Former employees of JDS Uniphase got a special Christmas present when MP Gary
Lunn, Minister of Natural Resources, revealed his government would forgive all
taxes and interest for a group of workers who were forced to pay taxes on
stock-options gains -- profits they never actually realized.
"It took a change in government to get someone to listen, but the Prime
Minister has come through and delivered tax relief on this issue," says Mr.
Lunn, who is the MP for Saanich-Gulf Islands in B.C., where the now defunct JDS
plant was located.
The issue, which affects many employees who exercise stock options only to
see the price of the shares plummet afterward, can best be illustrated with an
Let's say Jay, an employee of Hi Tech Inc., was given the option to purchase
1,000 shares of Hi Tech at $2 per share through the company's stock option plan.
Two years later, Jay exercises his options with the share price at $402.
Under Canadian tax law, Jay has received an employment benefit equal to the
difference between what he paid and what the stock was worth, or $400,000.
After the tech crash, the shares of Hi Tech drop back down to $2, and Jay
sells his shares, realizing a capital loss of $400,000 ($2,000 minus $402,000).
The tax problem stems from the fact that this loss is considered to be a capital
loss and as such, can only be offset against other capital gains, not against
the employment benefit of $400,000 reported on his T4 slip.
It is this mismatch of employment income with a capital loss that has created
a harsh economic reality for employees, such as those at the Saanich JDS plant,
who face massive tax bills on money they never received.
The former JDS employees' pleas for tax relief fell on deaf ears and some of
the affected employees were forced to take out second mortgages and lines of
credit to be able to meet the demands of the Canada Revenue Agency's collections
From a policy perspective, the CRA has traditionally been unsympathetic,
arguing that the tax system was fair and "reflects the result that, at the point
of acquisition, those employees who hold their shares have chosen to accept a
market risk as an investor in the expectation of a return on that investment,
including the future appreciation in the value of those shares."
Thus, they are subject to the same general income tax rules respecting
capital gains and losses on the underlying shares as other investors, the CRA
It took political action to make a difference in the JDS case, but what about
other affected employees in similar situations? Will the CRA be granting tax
relief to all?
"It's only for those specific employees" says Colette Gentes-Hawn, a
spokeswoman for Canada Revenue Agency.
This is clearly unfair and the government should amend the Income Tax Act to
grant relief to all affected taxpayers.
- Jamie Golombek, CA, CPA, CFP, CLU, TEP is the vice-president, taxation and
estate planning, at AIM Trimark Investments in Toronto.