Taxpayer rights don't apply equally

National Post


In Toronto's historic Dominion Public Building on a bright Monday morning in
late May, Minister of National Revenue Carol Skelton, flanked by Minister of
Finance Jim Flaherty, took the stage at a press conference to proclaim Canada's
new Taxpayer Bill of Rights.

In the two weeks since the announcement, the new bill containing 15 taxpayer
rights has been dismissed by various columnists (including Jon Chevreau and
Arthur Drache of this paper) as nothing more than a huge public relations
exercise by the Canada Revenue Agency.

But if you're one of the thousands of Canadians who face a looming tax bill
on paper profits that subsequently vanished, the new Bill of Rights and, in
particular, Right No. 8 -- "the right to have the law applied consistently" --
smacks of doublespeak considering the preferential tax treatment given only to a
small group of former JDS Uniphase employees.

It's been nearly six months since these Saanich, B.C., employees cut an
exclusive deal with their local MP, Gary Lunn, Minister of Natural Resources. In
December, 2006, Mr. Lunn revealed that his government would be forgiving all
amounts owing for a group of workers who were forced to pay taxes on their
employee stock purchase plan (ESPP) gains.

As Mr. Lunn, who is the MP for Saanich-Gulf Islands, where the now-defunct
JDS plant was located, stated at the time, "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."

The same issue affects many employees across Canada who participated in stock
purchase plans or exercised employee stock options, only to find the price of
the shares plummet.

Under Canadian tax law, if you purchase shares through either a stock
purchase plan or by exercising an employee stock option, your taxable employment
benefit (and thus, your tax liability) is based on the difference between the
price you paid for the shares and the fair market value of shares on the date
you receive them.

While the value of the taxable benefit is fixed when the shares are acquired,
the benefit can generally be deferred until the year you sell the shares.

Therein lies the problem. Suppose the shares decline in value between the
date you received them and when you ultimately sell them. The resulting loss is
considered to be a "capital loss," which can only be used to offset capital
gains and cannot be deducted against the taxable employment benefit that arose
upon acquiring the shares. This mismatch of capital loss against employment
income creates 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 JDS employees paid about $3 for their stock, which was valued at more
than $300 when issued.

The price of shares plunged with the technology meltdown of 2000, leaving
workers who did not sell their shares upon receipt with a huge tax bill and
nearly worthless stock.

Years of lobbying by former JDS employees to fix this tax problem fell on
deaf ears and some of the affected employees were forced to take out second
mortgages and lines of credit to pay the CRA.

When the government announced its decision to forgive the taxes last
December, along with any interest owing, it was great news for the 60 or so
affected JDS employees. But what about people like Victoria resident Kevin Hawe?
Mr. Hawe joined ACD Systems, a technology start-up, in May, 1999, as
vice-president, sales and marketing. The company went public in 2000, and Mr.
Hawe exercised stock options, paying 25¢ per share when the market value of the
stock was around $12.

When he received his T4 slip in February, 2001, he was shocked to see that he
had crystallized a $1.2-million employment benefit, which would be deferred
until he sold the shares. Meanwhile, the stock had dropped in value to $7.

Mr. Hawe explains, "I didn't want to sell stock -- I just kept drinking the
Kool-Aid." As an insider, he was also subject to severe restrictions on when he
could sell the shares. Besides, selling the stock would have triggered an
immediate tax liability, not something Mr. Hawe wanted.

Earlier this year, he was forced to sell his shares when ACD was taken
private at 57¢ per share.

The CRA has traditionally had little sympathy for employees such as Mr. Hawe,
who don't sell their shares immediately. The agency's thinking is that employees
who hold their shares have chosen to accept a market risk as an investor in the
expectation of future appreciation. Thus, they are subject to the same rules
respecting capital gains and losses as other investors.

Whether or not you agree with this position, it is outrageous that the CRA is
cutting special deals for only limited groups of employees.

When Mr. Hawe first read about the JDS deal in his local paper, he
immediately called Mr. Lunn's office. "It doesn't apply to you," he was told. "I
felt like I'd been kicked in the head," Mr. Hawe said.

In January, I asked Ms. Skelton if the treatment JDS employees received would
be available to the thousands of other Canadians similarly affected. Last month,
I received a two-line e-mail response from Ms. Skelton, stating that the CRA "is
implementing the direction that the Government of Canada has provided, which
specifies that such relief is available only to former employees of SDL Optics
(JDS Uniphase) who participated in the company's stock purchase plan."

At the end of her press conference two weeks ago, I once again asked the
minister how Rule No. 8 of the Taxpayer Bill of Rights -- the right to have the
law applied consistently --jibes with her position on JDS. Ms. Skelton said she
would look into it and then shut down the press conference. We're still waiting.

Jamie Golombek, CA, CPA, CFP, CLU, TEP is vice-president, taxation and
estate planning, at AIM Trimark Investments in Toronto.