Tories forgive huge JDS tax bills

[myata]

From today's Ottawa Citizen (Story):

Quotes: "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".

Similar warning was voiced by CRA commissioner.

Again, more questions than answers: if there's a general issue with the tax law, why it's not being updated? Should anyone find themselves in the same situation, should they rely on law, or benevolence of their Tory MP?

Or maybe, the general idea is, that it's the government, not the law, that decides what is fair for any particular individual and what not.

Edited December 7, 2007 by myata

[guyser]

Linky no worky

[Riverwind]

Again, more questions than answers: if there's a general issue with the tax law, why it's not being updated? Should anyone find themselves in the same situation, should they rely on law, or benevolence of their Tory MP?

There are 1000s of former employees of tech companies in the same position. Many have huge debts, some have declared bankruptcy and lost everything. The law should be changed but if it is going to be changed then everyone who was hurt by the rediculous provision in the tax act.

[Topaz]

Linky no worky

Try this...www. bourque.org scroll down to Ottawa Citizen and its the 3rd story listed.

[Wilber]

There are 1000s of former employees of tech companies in the same position. Many have huge debts, some have declared bankruptcy and lost everything. The law should be changed but if it is going to be changed then everyone who was hurt by the rediculous provision in the tax act.

Yup, it's a bad law.

[August1991]

There are 1000s of former employees of tech companies in the same position. Many have huge debts, some have declared bankruptcy and lost everything. The law should be changed but if it is going to be changed then everyone who was hurt by the rediculous provision in the tax act.

Exactly.

I find it hard to believe that the Cabinet approved this. Many other people find themselves in similar positions and have to declare bankruptcy.

From link above:

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.

Unsophisticated investors? They had access to tax advice when they chose to hold on to these shares. They took a risk in the hope of a large gain. If they had made money, would they have volunteered to share a larger portion with the rest of us? So why should we forgive them now?

[White Doors]

Would be easy to fix. The tax on the purchase price could be deferred until the sale, not at the point of purchase. That is the tax liability could be valuized at the time of the purchase, but not redeemable until the sale.

[Riverwind]

Would be easy to fix. The tax on the purchase price could be deferred until the sale, not at the point of purchase. That is the tax liability could be valued at the time of the purchase, but not redeemable until the sale.

They already allow people to defer the tax. The trouble is some stocks like Nortel and JDS will never recover and there are many people sitting with 10s of thousands of deferred tax debt that will eventually come due.

Unsophisticated investors? They had access to tax advice when they chose to hold on to these shares. They took a risk in the hope of a large gain.

Not that simple. Employers handed options like candy out to people who had never dealt with anything more complicated than a T4 before. They did this with without giving them any advice or warning about the tax consequences. In some cases, the employers told people that they only had to pay tax on the difference between the exercise price and the sale price.

I agree with your argument when it comes to C suite executives. But it is completely unreasonable when applied to a secretary with a couple thousand options.

Edited December 7, 2007 by Riverwind

[Wilber]

Unsophisticated investors? They had access to tax advice when they chose to hold on to these shares. They took a risk in the hope of a large gain. If they had made money, would they have volunteered to share a larger portion with the rest of us? So why should we forgive them now?

Unfortunately it turns out that the real risk was with tax law, not the market. If they had made money when they sold the stock they would have been taxed on it. Under this law the government wants to tax their loss as well. The tax department will keep them so far in hock that they will never have the money to invest in order to have an opportunity to realize a capital gain that will allow them to write that loss off. They were losing twice. One on the worthless stock that they took in lieu of salary and again to a government who insisted in taxing them on money they never received.

When it comes to shares or options given to employees as part of their compensation, it should probably be treated as straight income and taxed accordingly at the time the shares are cashed in. The rate would be higher but at least there would be no surprises.

[White Doors]

Thanks Riverwind.

When it comes to shares or options given to employees as part of their compensation, it should probably be treated as straight income and taxed accordingly at the time the shares are cashed in. The rate would be higher but at least there would be no surprises.

Agreed 100% Wilber

[Riverwind]

When it comes to shares or options given to employees as part of their compensation, it should probably be treated as straight income and taxed accordingly at the time the shares are cashed in. The rate would be higher but at least there would be no surprises.

The devil is in the details. If you get options it takes time to exercise them. It can take up to two weeks to get them into your brokerage account so you can sell them. In the meantime the stock could have gone south. The income tax should be calculated based on the money you get selling the stock. The value of the stock at the time you exercise your options should be irrelevant.

[myata]

Well - not to diminish the plight these people found themselves in, the way I understand it from my limited experience, the proceeds are taxed at the time options are exercised. And they can be exercised in a number of ways, which I never completely understood, but the main ones are, for cash, or for the shares. If options are exercised for cash, the tax is charged for the same tax year. If they are exercised for shares, the tax is deferred till shares are sold.

