Alec Saunders SquawkBox

Squawk Box took a remarkable new direction this afternoon, with a special edition focused on the issue of fair taxation of stock options in Canada. The heart of the issue is simply this: in Canada the gain on a stock option is taxed as employment income, not capital gain, which means that any losses from that stock should you choose to exercise and hold the stock, cannot be written off against the gain. In practical terms, this has led to a litany of hardship for ordinary Canadians.

Our guest Ragui Kamel explained the issue, and then how it is affecting many ordinary people who are being forced to mortgage or sell homes, and liquidate RRSPs in order to pay tax on income they never received. Ragui and his group have met with MPs, ordinary people affected by the situation, business leaders and more.

 

 Squawk Box April 4 - Special Edition [40:03m]: Play Now | Play in Popup | Download

Once you’ve listened to this podcast, then please visit:

CFET - the site of the organization Canadians for Fair and Equitable Taxation. Read the impact statements, check out the slide presentation, and sign the petition.

The CFET Facebook Group - join the group, and contribute to the discussion.

And stay tuned. We’ll do another call to talk about the progress on this issue in the future.

I got the following note in email from Ragui Kamel, who's trying to raise awareness of a nasty gotcha in Canadian taxation rules for stock options.  We discussed it in email yesterday, and will be having a Special Edition Squawk Box call on Friday afternoon.  Anyone who cares to join is invited, but especially those who live in Canada.  The call is hosted on Facebook.  If you don't have a Facebook account, please email me personally and I will send contact details. 

—-

From: Ragui Kamel 

Subject: This shouldn't happen in Canada - Please support 

Did you know that CRA taxes people on income they never received?
 
The situation arises due to an anomaly in the tax act when you exercise and hold stock options.  When you exercise the options, you are deemed to have an employment benefit on the value of the shares on the day of exercise.  But, if you hold onto the shares and they crash, as many did in the bubble, your loss of selling these same shares is a capital loss.  Here is the tricky bit:  the capital loss cannot be used against the employment benefit so you are taxed … even though in reality you may have lost money!  This is a tax on phantom income.  As a simple example, an employee exercises stock options at $15 when the stock is at $115. He is deemed to have an employment income of $100. He then holds onto the shares and sells them, as the stock tanks for $15. He now has a capital loss of $100 but he cannot use that to offset the employment income so he ends up being asked to pay tax on $100 he never made!

I was personally caught in this and had to send CRA a sizeable cheque … but at least I could afford it.    

I recently became aware of and joined Canadians for Fair and Equitable Taxation (www.cfet.ca), a group of people caught in the same technical tax trap and was horrified by the human impact of this quirk in the tax law.  Some examples

• A single mother of two children who sold her options stock for $2000 and was taxed $50,000
• A couple working on the assembly line, each making roughly $35K a year who got hit with a tax liability in excess of $50K
• A software developer who had to cash his RRSPs and re-mortgage his house to pay the $80K in taxes he owed on phantom income.
• A 68 year old retired engineer from Nortel who already has given the bulk of his savings to CRA and, because he deferred some option "benefit" is living in fear that Nortel is sold and the benefit triggered.  He would have to give all his retirement savings and, given his age, cannot remortgage his house.  In his words: "I pray I die before Nortel is sold"  

Clearly taxing people on phantom income is unfair and un-Canadian.  But it is shocking that 7 years later and, while they are well aware of the human impact, politicians have done little to fix matters.    

In the US, a similar situation is being fixed as we speak through a Kerry/Lieberman bill … but, two suicides have been attributed to the issue.  Are deaths what is needed for our politicians to act??  

On behalf of the thousands of impacted Canadians, I am asking for your support to make this issue more prominent and to push for its resolution.  Please do three things

1. Sign the online petition at http://www.ipetitions.com/petition/cfet/signatures-1.html
2. Write to your MP and to the minister of finance expressing outrage that this situation should occur in Canada.  Feel free to borrow from this email or from the material on www.cfet.ca
3. Forward this note to others to raise awareness of this issue.  

Canada is a great country with a reputation for fairness and compassion.  This issue is a blemish on Canada.  Please help get it fixed

Want to know what it will take to get a VC interested in your company? Everybody's favorite Canadian VC Rick Segal is coming to Ottawa on April 16 for the Ottawa edition of the VC Round Table and he wants to talk to you.  Here's your chance to informally interact with VCs, learn about what it is exactly that they do and how the funding process works. This is a small (and free!) get together across Canada's major cities where Rick Segal, JLA Ventures Partner and VC blogger (http://ricksegal.typepad.com) will walk through what getting involved with VCs is all about. Rick Segal will be hosting the Ottawa edition of the VC travelling roundtable on April 16th from 11am to 1pm at everyone’s favourite pub TheClockTower at 575 Bank Street. If you would like to attend sign up on the link below. 

There's only room for 25 people, though.  So if you're interested, click here to sign up. 

There's a message being lost in the very public fracas between Albert Lai and Rick Segal, which is that startups in Canada are undersupported.  Canadian VCs have a reputation among entrepreneurs for being excessively cautious, which is perhaps undeserved.  After all, the size of the funds they've raised are dramatically different from Silicon Valley funds, so the impact of poor investments on IRR is much larger.  Moreover, it's not a problem confined to Canada.  I've met with many other entrepreneur friends at VON this week in San Jose, and it's clear that the exodus to the valley is continuing. Whether you're from Canada, Boston, Europe or Australia, the network, the people and the money here is significantly richer than other places.  That's why CEOs continue to move their companies here.  

As an entrepreneur I have sympathy for Albert's viewpoint.  He and I shared a hotel room on one of many fund raising trips to the Valley and swapped war stories about some of the people we'd pitched. Raising money can be a frustrating experience.  I have sympathy for Rick's view also, and his defence of the venture community which he's de facto representing.  There are lots of smart people starting smart companies in Canada. Rick wants to see more people starting more great companies — it's the life blood of his business. 

Let's not lose sight of the fact that we could have a more vibrant community of startups if more support (speaking broadly, and not just about funding) were available.  I think at the end of the day that's what matters the most. 

Two of my favorite personalities on the Canadian web are Mark Goldberg and Michael Geist.  Often taking opposite positions on key issues, their commentary is always a worthwhile read.  So, this morning read Geist's cautionary piece on censorship and then read Goldberg's counter that reasonable societies should censor some elements of the web. 

I don't pretend to know the answers.  You'll have to make up your own minds.  But I have sympathy for both the argument that children need to be protected, and freedom of expression must be preserved.  As a society we need to preserve both of these values. 

Let's start by reframing the debate though.  Censorship is a dirty word.  It implies a restriction on the reasonable freedoms that citizens in a free society should have.  If we're going to have a conversation about preventing access to child porn, then let's frame the conversation in those terms, rather than talking about censorship.