or Connect
TheCatSite.com › Forums › General Forums › IMO: In My Opinion › Tax nightmare: Company perk that became a $165k tax nightmare
New Posts  All Forums:Forum Nav:

Tax nightmare: Company perk that became a $165k tax nightmare

post #1 of 3
Thread Starter 
This sounds really bad. So stock options, immediate tax or tax only at point of sale. Yet the comment by that because they did not sell, they choose to accept the market risk of a falling share price seems kind of right. So what do you think?


A company perk that became a tax nightmare
Worker faces $165K bill

Joe Wood is a working guy, with a mortgage and modest middle-class income. But he has the tax bill of a millionaire.

The 42-year-old mechanical engineer is one of dozens of former employees of JDS Uniphase Corp. facing tax liabilities that will force them into bankruptcy, all arising from income they never received.

A bizarre technicality in Canada's tax laws means Mr. Wood and other workers who received company stock as part of an employee share purchase plan owe the tax man his cut of imaginary stock profits that never materialized.

For three years, they have fought with Canada Revenue and the Ministry of Finance for relief, but they have run repeatedly into a wall of bureaucratic indifference.

As far as the government is concerned, Mr. Wood owes $165,000 in taxes and interest. On his annual income of about $40,000, he can never hope to catch up. And unless the government has a change of heart, he could soon lose his home and his life savings. "I don't like what this is doing to my wife," he said.

"She really doesn't want us to lose the house. And facing that has caused her incredible stress, and it's not fair."

The peculiar irony of Mr. Wood's plight is the fact that a program that once seemed like a spectacular benefit now threatens to ruin him.

Mr. Wood first joined a company called C-Star Optics in 1991, and quickly rose to the level of a technological engineer.

C-Star was bought by SDL Inc., and in July of 2000 SDL was bought by JDS Uniphase, during the rampaging bull market in technology at the end of the 1990s.

Part of the JDS benefits package included an employee stock purchase plan, which allowed workers to buy the company's stock at a deep discount. For Victoria workers who were holdovers from SDL, that meant buying a stock valued at more than $300 for roughly $2 a share, through small deductions from their paycheques.

As JDS's stock skyrocketed in 2000, people thought they'd won the lottery. But the early retirement plans of line workers and office staff were short-lived.

The stock peaked in 2000 at $416 (before a stock split), but fell almost as quickly as it rose. By the end of the year, it was trading at $66.

That was devastating enough, but the worst shock was yet to come. When employees enrolled in the savings plan opened their tax forms that year, they learned the stock they'd been issued was being taxed as income on the basis of its value when it was issued in 2000 -- $305 a share.

Employees such as Mr. Wood, who had never sold a share and watched helplessly as the stock plunged, were told they owed massive taxes on phantom income they never received. Mr. Wood, who was making $45,000 at the time, owed $134,000 in taxes.

By the time the tax issue became clear, it was too late to sell. JDS shares had fallen by more than 80% and they were now worth far less than the taxes they owed.

The workers appealed, sure there must have been some mistake. Months passed and the value of their shares kept falling, while interest on the overdue taxes kept piling up.

That was three years ago, and they're still fighting. And the interest keeps piling up.

They say bad things come in threes, and in the summer of 2001, the third shoe dropped. JDS announced the closing of its Victoria plant, putting Mr. Wood and about 500 other people out of work.

Mr. Wood still holds the JDS shares he collected through the ESPP. At their peak, they were worth about $450,000. Today they're worth about $7,500.

"We're not stock speculators, we were just buying into the damn company," he said. "I'd never owned a stock before in my life. It's not something we're savvy with."

To pay off his tax bill, Mr. Wood would have to cash in his entire $70,000 in RRSPs, sell the dream home he bought with his wife in 1999 and start over from scratch.

That is exactly what Tim Couch and his wife, Lynne Bouchard, were forced to do. The couple were especially hard hit by the JDS shutdown in 2001. She was pregnant at the time, and when Mr. Couch lost his $35,000-per-year job as an assembler at JDS, they had to go on Employment Insurance.

They were struggling to make their house payments as it was, and were in dire need of a refinancing. Then Mr. Couch's T4 arrived claiming he'd earned the equivalent of $123,000 the previous year and he owed taxes of $50,000. He, too, still had all the stock he'd collected.

The banks told them they had to repay the taxes before they could remortgage their home. It was pay up, or lose the house. The couple reduced their tax bill by taking out a $25,000 loan to contribute to their RRSP, and paid the rest by borrowing more against their home.

"We had no choice," Ms. Bouchard says. "It set us back 10 years in our savings, and we didn't see a penny of income from those shares."

As bad as their dilemma was, others had it even worse. Another former employee, who asked not to be identified, is saddled with a tax bill of more than $720,000.