At the time of exercise, the owner who decided to hold options in shares becomes like any other investor who invested in these shares (except they've gotten them for a special price). I see no reason why these people should be given preferential treatment to others, who invested their own money and could have lost it due to fluctuations of the market. There wouldn't be anything fair about it. They'd get all the benefits of upmarket without any risk of its fluctuation. That's just sounds too good to be true for everybody.

Should better education have been done at the time the options were distributed, most certainly. Should everybody who's made poor investment decision, be let off the tax hook? I'm less certain about that. Should some special group of people get preferential tax treatment because of their proximity to certain MP? Definitely not!

[Wilber]

The devil is in the details. If you get options it takes time to exercise them. It can take up to two weeks to get them into your brokerage account so you can sell them. In the meantime the stock could have gone south. The income tax should be calculated based on the money you get selling the stock. The value of the stock at the time you exercise your options should be irrelevant.

If it was taxed as income instead of a capital gain or loss, that is what should happen.

[Riverwind]

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Edited December 8, 2007 by Riverwind

[Argus]

Exactly.

I find it hard to believe that the Cabinet approved this. Many other people find themselves in similar positions and have to declare bankruptcy.

From link above:

Unsophisticated investors? They had access to tax advice when they chose to hold on to these shares.

I'm not sure this story is entirely accurate. I seem to recall that many had never bought the shares at all. They never owned shares. They had been given options to buy which they had not exercised. Nevertheless, the options were considered part of their compensation, and they were taxed on the value. In any event, it was hugely unfair and good on the government for forgiving them.

Edited December 7, 2007 by Argus

[Riverwind]

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Edited December 8, 2007 by Riverwind

[myata]

Nevertheless, the options were considered part of their compensation, and they were taxed on the value. In any event, it was hugely unfair and good on the government for forgiving them.

This little I know. If options aren't exercised withing certain period, they'll simply expire and no income will be accounted or tax charged.

Quite likely, individuals in this case have exercised options for shares. The income was calculated as their gain on purchise (ie. share price at the time of exercise less cost of option). With shares at the high, income could have been significant. They probably counted on their shares going even higher up into infinity. Otherwise they would have taken cash and only paid tax on the gain. They risked; they lost; why should they get special treatment? Should government come to resque all risk takers who lost fortunes on the market? Even more importantly, should those with better access to the government have a better chance of getting a special treatment? I agree with the article - this is no less than a scandal. Once again, with this government, the law is playning second hand to somebody's private opionion.

[Riverwind]

They risked; they lost; why should they get special treatment?

They were given shares as part of their compensation - not options. They did not know that they should have dumped the shares as soon as they were given to them. They had no idea that they were betting on the market because their employer did not inform them of the tax consequences. The situation that these people were in was quite different from the situation of the majority of people who exercised options and then choose not to sell them. Edited December 8, 2007 by Riverwind

[August1991]

I agree with your argument when it comes to C suite executives. But it is completely unreasonable when applied to a secretary with a couple thousand options.

Uh, are you suggesting that we should have two tax systems with different rules? One rate for smart people and another rate for stupid people?

I'm sorry, a dollar is a dollar is a dollar. I notice that not all employees took advantage of this stock plan and of those who did, many sold the shares immediately to pay their tax liability. Thos who held on to the shares clearly were aware of other possibilities. I suspect that they held on to the shares because they wanted to make more money.

I'm not sure this story is entirely accurate. I seem to recall that many had never bought the shares at all. They never owned shares. They had been given options to buy which they had not exercised. Nevertheless, the options were considered part of their compensation, and they were taxed on the value. In any event, it was hugely unfair and good on the government for forgiving them.

Argus, if you look at the cite above, it refers to people receiving shares but frankly, if they received options it amounts to the same thing.

They received a financial asset with a market value. It should be treated as income and they should pay tax on it.

-----

I'll admit to ignorance of the tax details in this case. But it seems to me that if my employer gives me a new house as payment for my services, I think that I should declare the market value of the house on the day I receive it. Now, if the house falls in value, should I have the right to then use this lower value to assess the tax? Should I only pay the tax when I sell the house? If so, it would be tantamount to deferring a tax. It would be no different in saying that I won't pay tax on any of my savings in my bank account until I withdraw the money.

[Riverwind]

Uh, are you suggesting that we should have two tax systems with different rules? One rate for smart people and another rate for stupid people?

I am suggesting you direct your moral umbrage at the people who can reasonably be expected to know the subtle details of complex compensation mechanisms. I would also suggest that companies be required to disclose the the tax implications to employees as part of an employment contract. i.e. the document that promises employees X amount of shares should also clearly indicate the tax implications.

