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Stock Options: The Billion Dollar Tax Loophole

04/16/2014 12:37 EDT | Updated 06/16/2014 05:59 EDT

As the old saying goes: "A buck is a buck." But at tax time, there is a different set of rules for corporate insiders using a loophole for stock option deductions. This loophole has a $1 billion annual price tag for the rest of us. That lost revenue could easily be used to invest in the things most of us value and are proud of: taking care of wounded veterans and their families, food inspections, child care and rail safety.

Instead it goes into the pockets of bank presidents, mining magnates and most recently, the CEO of Onex. This year, Gerald Schwartz's stock option rewards and his other perks made him more money than the combined payouts for CEOs of Visa, Disney and Coca-Cola. That is no small feat.

The reality for the rest of us is quite different. After an average exemption of about $11,000, chances are you pay tax on every dollar you earn. That applies whether you are a personal care worker, retail clerk, teacher, or nurse -- like the more than 20 million Canadians who file tax returns at this time of year.

But Canada's wealthiest CEOs don't have to pay tax on 50 per cent of income received from cashing in company stock that they have received as part of their compensation. It is not uncommon for payouts to be in the millions of dollars. It is a deal that screams double standard.

Not surprisingly, it is a popular practice in Canada's top publicly traded companies. Nearly a quarter of executive compensation is tied to some kind of stock option deal and it leads to payouts that high-profile money manager Stephen Jarislowsky calls "absolutely obscene."

But that didn't stop Gerry Schwartz from recently cashing out $60 million worth of options and getting a tax holiday from half of it. As jaw-dropping as that is, it pales in comparison to a $300 million windfall for Potash Corporation's Bill Doyle.

Corporations like Onex and Potash justify stock options by saying it encourages directors, officers and consultants to make decisions that will drive up the company's stock performance. Indeed shareholders do benefit - at the expense of the taxpaying public. A growing number of business leaders and analysts are urging governments to eliminate stock options as means of compensation. There are legitimate concerns that stock options are susceptible to manipulation and encourage executives to be short-sighted - or worse. The question then is, why would government encourage that with an outdated tax policy?

The justification for the stock options deduction when it was introduced in 1984 was that it would help struggling companies get on their feet by encouraging employee co-ownership through stock options. But that's not who is cashing in. Over 90% of the benefit goes to the top 1% of income earners.

A recent snapshot of Canada's big three banks shows that their CEOs pocketed a combined $100 million tax-free because of this loophole. That is in addition to their multi-million dollar salaries. Not to be outdone, the Chairman of a Quebec-based pharmaceutical multinational owns more than $175 million in stock options . The CEO of a Calgary based energy giant can look forward to $50 million tax free when he cashes out. Companies in each and every province take advantage of the stock option deduction.

These companies and their senior executives profit from the infrastructure, legal, health and education systems for which the rest of us pay. Yet for decades, the Canadian tax system has careened towards "the more you have the less you should pay" -- sometimes with a shrug, sometimes with a wink. It shouldn't be a surprise that the list of those who benefit from the stock option deduction include former prime ministers and even sitting members of the Senate of Canada.

Unfortunately the free pass on stock option income is just one example in a tax system that has morphed into an unwieldy mass of targeted tax cuts that require the navigational talents of a Bay Street tax lawyer. Even the country's top tax professionals have admitted as much and have called for change.

Former Finance Minister Jim Flaherty identified "tax fairness" as a key theme in his budgets. He even implemented some changes. In 2010, he closed a stock option loophole that allowed both employers and employees to claim at the same time - literally tax code endorsed double-dipping. But subsequent budgets were more talk and not much action.

His successor, former investment banker Joe Oliver has been described as "understanding Bay Street." Let's hope he has the same understanding of the annual revenue losses that Canada incurs to make a few very rich people even richer.

Time and time again, polls and surveys show that Canadians believe that paying taxes is an investment. It is the price we willingly pay for good schools, safe streets, accessible healthcare and a democratic system. But over the years, the tax system has become riddled with loopholes that favour the rich.

Simply put, the system is not fair. Provincial and federal governments are losing billions of dollars of revenue because of these unfair and ineffective tax loopholes.

A good spring cleaning is a welcome activity after a long Canadian winter. A billion dollar loophole is a great place to start.

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