Question

Pasqual Melo is employed by a public corporation. On January 1, 2019, she was given an option to purchase 1,000 shares of the public corporation for $8 per share the option extended for two years) On December 15, 2019, she exercised her option and bought 1,000 shares et $8 per share (total = $8,000). On June 15, 2022, she sold the 1.000 shares. The value of the shares at the particular dates was as follows: Date option granted Date option exercised Date shares sold $ 8.50 10 14 Required: Determine the amount and type of income and when that income is taxable. Year Amount FMV of shares on exercise date Cost of shares acquired on exercise date Employment Income Stock option deduction Taxable income When the shares are sold Proceeds from Sale ACB of shares Capital Gain Taxable capital gain Determine the amount and type of income and when that income is taxable if the value of the shares at the date the option was granted was $8 rather than $8.50? FMV of shares on exercise date Cost of shares acquired on exercise date Employment Income Stock option deduction Taxable income When the shares are sold Proceeds from Sale ACB of shares Capital Gain Taxable capital gain Determine the amount and type of income and when that income was taxable if the employer is a Canadian-controlled private corporation FMV of shares on exercise date Cost of shares acquired on exercise date Employment Income Stock option deduction Taxable income When the shares are sold Proceeds from Sale ACB of shares Capital Gain

Answer 1

SOLUTION 1. In 20x0, the year in which the option was exercised and the shares purchased the following employment income would be earned for tax purposes (ITA 7(1): Value of shares on purchase date (1,000 x $10) $10,000 Cost of shares acquired (1,000 x $8) (8,000) Employment Income $ 2,000 In 20X3, the year the shares are sold -

Selling price (1,000 x $14) $14,000 Value of shares at purchase date (1,000 x $10) (10,000) Capital Gain $ 4,000 Taxable capital gain (1/2) $ 2,000 2. Since the option is not in the money at the grant date (i.e., the option price is not less than the grant date value), in 20xo, one-half of the employment income from the stock option (1/2 x $2,000 = $1,000) can be deducted from net income in computing taxable income as a stock option deduction (ITA 110(1)(d)]. 3. If the employer was a Canadian controlled private corporation the answer in part 1 would change in two ways: a. The timing of the recognition of the stock option benefit for tax purposes. The employment income of $2,000 ((1,000 x $10) - (1,000 x $8)] is included in the taxpayer's 20x3 income for tax purposes (the year the shares were sold) rather than in 20X0 (the year the shares were acquired) (ITA 7(1.1)]. b. The stock option deduction. Because the employee held the shares for at least two years, when computing taxable income in 20X3, one-half of the employment income from the stock option (1/2 x $2,000 = $1,000) can be deducted as a stock option deduction (ITA 110(1)(d.1)). Capital gain, in this case, may be eligible for the capital gains deduction as the shares may be qualified small business corporation shares if all or substantially all of the corporation's assets are used in an active business [ITA 110.6(1)].