Mr. Roy, a former Nortel Networks senior manager, did not realize he was headed for disaster when he exercised options on 5,000 Nortel shares at $50. It was the glory days when the shares were trading at $100 in the stock market, so his immediate gain was $250,000.
He thought the stock was going even higher so he didnt sell right away. As it tumbled, he kept waiting for a rebound that never came.
Now Nortel is bankrupt and the shares are no longer listed in Canada. And to pour salt into the wound, Mr. Roy (not his real name) is now faced with payingtaxes on the benefithe received when he exercised his options. He is losing sleep over the possibility he may have tocash in his RRSP or sell/re-mortgage his home.
Under Canadian tax law, the benefit of $250,000 is deemed to beincome received from his employer. He is is taxed on half of itwhenever the shares are disposed (at his marginal income tax rate when the options were exercised).
If a company disappears through merger, break-up etc., the shareholders are considered to have disposed of their shares. So Mr. Roy is now faced with a giant tax bill on his worthless shares (he cannot apply the capital loss to the benefit because it is consideredemployment income).
He is not alone. Besides other Nortel employees, there are employees of other high tech firms that exercised options during the bubble era. As long as they dont sell their shares, the tax bill is not triggered. But if they pass away or the shares are delisted due to merger, dissolution, etc., the tax bill is triggered.
A lobby group, called Canadians for Fair and Equitable Taxation ( CFET), has been formed to campaign for a change to the law. So far, they have not been successful even though a precedent for relief was established in Canada for a group of JDS Uniphase shareholders and the U.S. government last year amended its tax laws to give relief from the imposition of huge tax bills on worthless shares.