There may be hope on the horizon for employees holding on to underwater stock and facing looming tax bills on income they never saw. Last fall, the federal government granted a remission order forgiving both the income taxes and arrears interest of 35 former employees of British Columbia-based SDL Optics, Inc. (since acquired by JDS Uniphase) that arose from participation in the company's stock purchase plan.
The road to the remission order started in December, 2006, when these employees cut a special deal with their local MP, Gary Lunn, the federal Minister of Natural Resources.
The issue affects many employees across Canada who participated in stock purchase plans or exercised employee stock options only to see the price of the shares plummet.
Under Canadian tax law, if you purchase shares through either an employee purchase plan or by exercising an employee stock option plan, the taxable employment benefit -- 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 received 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: If the shares decline in value between the date you 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 has created the harsh economic reality for employees, such as those at the Saanich, B.C. plant, who faced massive tax bills on money they never "received."
While the remission order was a huge relief to those SDL employees, it did nothing for the estimated tens of thousands of employees across Canada in similar situations.
That may change. Minister of National Revenue Gordon O'Connor invites any Canadian in the "same circumstances" to apply for their remission order. He said affected employees have to meet three conditions to apply for similar relief:
First, they must have acquired their employer's stock under an employee stock purchase plan versus a stock option plan. One has to wonder why stock option plans are being left out as they are essentially the same thing -- especially when employees under a stock purchase plan can purchase the shares below their fair market value.
Secondly, the shares must have been purchased below fair market value.
The final condition is that employees have to demonstrate financial hardship arising out of their participation in such plans.
If you don't meet all three of these criteria you may still have a chance:Mr. O'Connor also announced that the government is reviewing the issue to determine whether the law itself needs to be changed.
To be truly fair to all those in similar positions, such a change would have to be retroactive, a point raised by committee member John McCallum, the Liberal finance critic.
A last resort may be to throw yourself upon the mercy of the courts. That's what former Cell-Loc Inc. employee David Howard did last month when he argued that his nearly $1-million loss on the sale of his Cell-Loc shares, which he originally reported as a capital loss, should be fully tax deductible as a "business loss" against his stock option benefit. The judge agreed and concluded that since Mr. Howard was a "trader or dealer in the business of selling his Cell-Loc shares," his loss was a fully deductible business loss.