I'll admit to ignorance of the tax details in this case. But it seems to me that if my employer gives me a new house as payment for my services, I think that I should declare the market value of the house on the day I receive it. Now, if the house falls in value, should I have the right to then use this lower value to assess the tax?

Actually the problem is with the way revenue canada insists you report the income. For example, these people would not have a problem if this income was reported as capital gains because they could offset the tax with the capital loss. Unfortunately, revenue canada forces you report as income which cannot be offset with a capital loss - a capital loss that the average person will never be able to use because any savings they have is likely in an RRSP. Edited December 8, 2007 by Riverwind

[myata]

It takes a lot of credibility to presume that people don't understand that shares = money. Sell shares, get money. Keep shares, they can go up. Or down. Especially given that those people were in the high tech sector. I would be really concerned for the safety of our high tech infrastructure if it were built by people who couldn't put two and two together.

I don't think capital gain is at issue here either. Capital gains / losses are to ofset one's own risk of investment. These people were paid, in kind. They could have sold shares. They kept them, maybe in the hope to make even more. Imagine this: I got paid a million. I want to make it two. I invest it in some high tech shares. Shares go down. I don't want to pay tax on my million. I call my Tory MP (or PM?).

Is the role of the "nanny state", in the Harper Conservatives view, now changed to tend to miscalculated middle class investors? If so, did they forget (again) to let everybody know about it?

P.S. The story does not say that explicitly, but the only case where I would be sympathetic to this case, is if the shares could not be sold at the time when tax was calculated. That would be a real problem, but I'm quite sure it could have been handled via normal "fairness" channel.

Edited December 8, 2007 by myata

[msj]

Well, I agree with myata and August1991.

But I'm a tax accountant so naturally I would agree with those who appear to know more about how options really work.

We must distinguish between the taxable benefit (which is taxed like employment income) and the capital gain/loss. There is a real benefit given to people when their employer allows them to buy shares that are worth $300 for a cost of only $3 (or so the story states).

Why would I, an outsider, have to earn, say, $425 of gross income, in order to pay $125 worth of tax to have that $300 to buy a share when these insiders get to buy them for $3?

Of course that is a benefit and of course there should be a taxable benefit component to it (although the question of timing of the benefit is a fair issue as well as other various tax matters regarding deductibility of capital losses etc).

I admit to having no sympathy for these people.

Why? Because back in the hey day of the tech bonanza a guy came in and asked for an opinion of how his options worked (he did not work for JDS or Nortel or any affiliated companies). We gave it to him and he paid his bill nicely and took the appropriate action necessary to protect himself from market risk and to put enough money away to pay the tax liability that would be due.

In the case of these former JDS employees we have people who claim ignorance and claim the company didn't inform them.

Nonsense - if they did not understand options then they should either not have involved themselves in them or they should have sought out an opinion from an expert.

There are people out there who are in similar situations but are not in this JDS group. One guy was interviewed in a Victoria newspaper a number of months ago and he was bitter over this.

Even though he is likely in exactly the same situation he does not get the same treatment.

Hell, if the government insists on doing up this special deal then at the very least they should open it up to all who have similar situations and apply the policy on a case by case admissions basis.

Instead, we have a government that is essentially buying 34 votes from people who rely on their ignorance of the market and the law to get out of a jam.

I mean, really, how can anyone be so ignorant as to not realize they are taking market risk when they exercise options that provide them with shares? Just how stupid are we supposed to believe these people are?

[Riverwind]

I mean, really, how can anyone be so ignorant as to not realize they are taking market risk when they exercise options that provide them with shares? Just how stupid are we supposed to believe these people are?

If you open up an account with a broker, the broker is obligated by law to find out what your risk tolerance is and to make sure that you don't accidentally make investments that go against your risk tolerance profile. These laws exist because the government recognizes that investing in stocks is complicated business and that it is not reasonable to expect everyone to understand it. Companies that issue stock to employees should be under the same legal obligation as brokers. i.e. they should be required to inform employees of the risks inherent in the compensation package. If someone has been informed and chooses to ignore the advice then I agree that they should face the consequences.

[msj]

If you open up an account with a broker, the broker is obligated by law to find out what your risk tolerance is and to make sure that you don't accidentally make investments that go against your risk tolerance profile. These laws exist because the government recognizes that investing in stocks is complicated business and that it is not reasonable to expect everyone to understand it. Companies that issue stock to employees should be under the same legal obligation as brokers. i.e. they should be required to inform employees of the risks inherent in the compensation package. If someone has been informed and chooses to ignore the advice then I agree that they should face the consequences.

Fine, then these people should seek remedy from JDS rather than us taxpayers.

Why does the state always have to bail out people when the private sector fails?