Tuesday, April 1, 2008

I got the following note in email from Ragui Kamel, who's trying to raise awareness of a nasty gotcha in Canadian taxation rules for stock options.  We discussed it in email yesterday, and will be having a Special Edition Squawk Box call on Friday afternoon.  Anyone who cares to join is invited, but especially those who live in Canada.  The call is hosted on Facebook.  If you don't have a Facebook account, please email me personally and I will send contact details. 

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From: Ragui Kamel 

Subject: This shouldn't happen in Canada – Please support 

Did you know that CRA taxes people on income they never received?
 
The situation arises due to an anomaly in the tax act when you exercise and hold stock options.  When you exercise the options, you are deemed to have an employment benefit on the value of the shares on the day of exercise.  But, if you hold onto the shares and they crash, as many did in the bubble, your loss of selling these same shares is a capital loss.  Here is the tricky bit:  the capital loss cannot be used against the employment benefit so you are taxed … even though in reality you may have lost money!  This is a tax on phantom income.  As a simple example, an employee exercises stock options at $15 when the stock is at $115. He is deemed to have an employment income of $100. He then holds onto the shares and sells them, as the stock tanks for $15. He now has a capital loss of $100 but he cannot use that to offset the employment income so he ends up being asked to pay tax on $100 he never made!

I was personally caught in this and had to send CRA a sizeable cheque … but at least I could afford it.    

I recently became aware of and joined Canadians for Fair and Equitable Taxation (www.cfet.ca), a group of people caught in the same technical tax trap and was horrified by the human impact of this quirk in the tax law.  Some examples

• A single mother of two children who sold her options stock for $2000 and was taxed $50,000
• A couple working on the assembly line, each making roughly $35K a year who got hit with a tax liability in excess of $50K
• A software developer who had to cash his RRSPs and re-mortgage his house to pay the $80K in taxes he owed on phantom income.
• A 68 year old retired engineer from Nortel who already has given the bulk of his savings to CRA and, because he deferred some option "benefit" is living in fear that Nortel is sold and the benefit triggered.  He would have to give all his retirement savings and, given his age, cannot remortgage his house.  In his words: "I pray I die before Nortel is sold"  

Clearly taxing people on phantom income is unfair and un-Canadian.  But it is shocking that 7 years later and, while they are well aware of the human impact, politicians have done little to fix matters.    

In the US, a similar situation is being fixed as we speak through a Kerry/Lieberman bill … but, two suicides have been attributed to the issue.  Are deaths what is needed for our politicians to act??  

On behalf of the thousands of impacted Canadians, I am asking for your support to make this issue more prominent and to push for its resolution.  Please do three things

1. Sign the online petition at http://www.ipetitions.com/petition/cfet/signatures-1.html
2. Write to your MP and to the minister of finance expressing outrage that this situation should occur in Canada.  Feel free to borrow from this email or from the material on www.cfet.ca
3. Forward this note to others to raise awareness of this issue.  

Canada is a great country with a reputation for fairness and compassion.  This issue is a blemish on Canada.  Please help get it fixed

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