January 14, 2011

Honourable Jim Flaherty Sent by Email Jan. 14, 2011

Minister of Finance

House of Commons

Ottawa, ON K1A 0A6

Re: Taxation of Employee Stock Option Plans

Dear Minister Flaherty:

On behalf of the BC Technology Industry, we thank the Government of Canada for

recognizing in the 2010 Budget the problems with how stock options are taxed in

Canada. That hard-working, well-intentioned, Canadians can find themselves with a tax

liability on exercised options which exceeds the value of their equity, illustrates the

fundamental problems with how options are taxed. Unfortunately, as companies,

particularly small and medium-sized enterprises (SMEs) endeavour to implement the

prescribed changes, they are finding that the cure may be worse than the disease.

With these changes passing into law, we ask the Government of Canada to keep an open

ear as they are implemented – particularly the withholding provisions. We urge the

Government to invite and listen to feedback and concerns from companies trying to be

compliant and to watch for the unintended consequences that some of our leading

companies are already experiencing.

While the system was not perfect prior to the 2010 changes, Canada’s SME’s did

understand how to navigate the system. For this reason we believe that the country

should have continued to operate under the old system until the Government of Canada

had more opportunity to fully review the implications of its changes. As entrepreneurs,

we want Canada to secure itself as a global leader in the attraction and retention of a

highly skilled workforce. We believe that these changes will impair that objective.

To ensure Canada attracts and retains talent, we encourage the Government of Canada

to undertake a wholesale review of stock option compensation in order to maximize

Canada’s global competitiveness for the long term.

Background

Feedback from companies and employees in our industry suggest that there are two

fundamental issues that need to be addressed with respect to stock option compensation:

1. Tax Real Gains Instead of Virtual Gains – tax employees when the stocks are finally

sold, not when the options are exercised. By taxing stock options twice (once at their

exercise and again at their sale), the government is creating an overly complex

environment that it continues to band-aid with more administration.

2. Reduce Complex Administration – remove the special rules for each class of company in

Canada (CCPC, non-CCPC, public). These special rules are exceedingly complex for

companies to understand, and even worse to communicate to employees. The

complexity is even greater for firms that switch from one company class to another, as

many successful technology firms do as they grow.

The Importance of Equity-Based Compensation

Access to capital and talent are key interrelated issues for companies in Canada’s

technology industry. As a knowledge-based industry, Canadian technology firms require

a highly skilled workforce, making attraction and retention of world-class talent critical

to their success.

Due to several access-to-capital issues, Canadian technology companies are chronically

underfunded, particularly in early and high growth stages. As such, equity-based

compensation is a key tool for these companies, not only to compensate their founders

and senior employees, but also to attract and retain highly skilled personnel by offering

equity in lieu of cash compensation.

To attract and retain highly-skilled talent, Canadian technology SME’s must provide

compensation that is competitive with that of large multi-nationals. Using equity

compensation, SME’s can preserve cash without losing or forgoing the required skilled

talent to drive the success of their companies. Larger companies wanting to attract the

best available managerial and technical talent use stock options as an additional attraction

tool in this international competition. For employees, equity-based compensation

provides a level of remuneration that replaces foregone wages and potentially provides a

level of return that is commensurate with the risk and commitment of a technology start-

up.

Impact of the 2010 Changes

For companies trying to be compliant, the new changes only serve to create more

ambiguity and confusion. Worse, there has been little communication from the

Government of Canada to clarify the situation.

As a result, the 2010 changes are creating a number of unintended consequences,

particularly surrounding events that change a company’s status. Events such as large

investments by foreign investors, and IPO’s, are typically considered to be milestone

events in the life of technology companies. However, the confusion surrounding the

changes and the uncertainty of the impact on the company has caused at least one BC

technology company to shelve its IPO, and other companies to curtail international

investment fundraising activities that could lead to the loss of their CCPC status. In

addition, several BC companies that were considering introducing stock option plans for

their employees have put those plans on hold.

For employees, complex rules and taxation scenarios are discouraging employees from

taking options and instead are choosing opportunities that offer cash-only remuneration

packages.

To be an incentive, employee stock option plans must be easy to communicate to

employees and must have relatively predictable outcomes. Continued changes to stock

options without tackling the fundamental issue of taxing virtual gains are making the

situation worse.

Final Thoughts

Canada is fiscally strong and we can not only afford but have to seize the opportunity to

improve our global competitiveness and to address our productivity deficits. Helping

Canadian companies (in all sectors) attract and retain the highly skilled workforce needed

to support Canada’s economy by revisiting the structural issues surrounding stock option

compensation is one important step in that endeavour.

We, the undersigned, call upon the Government of Canada to encourage more Canadians

to invest in the companies they work for and own, and to help Canadian companies to be

strong enough to take on the world and generate export wealth. We want to work with

the Government to establish a system that rewards Canadians for working hard, for being

entrepreneurs, and for taking risks.

On behalf of the BCTIA and our colleagues across BC’s technology industry, we thank

you for your consideration of these recommendations. We look forward to working with

you in their enactment.

Sincerely,

Pascal Spothelfer,

President & CEO

On behalf of:

Scott Edmonds, President & CEO, WebTech Wireless Inc

Robert Eisses Ken A. Fielding, President & CEO, Delta-Q Technologies

Jim Fletcher, Director, Vision Critical, Recombo Inc., Tyze

Paul Gorton, Founder & CEO, Park-Networks Inc.

Dr. Christopher Guzy, CTO, Ballard Power Systems

Caroline Jellinck, Partner, Odgers & Berndtson

Barry Jinks, President & CEO, Colligo Networks Eric Johnson, IBM

Moe Kermani, President & CEO, BYCAST

Paul Lindahl, President & CEO, NGrain Corp.

Richard MacKellar, Managing Director, Chrysalix Energy Venture Capital Andrew Marchant, Partner, Accenture

Ross McLaughlan, President & CEO, Lignol Energy Corp.

Andrew Reid, Founder & President, Vision Critical Jonathan Rhone, President & CEO, Nexterra Systems

Howard Riback, CFO, Ventures West Capital Ltd.

Angela Lau, Director, MacDonald, Dettwiler and Assoc. Ralph Turfus, Principal, Arbutus Place Investments

Wal van Lierop, CEO,Chryaslix Energy Venture Capital

cc: Rt. Hon. Stephen Harper, Prime Minister of Canada

Hon. Tony Clement, Minister of Industry

Hon. Keith Ashfield, Minister of National Revenue

Hon. Rob Moore, Minister of State (Small Business and Tourism) Hon. Lynne Yelich, Minister of State (Western Economic Diversification)

Members of Parliament