Many workers here as well as thousands across the country purchased stock options from their employers before the market took a downturn. This year they paid millions of dollars in taxes on income they didn’t receive because the company shares have lost their value.

It has been a problem for a more than a few people in the valley so I put the problem before Brian Sanders, Sr. Manager Tax for Mackay LLP chartered accountants to give me some explanation of the situation.

“Basically what happens with stock options generally with public companies is they’re issued at a time when the price is fairly low. Here is a good example. The price is at a $1, trading at a dollar and most of the time the securities commission will not let them give stock options way below market price so they could give a stock set at a dollar. So good news for the company as they get a big contract and whatever happens the price goes up to twenty dollars. So the employee says this is a good deal and I can buy it for a buck and decides to enter into that deal for the $20 stock so obviously it makes sense to enter into that and go ahead and buy it.

The tax implication is that you end up with taxable income equal to that $20 minus the $1 you paid or $19. It is then cut in half if the strike price you paid is that $1 and that was fair market value at the time it was granted to you. So now you have income of about $9.50 per share and that income is taxable. Now I guess what the very conservative person would do is immediately sell the shares. So they would have $20 a share and they would have plenty of cash to go ahead and pay that tax on that income. A lot of people will hang on to it on the advise of others. Many people will say hang on to it because the price is going up and all of a sudden it is at $40 and that person has already got in their mind that dream $1 million home and then all of a sudden the stock drops back down to a $1. Now, the problem is they still have that income of $9.50 a share but they don’t have any money to pay the tax. There are some rules that will allow you to defer that $9.50 until you sell the shares.”

The government knows these things are going to happen in many case but you can’t write rules for that assumption?

“Obviously the government knows it is possible for this to happen, absolutely. I mean look at the market if you just track the last five years, look at the volatility. That is why these rules allowing the deferral came into play. Is it enough? Well for the people who are caught in the middle of this, absolutely not. The thing that is not talked about, and it does little advantage for the person is this. If they were to sell that stock for arguments sake at the $1 after the drop, just because a dollar is better than nothing. They get a capital loss because they bought at a time that the stock was trading at $20 so they have this income from the $1 to the $19 cut in half in the right circumstance but their cost base is now $20 a share. When they go ahead and sell it for anything less than twenty dollars they get a capital loss but a capital loss cannot offset that employment income because that benefit of $19 is employment income not a capital gain. So that is the big problem you end up with recognizing a loss for tax purposes recognizing employment income but you can’t marry them up and that’s a big problem. Yes you have this capital loss and that is fine and good but it only does you good when you have a capital gain. Realistically for most of these employees the only gain they are going to have in their lifetime because now they will never invest in the stock market again after this fiasco is their house and that is a tax-free gain, the principal residence exemption. So realistically they have this capital loss and it doesn’t do them any good.

That is essentially the case. Yes, there have been some partial remission orders for some employees but it is too few. I will speculate that the primary reason that happened is because the party had a good friend or relative help contact the Member of Parliament and the Member of Parliament did what they are supposed to do, act for their constituents. Obviously the Minister of Finance is saying this system is in place it is supposed to be fair for everyone and there are no blanket exemptions for anyone.

The average employee in these companies doesn’t know what the stock market is going to do nor do we. It is that uncertainty you take yourself for instance if you got that stock for $1 and it continues to go up are you are going to wait for the big one? No one knows when it will hit its peak and when it falls it falls dramatically. Many of these companies live or die by the last contract.

I am not sure how many there are like this but companies like to do it because it doesn’t cost the company cash necessarily. In fact the companies get a little cash from the employee the $1 a share they receive then the public pays the other $19 when the person sells it on the market. You can feel for the people and it is a situation and I don’t know that if anyone does a good job in explaining all of these issues to their clients.”

The tax laws apply to us all equally and the finance minister was quoted, 'I can’t and won’t hold out any hope of any tax exemptions in respect to this situation.'"