Do you ever envy someone who gets stock options....here is a couple of cases where you wouldn't want them
Shannon McLeod had to pay a $100,000 tax bill on 'phantom income' from worthless stock options. (CBC)
Thousandsof Canadian workers who purchased stock options from their employersbefore the market downturn are expected to pay millions of dollars intaxes on income they haven't received because the shares have losttheir value.
"I had to take out over a hundred thousand dollars in loans, plusinterest, in order to pay off taxes," said marketing manager ShannonMcLeod, a tech-industry worker in Vancouver who faced the samesituation several years ago.
"I was a good little Canadian taxpayer and I paid it off, but it had a huge effect on me."
The income tax is applied to stock options, a benefit many Canadianemployees are given as part of their remuneration. Employees at variouslevels of companies in high tech, mining, banking and other industriesare allowed to buy stock in their firm at a significantly reduced price.
"Companies give out stock options to their employees thinking it isa huge benefit, and it's actually a huge liability," McLeod said.
Because of a little-known loophole in Canada's tax law, people areexpected to pay income tax on the market value of the stocks when theyare issued — not on their lesser value if they are later sold at alower price. Those affected call it a tax on "phantom income."
Tax experts estimate many Canadians have been hit since the lateststock market downturn. The national group Canadians for Fair andEquitable Taxation says it's hearing about dozens of new cases frompeople who have just received their assessments for the 2008 tax year.
Taxpayers going bankrupt, losing homes
"Ihave colleagues at many different companies I've worked at since thathave actually lost their homes," McLeod said. "They've gone bankrupt.It's a huge catastrophe — and it's something that the government caneasily fix."
Tax lawyer William Cooper thinks Ottawa should allow people to claim their losses against the 'income.' (CBC)
Forexample, if an employee bought $100,000 worth of stock for the employeeprice tag of $25,000 early in 2008, they would be taxed on $75,000worth of "income" for that year. If the employee held on to theirstock, as many do, they would still have to pay tax on the $75,000 —even if the stock's value drops to mere pennies. Employees can deferremitting the tax until they sell the stock or the company is sold, butthe tax bill doesn't change.
Thousands of tech-industry employees like McLeod have been hit since 2000.
McLeod bought 10,000 shares in Burnaby, B.C.-based digital-imagingcompany Creo — with money borrowed against the stock — for $17 each. Atthe time, the stock was trading at $53. She was assessed income tax on$360,000 — the difference between what she paid and the market value ofthe shares at that time. She was 27 years old and earning a modestsalary of less than six figures.
"On the advice of my financial planner and my accountant, I held on to the shares. And then the market crashed," she said
Ottawa taxed McLeod $100,000 on the stock options, even though bythe time the tax was assessed, the shares were worth less than shebought them for. Creo stock didn't recover and McLeod said she didn'tmake a penny. The company was eventually sold, and McLeod had to use aline of credit to pay the $100,000 bill.
"If I had again gone into the stock option plan with the company Iam with now, right before the 2008 crash, I would again be in the exactsame situation," McLeod said.
Thousands more potentially hit by downturn
"Peoplejust don't want to talk about it, and they certainly don't want to sayI owe the government a quarter of a million dollars and I can't payit," Vancouver tax lawyer William Cooper said.
"Right now there are probably thousands of people under water. Andhow many know about this tax before they get the bill? Not a lot. Iwould say very few."
Finance Minister Jim Flaherty indicated Ottawa has no plan to help affected taxpayers.
'I won't hold out any hope of any tax exemptions'—Finance Minister Jim Flaherty
"Thetax laws apply to all of us equally," Flaherty said. "There are someremedies that are available through hardship cases, but the reality isthat those stock option situations are not uncommon and apply to alarge number of Canadians. So, I can't and I won't hold out any hope ofany tax exemptions in respect to that."
When Flaherty mentioned "hardship" cases, he was likely referring toJDS Uniphase employees from Victoria. After lobbying by their MP, GaryLunn, 35 employees with the optical-equipment company were grantedexemptions from paying the tax last year.
Nortel employees are another example, but they haven't received anyexemptions. Many are still holding on to stock they bought at theemployee rate years ago, when the market value was over $100 per share.
Federal Finance Minister Jim Flaherty says no exemptions will be granted.(CBC)
IfNortel's bankruptcy proceedings force the shares to be sold, their hugetax bills on those shares — worth approximately 25 cents each now —will come due. Former Nortel executive Ragui Kamel, an Ontarioresident, said he has already paid $300,000 in taxes on stock he soldand could be hit with another bill soon.
"If Nortel collapses, through no action or desire of my own, I willbe deemed to have sold the [remaining] shares I still hold in Nortel.That will trigger a tax of over $500,000 — wiping out the bulk of mysavings in 30 years of work," Kamel said.
Former Nortel employee contemplates suicide
Anotherformer Nortel manager from Toronto, who was let go in 1999, said hewill get hit with a $204,000 tax bill on stock he still owns, which isworth $250.00 now. The man, who didn't want his name used, is 69 yearsold and said he has seriously contemplated suicide to avoid beingforced to sell his house.
"I've been living an nightmare, not sleeping at nights. It's affecting my marriage," he said.
Tax lawyer Cooper said that, in his experience with tax policymakers in Ottawa, the effects of unfair rules are often not taken intoconsideration.
"Sometimes I think they are just in this bubble. All the techniciansare saying, 'Well, this is how the rules work and this is how they aresupposed to work and it all fits within the scheme of the Income TaxAct, so what is the problem?' "
"I think that the country needs to pull together and talk to theirMPs and voice their opinion and let the government know that this isn'tacceptable," McLeod said.
The United States had a similar tax policy until 2008, when the lawwas changed to essentially fix the problem for American employees wholost money through stock options.
"The fact that we are the only G7 country to do this still is kind of embarrassing. It's pretty archaic," McLeod added.