In a rare move, the federal government is forgiving the income taxes and arrears interest owed by 35 former employees of a British Columbia company as a result of their participation in an employee stock purchasing plan.
In a notice published earlier this month in the Canada Gazette, the official newspaper of the Canadian government, a remission order was granted to the former employees of SDL Optics, Inc., since acquired by JDS Uniphase.
The road to the remission order started back in December, 2006, when these Saanich, B.C., employees cut a special, exclusive deal with their local MP Gary Lunn, minister of natural resources.
But the issue affects numerous other employees across Canada who participated in stock purchase plans or exercised employee stock options, only to have the price of the shares plummet thereafter.
Under Canadian tax law, if you purchase shares through either an employer-sponsored 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 the 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 ultimately sell them and the date you received 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.
It is this mismatch of capital loss against employment income that creates a harsh economic reality for employees, such as those at the Saanich JDS plant who faced massive tax bills on money they never "received."
While the remission order may be of huge relief to those 35 employees whose taxes and interest were forgiven, it does nothing for the thousands of employees across Canada in similar situations.