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Monday, March 14, 2005

I support Joe Wood!

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Let me get the Hat-tips out of the way. Via The Monger I found LetItBleed's post referencing a Macleans article first posted by Babbling Brooks.

It is just plain wrong that Joe Wood and family are going to lose their house due to a tax bill on virtual money. Joe Wood never received the benefits of a paper money gain, why should he be saddled with a real tax bill of over $144,000. The PM promised he would do something about this egregious situation.

Well promise made, promise broken.

It is time to support Joe Wood.

PoliticalStaples

P.S.  Someone who is better with graphics can feel free to make a better button.

Posted by Greg Staples on March 14, 2005 | Permalink

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» Reader Tips from small dead animals
A few reader tips before I head to town. Former CSIS agent is blunt. If you want to stay off Canada's list of terrorist groups, vote Liberal. An article from 1997 to disabuse you of any warm and fuzzy notions... [Read More]

Tracked on 2005-03-14 7:52:21 AM

» I Support Joe Wood from Rantastic
Joe Wood is fighting the government for fair taxation. He was an employee at JDS Uniphase, and bought into the company's stock options. He bought shares valued at over $300 (at the time) for $2 apiece... and the government wants to tax him on that, [Read More]

Tracked on 2005-03-14 11:26:16 AM

» who is Joe Wood? from Dust my Broom
Which one is the real story? This or that? Either or it makes for a wonderful story but I don’t think I’ll be pinning on a button just yet.... [Read More]

Tracked on 2005-03-14 8:32:40 PM

Comments

Forgive my ignorance but how can a gov't tax virtual reality, i.e., something that has not happened? After all, one is not taxed on RRSPs which exist, in their virtuality, until one cashes them in - i.e., changes the virtual to the actual. THEN, you are taxed on that actuality.

But, to my understanding, these shares were never cashed; therefore, they remained virtual. How can they be taxed?

As for our Liberal Party - they do 'what's right' only when it's wrong - ie- favour for their friends.

Send zillions of complaint copies to Martin and Harper.

Posted by: ET | 2005-03-14 7:29:48 AM


Leviathan, Taxes and the Geese


"The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest amount of hissing."

Jean Baptiste Colbert (1619-1683)


Will the Canadian geese hiss, squawk, or peep?

ZZZZZZ.... The Quiet Canadian::::::::::

Posted by: maz2 | 2005-03-14 8:20:05 AM


It's quite simple, ET. When you get paid you owe tax on the current value of what you received.

Suppose I hire you to do $1000 worth of work on my house. I can pay you $1000, or back when Nortel share were $100 I could give you ten shares, or I could give you an option to purchase twenty Nortel shares at $50. As soon as that transaction happens you owe tax on $1000 of income.

It is certainly unfortunate for you if Nortel immediately crashes before you sell the stock, but that's a risk you take on whether you realize it or not. In this case the JDS folks didn't realize the risk they were taking in holding onto stocks and options too long. Certainly a tough lesson, but it's the same law the rest of us live under if we have compensation in stock or options.

Posted by: Kevin Jaeger | 2005-03-14 9:05:08 AM


In reply to Kevin, I see a different scenario.

You set it up where you are, rather than paying me $1,000, you are paying me, let's say $800.00 PLUS 2 shares of Nortel @$100 each.

No. You paid me the full $1,000. Then, I took $200 from my earnings and bought two shares of Nortel at $100 each. That's like buying an RRSP.
I don't pay tax until I cash in the RRSP.

The key difference is whether the employees were paid in 'money' or 'in shares'. I would think that the latter would be illegal for the very reason that the value of those shares would be flexible. Therefore, it has to be that the employee was paid, in full, in cash, and was also told that they could buy Nortel shares via payroll deductions. Exactly like you can buy Canada Bonds via payroll deductions. Or RRSP's.

So- I still cling to my point. I don't see how our gov't can tax virtual reality. It can only tax actual reality.

Posted by: ET | 2005-03-14 9:23:52 AM


ET wrote:

"The key difference is whether the employees were paid in 'money' or 'in shares'. I would think that the latter would be illegal for the very reason that the value of those shares would be flexible."

