Tuesday, March 15, 2005

Rebutting the rebuttals and smacking the Martinis

Babble on.

Now that the "I Support Joe Wood" campaign seems to have taken off - or at least started lumbering down the runway - Steve Maich has posted a reply to his detractors (Sean, Ginna, and Shannon (in comments) - I'm looking at you!).

I've received a lot of feedback on my recent column on this issue. The same thing happened when I wrote about this same issue for the Financial Post, about a year ago. There were many sympathetic letters. But there were also many people DEAD SET against providing any sort of relief to the JDS workers.

Since I don't have time to get into email debates with dozens of writers, here are the main arguments against the JDS workers, and my responses...


Quite frankly, some of Steve's points are better than others. The differences between how income and capital gains are treated from a tax perspective is quite frankly beyond my expertise - hell, some days it seems balancing a chequebook is beyond my expertise - but should be discussed in more detail before advocating changes to tax law.

But the one argument he doesn't make here - the one I think the Conservatives and the press should both make a big stink over - is the fact that Paul Martin promised during the election campaign that he'd take care of this.

Kind of makes his convention speech ring a little hollow, doesn't it. Especially since trustworthiness isn't too high on the list of qualities Canadians associate with the Libranos right now.

“Paul Martin is a man who, when he says he will accomplish something, he does and his government reflects that. As he told us in his speech, when he makes a promise he keeps it,” said Steve MacKinnon, national director of the Liberal Party.


Really?

Babble off.

7 Comments:

At 12:00 PM, Blogger Brian Mertens (Free Advice) said...

It does seem a bit like making people pay taxes on losing lottery tickets.

After all, they could have won -- it's their own damn fault they didn't pick the right numbers.

 
At 4:36 PM, Blogger RJ said...

Damian,

Steve Maich doesn't seem to understand stocks, options, and taxation. Other than that, he's got a solid tearjerker argument.

I just want to take apart a couple of his msiconceived arguments.

3. This was NOT a stock options program.
It was called an Employee Share Purchase Plan, and as far as I can tell, there was no other plan in Canada exactly like it.
Employees simply had small deductions taken from their paycheques, and on a certain date the pool of money was exchanged for shares at about $2 per share.
Employees then received a statement that said "you now own X number of shares"
Most of the recipients were not terribly sophisticated financially. They figured they'd have to pay tax when they finally sold, but it didn't occur to them that they'd have to pay income tax immediately.
This a big part of the reason why I'm so sympathetic to them. If they were exercising options, then I'd be more inclined to say it was their fault. But these people were really passive in this whole process. All they did was enroll in a program they didn't fully understand, and now it's going to ruin them. That just doesn't seem fair to me, when the government is so willing to bend over backwards to help the likes of George Radwanski.



If it looks like a duck, quacks like a duck, odds are pretty good that it's a duck.

Contrary to Maich's assertion that this is not an option program--it is set up exactly like a stock option program. Employees pay cash to receive shares at a substantial discount to the market price. Employee share purchase plans are in all the ways that matter--identical to options. Calling them share purchase plans does not eliminate the benefit the taxpayers received. Had the company issued shares to the employees at the market price, then the employees would not have been subject to the

And he ignores the point entirely that the employees did receive a benefit. They did receive shares at a substantial discount to what someone else would have to pay to acquire those shares in the market. That is what they are being taxed on. That the shares later fell in value is irrelevant.


-If we cut them a deal we have to cut a tax deal for everybody who ever lost money in the stock market.

Ladies and Gentlemen, I present to you, the biggest red herring of all. Nobody's asking to be compensated for their stock market losses. They are asking not to have to pay taxes on stock market gains they never received.
All the people who wrote variations on this argument, are hereby given detention.
I want you all to write the following line, 100 times in your notebook: "I will not muddy the waters by emailing columnists with fatuous arguments."


Sorry, no. They did receive the benefit. They received shares at $305/share for the low, low price of $2/share. Can anyone tell me how they never received the stock market gains when they received them the instant that they acquired the shares?

Oh, it was all paper gains you say. Well, here's the shocker for you. They were not paper. These were real gains, real assets. Shares are not merely paper. They are assets.

Steve, write 100 times in your notebook: "Shares are assets. Purchasing shares at a discount to the market price as a consequence of employment is a taxable benefit."

The entire crux of Steve's argument is based on the assumption that shares are not assets--that they have no value unless converted into cash.

RJ

 
At 6:00 PM, Blogger Paul said...

