Matt: How will this new development affect the taxation of ISO in the US? As I read the from the IRS website (2007), the IRS considers the granting and exercise of ISO non-taxable event. Will this new development change this? If so, how will the value of the ISO at the time of grant be determined? Previously, it was deemed to have a value of $0 since there is no market for such options, and the strike price is set at the FMV of the underlying stock at the time of grant.

Larry: Options in the US are now expensed as a cash expense on corporate books. While I don’t believe they are in Canada, there has been a hit to shareholder equity on the books . SO in many way there is an Expense to the employer and the owners. Just cause its not profit sharing (physical Cash) doesn’t mean its not considered capital.

If the option is locked in, and if it could be sold, would it be sold at a discount.

And of course the answer is Yes - because their is risk associated with future value.

That’s exactly the same process that applies to locked in bonds - where the faith in the underlying companies ability to meet it’s obligation and the time until the bond becomes due strongly factor into it’s present value.

Locked in options are worse because the stock market in much more volitie than the bond market, so present value is much harder to determine.

I raise this because I believe if you are going to change the law you have to start where the discrepancies are greatest - and determining the value of a locked in options is that place.

Next step is to deal with the cases where options were included as a standard part of the employement package - ie the employee did not elect to purchase but was obligated to.

Then move to the case where the employee is given the right to buy options as part of their compesation at a discounted rate off the current stock price. Here I would argue that where the option is locked in the employees decision includes two components - the delta between the current value and a discount to address risk that future value will not be the same as present value. I’d go further and agrue that where the delta is large that both the employee and the employer beleive the risk that future value will change is substantial.

It’s not hard to argue this when one looks at the P/E of many of the companies that offer options.

While it’s a nice tax grab it doesn’t jive with either the government own practice or fundamental economic behaviour - and for that reason it’s unreasonable to call an excersised option a capital gain.

Keith: Whether this is or not the SAME is pretty much a subjective debate. I do not think it is the same. There was never any cash layout by the employer in the transaction. The employee purchase the share at $X when its value was determined by market participants at $Y. The different is capital gain by any definition.

Today, many homes are sold or bought at below appraised or assessed value. Should the buyers of these homes be deemed to have received a benefit or income and thus forced to pay a tax on such difference between purchase price and appraised/assessed value of the purchase?

In the Canada, the ESO benefit is taxed like capital gain. Why is that? Because the authority clearly recognized that it is nothing but capital gain. For some reason, such capital gain is “deemed” to be income. On what basis was this “deeming” justified?

1. Creating a tax liability when you buy stock via options is the only event in the personal tax code where you create a liability for buying something. No wonder people are confused … and that includes accountants and tax lawyers

2. What you are buying is stock .. you are buying it at X and its value is Y. This should be clearly a capital gain (it is even calculated as a capital gain) … so why the silliness of treating as other than a capital gain?

3. Regardless, this technicality (and it is a technicality) has caused misery to lots of people … many of whom are being ruined. How about the $14/hr assembly worker who finally thought she would have a little cash only to find a tax liability that causes her to lose her home. Let’s transcend legalistic arguing about a flawed law and show some compassion

4.The US had an analogous situation but have the wisdom to be fixing it via a John Kerry/Joe Lieberman bill currently going through congress. We are Canadians who pride ourselves on traditions of fairness and compassion and we can’t fix it? Makes me want to move

Two places where this is a distinct problem is marketvalue assesment for houses and stocks. Neither of these items actually establishes its real value until their is a transaction - as the price elasticy for stocks post 2001 and current US realestate housing clearly demonstrate.

For stocks the isses is even worse because market analysis often impune the value of a company by multiplying current stock value by all shares - but unless the company is drastically undervalued AND central bank policies have encouraged cheap money - no one would buy all the shares at the market price. It’s generally a fiction that the value of a company = stock price * all shares.

The CCRA position is a travisty.