Sorry, ET, far from being illegal, it happens all the time, except that, legally, the employees are not receiving "shares" per se, just options to acquire shares. These options are considered for tax purposes, not to be "virtual", but to be "fungibles" (i.e. a form of property) in and of themselves on which tax can be levied. Accordingly, receiving an "option" as an employee to acquire something for less than it's worth is treated, for tax purposes, as being the same as actually receiving that something.

The problem derives from tax policy that seeks to minimize those situations where tax might be deferred, i.e. employees aren't taxed on stock options until they exercise them. This is sound tax policy, notwithstanding it leads to inequities such as that being experienced by the likes of Mr. Wood. Accordingly, the focus should not be on the "timing of income inclusion" side, but on the "tax relief if the share value tanks" side. Although there is a mechanism within the tax system to provide limited tax relief to persons in Mr. Wood's situation, it is not a complete measure and will often be of little or no practical assistance.

If it makes anyone feel any better, the people who take the biggest tax hits on stock options are, of course, the Robert Miltons and Bernie Ebbers of the world.

Posted by: firewalls 'r us | 2005-03-14 10:31:34 AM


Before Kevin sounds off about stock option taxation he would do well to contact Joe Wood and others who got caught in this bind. It's easy to think of stock options as part of an executives pay packet but in this case those involved were pretty much productive, hands on working stiffs. Their company SDS fell into the hands of a very peculiar man a Mr. Strauss of JDS(L) and shortly thereafter the company tubed partly as a result of his connections with Nortel!!! Kevin might also like to review the way Revenue Canada dealt with the Royal Trust executives who got stuck in the same sort of bind back about 5 or 6 years ago.

Posted by: David Stern | 2005-03-14 10:32:04 AM


I think the key question is did he have the opportunity to sell his shares at the high price he is being taxed on. If he did then he is to blame if he held onto the shares too long. If the shares could only be sold after the price crashed he shold not be responsible for items he did not control.

Posted by: Mark Fox | 2005-03-14 10:32:43 AM


David - I know nothing about Mr. Wood but I know about and have participated in quite a number of stock and option plans.

It is a very nice perk to be able to buy stock below market price, but it incurs a tax liability. If a company offers you the chance to buy $300 stock at $2 who wouldn't leap at the chance? Everyone involved just needs to be aware that that incurs $298 of taxable income as soon as you do it. So you sell half right away and set it aside for the tax bill.

Normally when anyone is enrolled in these plans the tax implications are made pretty clear. Perhaps JDS didn't do all they should have in that matter, I have no idea. I was just pointing out that these are exactly the same laws that apply to the rest of us.

If anyone really cares about Mr. Wood I think they should start a fund to help him with his tax bill.

Posted by: Kevin Jaeger | 2005-03-14 11:32:25 AM


Maz2, grat quote from Colbert. Will the Canadian geese hiss, squawk or peep? Dunno. But with the country's abusive tax laws there's a good chance many will fly south........even in summer!

Posted by: John Palubiski | 2005-03-14 12:33:35 PM


Kevin said: a lot but nothing convincing.

Mark said: “...I think the key question is did he have the opportunity to sell his shares at the high price he is being taxed on. If he did then he is to blame if he held onto the shares too long. If the shares could only be sold after the price crashed he should not be responsible for items he did not control.”

firewalls said: “tax policy that seeks to minimize those situations where tax might be deferred. This is sound tax policy, notwithstanding it leads to inequities such as that being experienced by the likes of Mr. Wood.”

Balderdash!

Under any other investment scenario if you buy a stock you are taxed on the gain (or loss) ONLY when you sell it. When you COULD HAVE sold it is completely irrelevant (except for kicking yourself for not having sold higher). And "held onto the shares too long"?? Define too long.

As for this being sound tax policy - how so, particularly if it leads to Joe Wood’s situation? And why shouldn’t tax be deferred until the value of the asset is actually realized? Oh, I know, because then “the government” might “lose” money.

Treating stocks and options under corporate compensation schemes any differently than in ordinary investments is ridiculous.

This is loopy (or as John P, says abusive) tax law that needs to be changed now.

Posted by: JR | 2005-03-14 12:48:39 PM


I think it might be useful to go back to Maich's original article in Maclean's for a moment:

"But in lieu of fairness, Ottawa offers equality, and it's a poor substitute. Bad news: government is willing to screw you, and take everything you've worked for, on the basis of a foolish technicality. Good news: at least everyone gets screwed equally. How reassuring."

