All Business

VICTORIA’S TAX NIGHTMARE

How phantom stock profits threaten to ruin a group of tech workers

STEVE MAICH March 14 2005
All Business

VICTORIA’S TAX NIGHTMARE

How phantom stock profits threaten to ruin a group of tech workers

STEVE MAICH March 14 2005

VICTORIA’S TAX NIGHTMARE

How phantom stock profits threaten to ruin a group of tech workers

All Business

STEVE MAICH

EVERY SO OFTEN, powerful people suffer episodes of amnesia. They forget the details of a meeting or the intent of a policy. On occasion, they’ll even confuse the meanings of simple words. They’ll generally try to bluff their way through such situations in hopes their confusion might rub off on us and we might forget to challenge them on the particulars. These cases of selective disorientation seem especially prevalent on Parliament Hill. It would be easy enough to laugh them off, except that sometimes these matters

have profoundly destructive consequences for real live human beings.

One such case has been dragging on for four years now, taking a heavy toll on a handful of former employees of JDS Uniphase in Victoria, who’ve been fighting in vain to overturn massive tax bills levied on income they never received. Several times over the past few years it seemed that their tax nightmare would soon end happily. Paul Martin himself suggested as much last spring. But every time they raised their hopes, they hit the same wall of bureaucratic indifference.

Now they’ve run out of appeals. Unless one of those sporadically disoriented powerbrokers in Ottawa intervenes soon, Canada Revenue Agency will move in to collect taxes they never should have owed in the first place. For some, it will mean having to drain their life savings, or sell their homes, or declare bankruptcy.

All because people held a stock when they should have sold it. Because authorities have forgotten the intent of the tax code. Because politicians don’t remember their promises. And because John McCallum, the minister of revenue, can’t keep straight the difference between equality and fairness.

It all began with a perk. Part of the JDS benefits package was an employee stock purchase plan, which let workers buy company shares at a huge discount. As JDS’s stock surged in 2000, workers were able to get shares worth more than $300 for roughly $2 apiece through small deductions from their paycheques. Plant workers with modest incomes suddenly had visions of expensive cottages and early retirement. But the celebration was short-lived. The stock peaked

in March of 2000, then tumbled almost as fast as it rose. By the end of the year, it had dropped by 68 per cent.

The plunging share price was a disappointment, but the real disaster came that winter, when the tax forms arrived. Because the workers got stock at a discount, they were taxed on the difference between what they paid and the stock’s value on the date it was issued—$305. Joe Wood worked as an engineer at JDS for $40,000 a year, and he suddenly had a tax bill for $ 13 8,000. By the time he realized what was happening, it was too late to sell—the shares had fallen by 80 per cent and were worth a fraction of the taxes he owed. To make matters worse, JDS closed its Victoria plant in the summer of 2001, putting Wood and hundreds of others out of work, with no way to pay their tax bills.

For four years, they have pleaded and appealed, and gotten nowhere. The law is clear. It says they received a taxable benefit, even if it never yielded a penny of income. Many workers eventually relented, cashing in RRSPs and taking out loans to pay what the CRA says they owe. But Wood and about 28 others have kept fighting. With interest, Wood’s tax debt is now almost $200,000. On his household income of about $55,000 a year, the payments will be impossible. He will have to sell the home he shares with his wife, Anne Fearon-Wood, to settle the debt.

At this point, the Woods’ only hope is

political intervention. The law says the government can overturn any tax assessment deemed unfair, and last spring it seemed Paul Martin was ready to do just that. While campaigning in Victoria, he told a group of JDS workers, and the local Liberal candidate working on their behalf, that help was on the way. “I’ve already asked Ralph Goodale to fix that up,” he said. But another case of sporadic amnesia soon set in. The fix never materialized, and last month, Ottawa rejected the workers’ final appeal.

When the local Conservative MP Gary Lunn asked why Martin had broken his word, McCallum rose in Parliament to defend his ministry. “What is critical is that each and every taxpayer knows that he or she will be treated exactly the same as every other taxpayer,” he said. “The integrity of the tax system requires that each and every taxpayer be treated in a manner that is fair in comparison with other Canadians.” The contradiction in that statement is lost on the minister and his bean-counters. Fairness often requires that people be treated differently. That’s why we tax incomes at different rates, remember?

If Ottawa can’t bring itself to address the legal flaw of taxing income that never existed, it should at least be willing to recognize the tax code was never meant to crush people for the sake of phantom stock profits. But in lieu of fairness, Ottawa offers equality, and it’s a poor substitute. Bad news: government is willing to screw you, and take everything you’ve worked for, on the basis of a foolish technicality. Good news: at least everyone gets screwed equally. How reassuring.

And what of Martin’s promise? “Is this a guy who is a pathological liar who will say anything and do anything just to get a vote?” Lunn asked in exasperation last week.

It’s a legitimate question. Does the Prime Minister have the courage to answer it? lifl

Read Steve Maich’s weblog, “All Business,” at www.macleans.ca/allbusiness

TRUE fairness often requires that people be treated differently. That’s why we tax incomes at different rates, remember? Ottawa’s offer of equality is a poor substitute.