That is "an amount we wouldn't be able to save in our entire lives if we live to be 100 years old," the person said in an e-mail. "We are at risk of losing everything we've worked so hard for our entire lives."

Such stories have failed to sway officials in Ottawa. In countless letters to various employees and to Conservative MP Gary Lunn, who has championed their case on Parliament Hill, government ministers and officials with the CRA have bluntly rejected their appeals.

As far as the government is concerned, the fact that employees didn't immediately sell their shares as soon as they were issued means they "chose to accept a market risk."

In a letter to the Wood family, Bill McCloskey, assistant commissioner of the policy and legislation branch of the CCRA, said the JDS employees are essentially like an investor who buys stock with borrowed money. Because the workers received their stock at a discount to the market price, it is considered an immediate taxable benefit regardless of whether they chose to sell.

That position was upheld by the Tax Court of Canada a year ago, when an Ottawa high-tech worker challenged this section of the Income Tax Act, and lost.

While the situation for the JDS workers is extreme because of the vast difference between what they paid and the eventual value of the stock, this section of the Income Tax Act surely affected thousands of other workers to a lesser extent when tech stocks were surging in 1999 and 2000.

To Andre Rachert, a Victoria-based tax lawyer hired by a group of about 30 former JDS employees, the tax court's decision is simply not fair. He is preparing a final remission application, requesting the government overturn an unduly harsh tax ruling. If it fails, he says, most of his clients will be financially ruined.

"CCRA's position is that they enforce the rules and if you're screwed, you're screwed," Mr. Rachert said. "On an incredibly technical reading of the Act, [CCRA] is right. But from a policy perspective, this is the stupidest thing I've ever seen in my life."

The legislative solution would be relatively simple, Mr. Rachert said. Government could amend the tax law so workers receiving shares as part of an employee stock program would be taxed based on the value when they sell the shares, rather than the value when the shares are issued.

That's how the tax laws in the United States deal with such programs. But so far, Canadian authorities refuse to budge.

"If people choose not to sell their shares after they receive them, then they accept a market risk like any other investor," said Andree Houde, a spokeswoman for the Ministry of Finance. "It wouldn't be fair to provide retroactive tax relief to people who find themselves in an unfortunate position because of decisions they made."

Ms. Houde refused to say whether the department is reviewing this part of the Act. But when Paul Martin was finance minister, he indicated he supported a change to the Act to give relief to employees such as those at JDS, Mr. Lunn said.

That changed when John Manley took over as finance minister. He bluntly told the JDS employees the law stands and they should make payment arrangements with their local tax office.

Mr. Lunn stood up in the House of Commons again this week to implore government to fix the Act and withdraw government's tax claim. But with the Liberals so preoccupied with the sponsorship scandal and a possible upcoming election, ministers have simply stopped responding to the group's pleas, Mr. Lunn said.

"What's not being looked at here is the emotional toll on these families," Mr. Lunn said. "It's an enormous crisis for them. They're caught in a bizarre tax law and I honestly don't believe they owe these taxes."

For some, that emotional toll just wasn't worth it. When the controversy first arose three years ago, there were hundreds of JDS employees in the fight. The numbers have since dwindled to about 30. The others simply surrendered and paid the bill by taking out loans and second mortgages or borrowing from family.

For the rest, it looks to be another long summer in Victoria waiting for the tax collectors to call.

Most have pinned their hopes on Mr. Rachert's final remission application and on Mr. Lunn's efforts for legislative change in Ottawa. Failing that, the results will be grim.

"The advice will be: Add up your assets and add up your liabilities. You're insolvent. You need to go bankrupt," Mr. Rachert said. "And that means losing it all."
post #2 of 3
Oh my goodness, what a nightmare
post #3 of 3
I don't know how the US taxes these transactions, since this is a Canadian story and I'm in the US. But at the risk of sounded hard-hearted, the biggest question to me would be whether the tax implications of these types of options were explained to the employees. I suspect they were, perhaps not verbally in simplistic terms, but I'd be surprised if somewhere in the paperwork they signed there wasn't a reference to market risk or the need to seek advice from a tax expert before buying these types of options.
You cannot remove the consequence of market risk from the stock market, unless you expect the taxpayers to pay for other people's uninformed or reckless investment decisions.

I had a similar reaction to the Enron situation though. It was terrible that all of their employees lost their jobs. But all of the news reports of people losing hundreds of thousands of dollars of pensions were misleading. They lost the wild market appreciation on Enron stock, just as many external investors did. If they had invested their pension assets in balanced mutual funds, they would not have had the huge paper gains that disappeared, but they would still have their pension assets.
New Posts  All Forums:Forum Nav:
  Return Home
  Back to Forum: IMO: In My Opinion
TheCatSite.com › Forums › General Forums › IMO: In My Opinion › Tax nightmare: Company perk that became a $165k tax nightmare