I deferred in 2000. With the stock’s performance and the FX (it’s a US listed stock), the proceeds today would barely cover the taxes owed. As the stock provides dividends, keeping it is preferable to selling it and turning over the proceeds to CRA. But if there was some relief available beyond that, I’d consider selling the stock and paying a reduced tax bill to CRA. That’s mostly because I don’t have any confidence in the long term prospects of the company. If I’m right about that, seems like it would be good for CRA as well as me to get something versus nothing. Anyway, any clarification appreciated and thanks again for the article.

CC nice post but can you post more details such as above?

@CC: IMHO, this is still providing selective benefit, but not in the way you are thinking. It specifically provides benefit to employees who chose to defer tax payment. It does not provide remedy for employees with identical benefit who did not defer taxes (ie. through a reduction/elimination of previously paid taxes). It provides relief that is disproportionate for employees who incurred smaller losses relative to ones with a substantial or complete losses. The structure of the policy, it’s discrimination between normal investors and different classes of employee investors, and the lack of any meaninful penalties for either ignorance or willful disregard for tax law is absolutely galling to me.

We now have a situation where people have effectively been allowed to invest pre-tax dollars where the tax bill is wiped out on an extreme loss, and where profits (had there been any, there certainly were for some people but not those doing the lobbying) would have been reduced by 50% for taxation purposes (both the income and cap gains parts). Imagine if the government did that for everyone’s RRSP investments.

I guess you are asking about (2). Let’s assume that your strike price is $X, the FMV is $Y (since the company is private, you’ll have to ask accounting what the FMV is). If you exercise now, you’ll have to come up with $X to pay your employer for the shares. You’ll owe taxes at 50% on $Y – $X. You can’t defer the taxes anymore, so you’ll have to come up with the cash to pay CRA.

So your cost will be $X + 20% of ($Y – $X). The question you have to ask yourself is: Is my investment today worth the risks of (a) owning illiquid shares in a private company (b) owning stock in my employer? Your answer would likely depend on what your outlay is compared to your net worth and portfolio value.

I do completely agree with you that the tax deferral was a bad tax policy to begin with and that those who are affected by it probably did not think through the implications. I am also sympathetic to giving them a break in this budget because this quirk has caused undue hardship to a lot of people.

But I do think there is a valid reason for treating stock option and ESPP gains as employment income and not capital gains. It is to prevent the ability to offset capital losses in investment accounts.

CC: What people should have known is a matter of opinion that I’m happy to sidestep other than to say that we often see things much more clearly in hindsight that we do beforehand.

When the rules changed so that the stock option employment gain was taxed at the same rate as capital gains (50% instead of 100%), most people simply didn’t think about what might happen with deferred gains if stocks tanked. Among the few who did think about it, they just assumed that since stock option gains were being treated similar to capital gains, and that amounts could offset. I thought this initially. In 2000 I discovered my mistake. When I talked to my management and accounting people, they were all surprised (and some realized that they had personal exposure). I then took my findings to a high tech lobby group and encountered surprise from everyone there. Maybe they should have known better, but they didn’t. It could be that there were people around who understood all this from the beginning, but I didn’t encounter any such people.

I agree that ignorance of the law can’t be allowed as a valid defense. But this fact isn’t a good reason for having bad laws. I think shutting down stock option gain deferral is the right thing to do here. The only reasonable choices were to either have deferral and treat all gains and losses as capital gains and losses, or have no deferral at all. The midway solution containing a trap for the unwary just made no sense.

CC, your interest and aptitude for sifting though information about taxes and other financial matters is easily in the 99th percentile. It’s hardly surprising to me that others could come to understand this entire issue incorrectly.