Ron Vader (left) and his group our out to save stock option holders from unfair tax burdens. (Darren Brown, OBJ)

Tech workers burned by huge tax bills on stock options number in thousands, says group

Some former workers of Nortel Networks are so nervous about the tax repercussions of the telecom firm being sold into private hands like BCE, they hope they die before it ever happens.

That's the reality for dozens, some say thousands, of Canadians left with stock options from the heady days of the tech boom that have proven to be federal tax time bombs. A group of people is trying to do something about it, among them former Nortel executive Ragui Kamal.

Mr. Kamal was a former vice-president of Nortel in Ottawa. Prior to leaving the firm in 1999, he exercised the stock options given to him as an employee benefit but did not sell the stocks. It wasn't until he was doing his income taxes later, after the stocks had plummeted in value, that he realized he owed the government taxes on the value of the stocks at the time that he exercised them.

While he did not gain from their rise in value, he owed taxes on the amount the share price had increased – to the tune of $300,000.

"It's ruining lives, stressing people out . . . for a technicality," he said. "None of us believe the government intended these kinds of consequences. Tax us on money we really made. Don't tax us on phantom income."

Mr. Kamal is a member of Canadians for Fair and Equitable Taxation (CFET), a group of about two dozen people across Canada – a number of whom are in Ottawa – who hope to recruit others in the same predicament, in an effort to exert more pressure on the federal government to either change tax laws retroactively, or to provide an exemption.

The CFET believes thousands of people have been impacted by the laws. Ron Vader, a former Entrust Technologies employee, also with CFET, said a "perfect storm" of events put employees into the unenviable position.

"It was really a coincidence of events, where in the late 1990s, there was this growth in the dotcom, Internet and general high tech.

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"Consequently, employers were handing out a great deal of stock options as an employment incentive . . . Of course, when all this came tumbling down at the beginning of 2000, individuals found themselves in a situation that otherwise wouldn't normally occur."

The United States, they say, which had tax rules on stock options similar to Canada's, is in the midst of changing them. Two apparent suicides allegedly linked to the fiasco may have speeded up the situation, however.

"What do we need? Do we need suicides in Canada?" asked Mr. Kamal.

The solution is simple, he said. "Allow the capital loss to be used against the employment benefit gain, retroactively. Let me redo my taxes for 2001. Let me claim the loss against the gain."

Giving the men some reason for hope are recent actions by Minister of National Revenue Gordon O'Connor. The MP for Carleton-Mississippi Mills has approved "remissions" for five individuals across Canada as well as a group of 32 former SDL Optics employees in British Columbia. He said in Parliament March 12 that he was willing to look at other cases, but was "unaware" of any others.

Mr. Vader, who in 2002 requested a remission to the Canada Revenue Agency but was denied, has since appealed, this time with the help of local MP John Baird.

However, it might not be so easy, said Alan MacDonald, an investment adviser with Richardson Partners in Ottawa. He knows of people in the same situation. He doesn't think the group is as large as CFET believes, as most workers took the cash when they exercised their options.

"I hate to pin it on someone, but it's the employees who got themselves into the fix," he added. "I can understand why they're annoyed, but that was a pretty well-known law at the time."

Whether or not you take the cash when you exercise the stock by selling, "you've had a tax event," he said. "You want to make sure you set aside the money for the taxes that you owe."

These days, said Mr. MacDonald, companies typically withhold accrued taxes to remit to the government when their employees exercise them. But earlier this decade, that didn't happen as much. Mr. MacDonald said that the times were strangely loosey-goosey.

"In 1999 and 2000 . . . no one ever thought tech stocks would go down. (They) didn't feel high risk at the time."

But there exist other kinks in the law. Tax laws were changed recently, but only partially, allowing workers who exercised their options but who did not sell them to keep deferring payment. In theory, they could be deferred in perpetuity.

Unfortunately, the shares could be "sold" involuntarily if the public company is sold in a private equity deal such as in BCE's case, or if the individual leaves the country.

Mr. Kamal – who has indeed exercised shares he has not yet sold – can be on the hook for "substantially more" than the $300,000 he's already paid the federal government in taxes, if Nortel is sold into private hands. He said he – as well as others in his group – are worried Nortel could be flipped.

"Have you seen (Nortel's) results recently?" he asked. "Their results aren't stellar. There are lots of rumours lately that they are a prime candidate (for a sale)."

One member of their group is so worried, Mr. Kamal said, that if a sale of Nortel did happen, he hoped to die before the deal was done.

"This guy is 58," said Mr. Kamal. "He's retired. If Nortel is to be taken private, he basically has to sell his home, cash in his RRSPs, and go join the bread lines, because he has no additional means of support.

"If Nortel is sold tomorrow . . . he goes to the poor house. If he dies before Nortel is sold . . . his estate actually remains whole."

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Canadian for Fair and Equitable Taxation.