Canada Revenue Charging Brokers Taxes On Their Stocks When They Were The Highest!

[Kommander_KornFlakes]

Many employees who get free stocks from their companies as bonuses have been hit with bills for $100,000 in taxes even though their stock have gone down 80%.

http://www.liveleak.com/item?a=view&token=889_1243434116

[pitz]

The ability to rectify this problem is extremely limited, as options, when granted, theoretically could be turned into income, even before such options become significantly 'in the money', simply by reselling them on the open market.

Its hard to have a lot of sympathy for people who, in their infinite wisdom, thought it was acceptable to put their entire life savings into Nortel, JDSU, etc. stock, instead of holding a more diversified portfolio.

[charliebrown]

Many employees who get free stocks from their companies as bonuses have been hit with bills for $100,000 in taxes even though their stock have gone down 80%.

http://www.liveleak.com/item?a=view&token=889_1243434116

There's limited tax consequences until the employee actually EXERCISE those options. And I'd assume they aren't stupid enough to exercise at $10 when the stock is trading at $2

[P1x44r]

Yeah, I was too quite disgusted when I read about this last night.

[AllWheelDrift]

The issue is when the company gives you something, you end up taxed based on it's value at the time.

That means:
1)If they gave you stocks for free, you're taxed on the value of those stocks when they gave them to you.

2)If you got stocks from your company at a discount from the market price, you're taxed on the discount you got.

3)If you got options, I think you'll be taxed on the difference between the strike price and the market price when you exercise them
(Unless things have changed in the last several years. Stock options granted to employees generally can't be resold on the open market, plus they usually have a vesting period.)

I believe it's usually #2 that cause the surprise tax liabilities. This occurs because ESPP plans can do things like let you buy stock for 85% of the lesser of the price at the start or end of the period, so if the stock is $10 at the start of the period, and $100 at the end of the period, you get to buy it for $8.50 when it's trading for $100 and the $91.50 discount you got is a taxable benefit immediately, even if you don't sell the stock.

[pitz]

I think the big problem is that these ESOP's (employee stock option plans) have a ton of restrictions on vesting, when a person can sell stock, etc.

Basically these employees were, to some extent, trapped. As AWD points out, the employee would be insane to not exercise the options -- but in many cases, the employee isn't allowed to sell the stock because there is not only a vesting period, but also a stigma, *and*, in some cases, legal requirements attached to selling a stock.

For instance, some people at Nortel who received options and exercised would have had SEC registration requirements. If shareholders/upper management sees that a Nortel employee is selling stock (despite Nortel billing itself as a great company), that's seen as bad for business, and such employee probably would get terminated immediately.

[AllWheelDrift]

Your title is wrong. Brokers are not being charged taxes (unless they are the actual recipients) and the taxes are not necessarily calculated when stocks were at their highest.

Please change the title of this thread as it is erroneous, misleading, and arguably sensationalist.
His avatar is just plain wrong too. Everyone knows Tony the Tiger is the logo for Frosted Flakes. The Kommander should change his avatar to a rooster.

[ghostryder]

Its hard to have a lot of sympathy for people who, in their infinite wisdom, thought it was acceptable to put their entire life savings into Nortel, JDSU, etc. stock, instead of holding a more diversified portfolio.

+1


I have no sympathy for people who knew they had a taxable employment benefit, knew they would have to pay income tax on that benefit when they aquired the shares, then got greedy and hung on to the shares hoping for a big capital gain.

They made their bed, now they get to lie in it. Suck it up buttercup.

[i6s1]

Many employees who get free stocks from their companies as bonuses have been hit with bills for $100,000 in taxes even though their stock have gone down 80%.

http://www.liveleak.com/item?a=view&token=889_1243434116

I presume you have a workable solution?

[brunes]

Options have zero tax implications unless they are exercised. If someone was stupid enough to exercise their options without knowing they have a required vesting period, that is their idiocy.

Also, if the stock actually did go down 80%, then the holder is perfectly allowed to claim this capital loss against the capital gain of the original option, so *NEXT YEAR* they will get all of that money back.

[cambridge99]

Options have zero tax implications unless they are exercised. If someone was stupid enough to exercise their options without knowing they have a required vesting period, that is their idiocy.

Also, if the stock actually did go down 80%, then the holder is perfectly allowed to claim this capital loss against the capital gain of the original option, so *NEXT YEAR* they will get all of that money back.


Yes, options when granted have no tax implications until exercised, however the gain calculated when exercised is considered employment income. So if the individual one year made $100k on the exercise but didn't sell the shares at the same time and held them but the stock went down by 80%, the individual would have an $80k capital loss. Hence she wouldn not be able to use the captial loss of $80k to offset the employment income gain.

This situation only occurs when someone is greedy and exercises the shares and then decides to hold on to the shares. One should try to sell the shares as soon as possible after exercising the option.

[pitz]

This situation only occurs when someone is greedy and exercises the shares and then decides to hold on to the shares. One should try to sell the shares as soon as possible after exercising the option.

Try having the John Roth Nortel Kool-Aid poured down your throat at the height of the tech boom, every day, and then selling your shares.

Lol. That was the tragedy of the tech bubble for some of these people, they were brainwashed into believing it would never end. Just like finance guys right now...

[brunes]

This situation only occurs when someone is greedy and exercises the shares and then decides to hold on to the shares. One should try to sell the shares as soon as possible after exercising the option.

Right.

I work at a high tech startup, an dhave a fair number of options, all of which are already vested. When we eventually do go public or get acquired, there is no way **in hell** I am keeping my stock, no matter what pressure people put on me. I might keep a small amount, like 10%.

It just makes no sense to me why anyone would do that, especially when you have existing debts like a mortgage or anything. To me, it is the same as taking out a mortgage on your house to invest in ONE startup company, because that is essentially what I would be doing by not cashing out and paying down my debt.

At the end you should be treating it like any other stock in your portfolio - which you should balance.

[Krox]

Right.

I work at a high tech startup, an dhave a fair number of options, all of which are already vested. When we eventually do go public or get acquired, there is no way **in hell** I am keeping my stock, no matter what pressure people put on me. I might keep a small amount, like 10%.

It just makes no sense to me why anyone would do that, especially when you have existing debts like a mortgage or anything. To me, it is the same as taking out a mortgage on your house to invest in ONE startup company, because that is essentially what I would be doing by not cashing out and paying down my debt.

At the end you should be treating it like any other stock in your portfolio - which you should balance.

Exactly, my g/f is in the same situation with options in her company.

Or at the very least, you could sell enough to cover the purchase and tax for exercising your options. That way if the stock goes down, at least you are not out anything.

I've always thought that having a lot of stock in the company you work for is not that wise. If for anyway reason the company goes under, you've not only lost your salary but your savings as well. Can you imagine being a GM employee right now and owning GM stocks.

[evoviii]

It's one thing if they had no options to divest but if they did then it's their fault for not planning properly. Ignorance is not an excuse, perhaps unfortunate. This tends to affect tech more than others given that they tend to rely on options more as performance oriented compensation.

Especially for companies with fast rising share prices, greed overtakes common sense. It's double concentration, when you have both your livelihood and retirement portfolio based on the same company.

[brunes]

Exactly, my g/f is in the same situation with options in her company.

Or at the very least, you could sell enough to cover the purchase and tax for exercising your options. That way if the stock goes down, at least you are not out anything.


I have saved up A TON of RRSP room for this purpose.