From a bureaucratic standpoint, the government is undoubtedly in the right ("This is the law, and it's the law for everyone"). There seem to be two questions that arise from this position, though: is the law fair, and should the government make an exception in this one case?

Personally, I don't think the law is a particularly fair one, and I'd like to see it changed. If you buy stock at $5 when its current value is $10 and sell it a year later when its value is $15, the government should tax you on a $10 gain when you sell. But as firewalls says, the gov't resists any attempt to defer taxes, so don't hold your breath.

The second question is trickier, as it involves making an exception to an established rule. Gov'ts tend to get themselves into trouble when they make exceptions like this. But they recently made an exception for someone many would consider a complete villain (Radwanski), and Paul Martin himself promised to make an exception during the summer's political campaign. For me, that seals the deal: you said you would, so now you should.

Posted by: Damian | 2005-03-14 1:16:13 PM


JR wrote:

"Under any other investment scenario if you buy a stock you are taxed on the gain (or loss) ONLY when you sell it."

It's apples and oranges, JR. Joe Wood IS treated the same as other investors once he's exercised his option and purchased the shares - if he sells them for a gain, he pays tax on the capital gain, if he sells them for a loss, he gets a capital loss to offset capital gains.

The contentious issue is the fairness of the tax rules on the employment benefit he received by virtue of being given the option to acquire those shares for less than what they were worth at the time. In my view, those rules are fair and the "hard cases" that result like that of Joe Wood should be addressed by some means other than tossing the rules out.

As to "minimizing deferral" being sound tax policy, rest assured, I am no cheerleader for the Canadian tax system, but I understand that, if you're going to tax people (a debate for another time!), a primary objective is to make the system as fair and equitable as possible. "Deferral" is a substantial tax benefit, ergo, opportunities for taxpayers to defer tax should be (a) few and (b) available to as many taxpayers as possible. Since a deferral of income inclusion on employee stock options would never be available to more than a small percentage of (generally) GTA taxpayers, IMO it shouldn't be one of the few tax deferral opportunities in the system.

Posted by: firewalls 'r us | 2005-03-14 1:31:58 PM


firewalls wrote: “it’s apples and oranges, JR”

It isn’t apples and it isn’t oranges - it’s taxation of a hypothetical ‘benefit’ - a benefit that WOULD HAVE BEEN realized only had the stock been sold on the date of issue.

The Maclean’s article stated:
“Part of the JDS benefits package was an employee stock purchase plan, which let workers buy company shares at a huge discount. As JDS's stock surged in 2000, workers were able to get shares worth more than $300 for roughly $2 apiece through small deductions from their paycheques.”
“...they were taxed on the difference between what they paid and the stock's value on the date it was issued -- $305."

I assume CCRA is treating the hypothetical benefit (the above ‘difference’ of $305) as earned income in the year it was given and any gain above this difference (should it have materialized) as capital gains when the shares are sold.

Well, taxing hypothetical benefits (earned or otherwise) is NUTS!

One way CCRA could have set this up to avoid Joe Wood’s situation:
- tax the realized return from the sale (proceeds - minus $2) in the year the stock is sold.
- tax the realized return UP TO the hypothetical difference ($305 computed on the date of issue) as earned income. E.g. if the stock were sold for $102 then taxes would be owed on $100 (rather than $305). If the stock were sold for less than $2 then a deduction would be allowed.
- tax any returns greater than the hypothetical ‘difference’ as capital gains.
This way there’s no taxation on income not received and the taxman gets only his ‘fair’ share.

Posted by: JR | 2005-03-14 6:45:27 PM


JR wrote:

"It isn’t apples and it isn’t oranges - it’s taxation of a hypothetical ‘benefit’ - a benefit that WOULD HAVE BEEN realized only had the stock been sold on the date of issue."

How does allowing somebody to buy for $2 something that, on the date it's purchased, is worth $305 represent a "hypothetical" benefit? Is the share that the employee, having paid $2, now owns, somehow magically worth less than $305 because he decides to hang onto it and not sell it?

