially because of the Canadian government’s unfair and unjust taxable benefit legislation.

They both had a well paying job during the Hi-Tech boom years, they bought their own homes, they saved money in RRSP’s and in personal savings accounts looking forward to the day they could retire and begin to enjoy the benefits of having worked steadily for 40, or more, years and raising a family.

Victim number (1) actually got to retire in the conventional way, with a retirement party, a parting gift or two and a decent golden handshake separation benefit. He also received his last allotment of Employee Shares Options (ESO) with a notice informing him that he could: (a) take the value of the underlying corporate shares in cash or (b) take the shares into his personal account for later disposition.

Before announcing his decision, on these equities, he asked a corporate ESO Plan Administrator to advise him on the tax implications of both choices.

He was advised, in writing, that the first ESO Plan administrator had consulted with a second of the corporate plan administrators and they both agreed the tax implications would be as follows: If he accepted the cash value now offered by the employer then the value of the payout would be treated as a “Capital Trade” and he would only be taxed on the actual profit (if any) at the capital gain’s inclusion rate for that year.

If, however, he elected to take the ESO option underlying shares and hold them in his personal account there would be no immediate tax implication. Taxes would only be applied if he realized a profit at the time he sold those shares and the taxes would be at the Capital Gains inclusion rate applicable in the year of sale.

Taking into consideration that at the time of retirement he had his normal 12 month salary, plus his separation benefit and to add another significant amount to his current gross income -- by accepting cash for his ESO shares -- would generate a huge one-time income tax levy. To avoid this happening he elected to take the underlying shares, into his personal account, and hold then for at least the next year.

Imagine his shock when in the following year his T4 arrived reporting his “Earned Income” the previous year was over $1,000,000.00 and his income tax levy was in the $250,000.00 range. This tax levy alone was over 300% of his gross earned income for the entire year.

Naturally he appealed to The Revenue Canada Agency (CRA) for a revised assessment that would base his income tax levy on his actual taxable income. His appeal was denied and the CRA politely explained his taxes were based on his deemed gain on the ESO shares he had received from his employer and was still holding.

The CRA also informed him he could defer the taxes levied on the ESO shares he had acquire that cost $100,000 or less in any specific year.

Even this tax deferment recourse was not fully explained, or perhaps misunderstood, because his initial perception of this option being that he would not be taxed until he sold the shares and then only if he realized a profit on those shares at the time of sale.

He made further inquiries and discovered the deferred tax would stand -- as initially levied – and become payable if he disposed of his shares, or moved out of Canada, or his employer went out of business.

Not long afterward his employer reported financial distress and filed for bankruptcy protection.

Now our honest, hard-working Canadian citizen began to have anxiety attacks and sleepless nights with the prospect of having his deferred taxes on phantom income come due and payable which would: (1) wipe out his RRSP and personal retirement savings, and (2) Force him to remortgage or sell his house and leave he and his wife to live on welfare for the rest of their retirement years if his pension, which was also now in jeopardy was lost.

After further research our victimized taxpayer discovered that should he pass away – due to natural causes -- while his tax deferment was still in effect then his estate would not be required to pay the deferred outstanding taxes on money he never saw.

His wife could then remain in their family home and receive the benefit of the RRSP and retirement savings they had planned to share before this outrageous unfair, unjustified tax was levied on their phantom income.

Although I do not have similar details of victim No (2) the fact that he also stated he hoped to die -- while his tax deferment was still in effect -- is a fairly good indication he is under the same duress as victim no (1).

Finding two Canadian taxpayers in this situation in the few dozen victims that have come to the notice of the CFET group is an indication there are likely a few hundred similar victims spread across Canada.

There is absolutely no excuse for even one, honest, hard-working, Canadian taxpayer to be abused in this manner.

Especially after the U.S.A. government has amended their Income Tax legislation (October 2009) to revoke taxes and related penalties levied on the phantom income of U.S. taxpayers.

Every true Canadian citizen should be outraged at this insidious tax trap which our high level bureaucrats insist is fair. They wouldn’t think so if they were the victim of their own tax policy.

Help bring relief to all Canadians caught in this tax trap by contacting all Members of Canada’s 40th Parliament and informing them you demand the following action:

(1) Canada’s defective taxable benefit legislation be corrected to put a stop to taxing phantom income – as the U.S. government has done.

(2) All Canadians who have outstanding deferred taxes levied on phantom income have to have these taxes revoked as was done for 37 victims per the Gary Lunn Tax Remission Order.

(3) All Canadians who have paid taxes on phantom income in the years 2000 to 2009 have their tax money refunded with interest at the income tax overpayment rate.


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

Victor Drummond ©