Flaherty’s two faced tax treatment of phantom stock option gains

Like Roger Martin, Dean of the Rotman School of Management, I am not a big fan of employee stock options. Furthermore there is no justification whatsoever for taxing employee stock options at HALF the rate of income from employment, which is how employee stock option gains are taxed.

That practice should be abolished.

One of the side benefits of doing so would be to avoid the situation where taxpayers are faced with huge tax bills for options that were, “in the money” at one point, only to be “out of the money” at tax time and a huge tax bill is owing to the government on this “phantom” income. With the major market meltdown of late, this has become a huge problem for many. See May 26th CBC article entitled: "Thousands of Canadians taxed on 'phantom income' Employees who lost on stock options face bankruptcy over huge tax bills."

Meanwhile what is Flaherty’s hot air balloon response to these people’s enormous tax dilemma that is causing some people to sell their homes to settle their tax bills in phantom income:

"The tax laws apply to all of us equally," Flaherty said. "There are some remedies that are available through hardship cases, but the reality is that those stock option situations are not uncommon and apply to a large number of Canadians. So, I can't and I won't hold out any hope of any tax exemptions in respect to that."

Unfortunately, this is NOT THE APPROACH that Flaherty took to this same issue on behalf of 35 constituents in the riding of his fellow Cabinet Minister, Gary Lunn, back in December 2007 and who had worked for JDS Uniphase and were faced with the same phantom income dilemma. EXCEPT HOWEVER, the laws DID NOT “apply to all of us equally”, because in that instance these select taxpayers got a special tax concession deal from Flaherty, which I decried at the time, by arguing that the rules should be changed for all, and not just a few, as was done by Flaherty for 35 constituents of Gary Lunn’s riding. You will remember Gary Lunn, as he was the one who fired Linda Keen, Head of the Nuclear Safety Commission.....for doing her job properly and protecting Canadians from the potential nuclear fallout at Chalk River.

Here was that exercise in hypocritical bespoke tax carve outs by the two-faced incompetent Flaherty in December 2007:


Tories forgive huge JDS tax bills
The Harper government has forgiven the tax bills of several dozen of the former JDS Uniphase employees who made and lost millions on paper, in a special deal that could open the door for other taxpayers to demand the same treatment.

By The Ottawa Citizen
December 7, 2007


The Harper government has forgiven the tax bills of several dozen of the former JDS Uniphase employees who made and lost millions on paper, in a special deal that could open the door for other taxpayers to demand the same treatment.

The decision, which was recently published as a "remission order" in the Canada Gazette, was approved by cabinet despite objections from officials at Finance and Canada Revenue Agency. Senior bureaucrats warned such a decision was unfair to other taxpayers and set a dangerous precedent for employees of other high-tech companies who watched their fortunes rise and fall during the dot-com boom and subsequent crash.

"It's outrageous, the biggest outrage in tax policy I've seen," said Jamie Golombek, vice-president tax and estate planning at AIM Trimark Investments.

"This is complete favouritism and is purely political. It is outrageous that a specific group of people could lobby and be given private tax relief when there are hundreds of thousands of Canadians in share-purchase or stock-option programs in the same position."

A similar warning came from Canada Revenue Agency commissioner William Baker. In a memo to National Revenue Minister Gordon O'Connor, he warned that waiving taxes in this case was "inconsistent" with the laws and policies applied to all other Canadians. It also flies in the face of the new Taxpayers Bill of Rights.

The Conservatives proclaimed the bill of rights last summer, guaranteeing taxpayers "the right to have the law applied consistently."

The order absolves 35 shareholders of having to pay hundreds of thousands of dollars in taxes and interest. All of them worked for SDL Optics Inc. in British Columbia when it was taken over by JDS Uniphase in 2000 in a $41-billion deal billed as one of the biggest technology mergers in corporate history.