And following through with your logic, what if the share is worth $1,000 the day he sells it - does that mean his taxable benefit from employment, taxed at much higher rates than capital gains, is $998 - betcha the Joe Woods will be thrilled with THAT recommendation, JR.

Perhaps it's easier for you to grasp if you replace "shares" with something that doesn't fluctuate as rapidly in value as equities, like, say, Canada Savings Bonds. Would you seriously be arguing an employee allowed to purchase $305 worth of CSB for $2 had only realized a "hypothetical" benefit until he gets rid of them?

Using your $102 sale price example, the employee would have a capital loss of $203 to offset any capital gains he might have realized or realize in the future. This is the "flawed" tax credit I referred to in my previous posts, since there is no guarantee the capital loss will be useable and it only saves roughly 50% of the tax payable on the employment benefit. Hence my comment that this is where any reforms to deal with situations like Joe Wood should be focused.

I shudder to think what your views might be of "deemed dispositions on death".

Posted by: firewalls 'r us | 2005-03-14 8:42:27 PM


firewalls,

This proves I've got way too much free time.

Point by point:

1. It’s hypothetical because it’s value is $305 only in the hypothetical event that it were sold on the date of issue. The benefit’s real(izable) value changes from day to day thereafter. Ask Joe what he thinks it’s real value is/was.

2. Following my example and assumption if the share is sold for $1000 then Joe would pay tax at the earned income rate on $305 and on $998-$305 = $693 as capital gains. He wouldn’t be too unhappy since he’d be $998 (less tax) per share richer rather than bankrupt. But if you prefer to propose another method where all $998 is taxed as capital gains then be my guest - Joe would certainly prefer it. The point is to ensure that taxes won’t be owed on income not realized (hypothetical benefits). As long as the stock is sold for $307 or more, there’s no problem.

3. “Would you seriously be arguing an employee allowed to purchase $305 worth of CSB for $2 had only realized a "hypothetical" benefit until he gets rid of them?”
Sure, it’s not nearly as problematic, but why not? Bonds could become worthless. The odds are huge, however, that he would eventually be taxed on the full $303. And I don’t know of (m)any companies that offer heavily discounted bonds as a benefit. Discounted stock certificates are much less expensive to issue.

4. Using my method and example, selling at $102 results in taxes owing only on $100. There is no capital loss to consider. And Joe’s still ahead $100 (less tax).

5. “I shudder to think what your views might be of "deemed dispositions on death".” Don’t see the relevance. Have similar problems cropped up here? I’ll have to bone up on estate tax rules.

Posted by: JR | 2005-03-15 2:03:00 PM


Wow - there are really a lot of people out there that know nothing about the tax laws they live under... get educated!

First of all - people appear to be confusing "Stock Options" and "Stock Purchase Plans". Two very different items.

Have you ever heard the expression "Ignorance is no defence"? I have taken part in stock purchase plans - but I did my homework and knew the tax implications. The law is not that extreme - the JDS plan was - this is why the tax was so high.
Tax on benifits is common - my dad worked for a university so I got free tuition. This was a taxable benifit for my dad (in effect raising his income). Suppose I was unable to get a job after my university degree - would my dad appeal to the government that the education was worth nothing and that he should not have been taxed for it?

If my employer were to give me a car and 15 years later I sold it for $100 - what should I be taxed on? You people are considering the depreciation of stock the same way...

Another point - if someone gives you $300 for free - do you not ask if there are strings attached? Here I go with another quote "Too good to be true"... The stock purchase plans I have been part of are far more reasonable (ie. you get 10% discount when you purchase up to 15% of your income - this would be $600 on a $40000 income) - therefore the tax is reasonable compaired to your income. These JDS plans were like winning the lottery! They were probably the equivilent of 99% discount (read FREE).

Suppose you were living close to the poverty line and struggling to pay your taxes then you heard about rich people getting a $100 salary but getting $40,000 stock and not paying tax on it? Wouldn't you be pissed?

This is an incredably unfortunate situation - I feel bad for these people. Part of the blame is on JDS for not helping their employees understand the tax implications. The remaining blame is on the individuals (sorry). They should have covered their asses. The government is just doing business as usual - it is not their fault.

Posted by: JS | 2005-06-16 1:18:36 AM



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