RJ: what are your specific qualifications as either a securities expert, or a taxation specialist? I am neither, but your argument is full of errors.

These were not options. Repeat that a few times.

If they were options, then the rules regarding the exercise of options would have come into play. When I exercised my Nortel options, I was given the choice of: (1) converting to shares, redeeming the entire value for cash, and having the taxes payable withheld by the broker; (2) converting to shares and redeeming enough shares to cover the taxes owing; (3) converting to shares and providing a cheque (immediately) to cover the taxes owing.

I have no recollection of being allowed to choose to defer the taxes payable as of the exercise of options. The exercise of options occurs on a date chosen by the holder, within the limits of insider trading rules, and required the use of a broker.

An ESPP does not operate this way. Its administrator operates under contract from the employer, and the transactions (once participants sign up) are automatic. In the case of the JDU ESPP, it appears, as you suggest, that a significant part of the purchase was accounted as income (taxable benefit).

But treating it as income triggers a legal requirement for JDU to perform the tax withholding as on other income and benefits. Clearly, they failed to do so.

The fair solution would seem to be for the employees to return the appropriate number of shares which should have been withheld in the first place, and for JDU to make the correct income tax remittance to the government on their behalf. That JDU would need to make up the difference out of their own pocket would be just, as it was their error in not remitting the tax withholding which created the inequity.

 
At 8:17 PM, Blogger RJ said...

Sorry Paul, but you're wrong on a couple of counts.

In RevCan's eyes, ESPPs are options:

http://www.cra-arc.gc.ca/tax/business/topics/payroll/calculating/otherbenefits/security/stockopt01-e.html

Types of options issued to employees

Options issued to employees generally will be provided under one of the following three types of plans:

Employee stock purchase plan (ESPP): This plan allows the employee to acquire shares at a discounted price, (i.e., for an amount that is less than the value of the stock at the time of the acquisition of the shares). Many ESPPs provide for a delay in the acquisition of the shares: an employee contributes a certain amount into a trust fund and at pre-specified periods, the employee can purchase shares at a discount. The benefit is equal to the value of the shares, minus the amount paid.

Stock bonus plan: Under this plan, an employer agrees to give the shares to the employee free of charge. In effect, the employer agrees to sell or issue shares to the employee for no cost.

Stock option plan: This plan allows the employee to purchase shares of the employer's company or of a non-arms length company at a predetermined price.


Ultimately, it is a question of semantics. The key here that everyone seems to ignore is that there is a benefit because shares worth $305 were allowed to be purchased at $2. That $303 difference is what is being taxed.

Regardless of how passive the participants in the plan were, they still received that benefit. And RevCan defines that benefit as taxable.

Also, RevCan does not require the withholding of tax on the exercise of options. You were fortunate that you had a good broker who looked after your income tax liability when you exercised your options.

http://www.cra-arc.gc.ca/tax/business/topics/payroll/calculating/otherbenefits/security/stockopt05-e.html

"An option benefit is a non-cash benefit. You have to withhold income tax only if there is other cash remuneration paid to the employee from which to withhold tax."

RJ

 
At 10:27 PM, Blogger Shannon said...

Damian, I appreciate your acknowedging that the policy issues around this need to be examined in more detail before advocating changes to our tax laws.

That said, it seems to me when you say that since Paul Martin made a promise he has to do something to fix this, without some suggestion as to how he should fix it, you're kind of putting the cart before the horse.

Should the government just forgive the taxes owed by anyone who loses a lot of money and has difficulty paying? Or just in this case, because Martin made a promise?

 
At 1:07 AM, Blogger Sean McCormick said...

"Paul Martin promised during the election campaign that he'd take care of this."

Uh-huh. I bet you believed all that 'mad as hell' and 'get to the bottom of this' stuff about AdScam as well.

*cough*

I expect Paulie to help out Joe Wood just as soon as he takes care of his promise to scrap the GST that he made so many moons ago.

 
At 1:41 AM, Blogger Ginna said...

I've got some more comments on Steve's rebuttal here, but I'll make two points.

1) I was actually offended by Steve's assertion that poor dumb engineers and assemblers can't possibly be expected to understand the magical and mysterious world of high finance.

2) Pop quiz: did you think the Bre-X investors should have received government assistance? How is this case different?

Both involved investors risking more than they had to lose, without understanding the implications of their decisions. So why should Joe Wood get relief from the government, and not the penniless investors in a worthless gold mining scam?

 

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