The order has been in the works for months. The tax agency was instructed last December by then-national revenue minister Carol Skelton to prepare the order. That's also when the employees' long-time champion, Natural Resources Minister Gary Lunn, announced the government would forgive all taxes on the windfall gains employees made on their employee stock purchase plan, but never cashed before it plummeted in the high-tech meltdown.

As an MP for Saanich-Gulf Islands, Mr. Lunn took up the cause of these workers, many of whom are in his riding, and derided a policy that "taxed people for money they never saw."

"I'm pleased to finally be able to close this file," Mr. Lunn said. "The government followed through on this for a number of people caught in a very specific situation without remedy."

The remission order will repay taxes wrongly paid and interest for those who paid more in taxes than they earned, he said.

"It took a long time to do it, but I'm glad it's done," he said.

Remission orders are rare and are usually granted to individuals in cases of extreme hardship or a major financial setback that is complicated by extenuating factors. They will also be given if the tax agency made a mistake, gave wrong advice or the tax debt was an unintended consequence of the law. Remissions are a last resort and issued at cabinet's discretion after all other appeals are exhausted.

Some say it is highly unusual for the government to issue a tax remission for a specific group. The government could have amended the Income Tax Act to resolve the whole issue, but officials felt such a change in tax policy couldn't be justified.

The biggest concern is all the other employees in stock-purchase or stock-option plans who are in the same boat. What about all those who mortgaged their homes, took loans, sold assets or ended up declaring bankruptcy to settle their tax debts in similar situations?

"The provision of relief to a few SDL employees would be unfair to the many Canadians who voluntarily complied with the law," Mr. Baker wrote.

"If relief is granted, there will be extreme pressure to extend relief to others beyond SDL and there is a distinct possibility that those to whom relief is not provided would take legal action."

Mr. Golombek argues that if the government considered the law unfair it should change it, not show favouritism. He said the move shakes the foundation of Canada's tax system, which is built on fairness and consistency, and will put pressure on the government to change the policy.

"This is a purely political move that was done by a group of people lobbying in Minister Lunn's territory," he said. "But now that it's done, I think it is irreversible and they will have to do it for everybody or it is unfair to all Canadians."

But Mark Siegel, an Ottawa tax lawyer, disagrees. He argues these employees, who also ended up losing their jobs, faced extenuating circumstances and hardship that made them unique. This was a case of the government deciding these people were "hit so many times" that they deserved some relief.

"I don't think the agency and government has to be concerned that this will open the floodgates because the likelihood of another group hit so badly in the same situation is so low that it won't be a concern."

Few tech companies had the meteoric rise and fall of JDS Uniphase. The one-time Wall Street darling used its soaring stock to go on a buying spree of 11 companies, including SDL. It bought the rival company in an all-stock deal.

For some employees it was like winning the lottery. They were offered a stock purchase employee plan that allowed them to buy the stock, valued at $300 a share, at a deep discount of about $3 a share. And the stock continued to rise.

Under the Income Tax Act, however, employees who buy shares in stock purchase plans or exercise a stock option have to pay tax on the value of the stock when it was acquired -- whether they sold the shares or not.

About 245 of the more than 500 SDL employees bought stock in the purchase plan. Many sold the shares as soon as they received them. They faced big tax bills they paid out of their windfall profits.

Others, however, didn't sell and faced the same huge tax bills. By this time, however, the stock market crash of dot-com companies in 2000-2001 drove down shares and employees faced huge losses and tax obligations they couldn't afford.

The losses they faced were "capital losses" and under Canada's tax rules, investors can only write off such losses against capital gains, not against their salaries or employment income.

The impact was ruinous for some employees. Unsophisticated investors who made $35,000 to $45,000 a year were suddenly saddled with tax bills of $135,000 or more on paper gains they never actually received. Stories abound of those forced to sell or re-mortgage homes and cash in their life savings to pay taxes on money they never saw. On top of that, the plant closed and threw everyone out of work.

That led to the lobbying by former JDS employees, who first approached then-finance minister Paul Martin for help. He suggested a possible change in the act to give tax relief to employees in a situation like those at JDS, but that never materialized.
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