Question

TIF PROBLEM THREE - 12 Employee Stock Options During January, 2013, Lastech Inc. issued options to their employee, Ms. Marianne Black. The options allowed Ms. Black to acquire 1,500 of the Company's common shares at an option price of $23 per share. At the point in time when the options were exercised, the fair market value of the shares was $25 per share. All of the shares that are acquired through the options are sold on December 31, 2015 at a price of $28 per share. Required: Indicate the tax effect on Ms. Black of the transactions that took place during 2013, 2014, and 2015 under each of the following independent Cases. Your answer should include the effect on both Net Income For Tax Purposes and Taxable Income. Where relevant, identify these effects separately.

Case A Lastech Inc. is a Canadian public company. At the time the options were granted, the shares were trading at $22 per share. The options were exercised on July 1, 2014.

Case B Lastech Inc. is a Canadian public company. At the time the options were granted, the shares were trading at $24 per share. The options were exercised on July 1, 2014.

Case C Lastech Inc. is a Canadian controlled private corporation. At the time the options were granted, the Company’s shares had a fair market value of $23 per share. The options were exercised on July 1, 2014.

Case D Lastech Inc. is a Canadian controlled private corporation. At the time the options were granted, the Company’s shares had a fair market value of $24 per share. The options were exercised on July 1, 2013.

Answer 1

In case of Public Listed Company, On the date that you are granted or receive stock options in an employer that is a publicly listed company, you do not have a personal tax consequence. However, on the date that you purchase the shares, you will get a taxable benefit equal to the difference between the exercise price of the shares and the market value of the shares on that date. You cannot postpone the timing of this taxable benefit.

Case A

Since share price is $ 22 and exercise price is $ 23, taxable deductable loss would be $ 1 per share

Case B

Since share price is $ 24 and exercise price is $ 23, taxable gain would be $ 1 per share. Therefore, the taxable benefit that will be included in your income at the time of exercise is $20 / share.

When your employer grants or gives a stock option to you, you do not have to include anything in your taxable income at that time. In other words, there is no tax consequence to you at the grant date.

When you exercise a stock option, which means to purchase the shares through your employer, you must include a taxable benefit in your income. The taxable benefit is equal to the difference between the exercise price (i.e. the price you paid to buy the shares) and the market value of the shares at the time of purchase.

There is a special tax deferral for employees of CCPCs. The taxable benefit can be postponed to the date the shares are sold. This makes it easier for employees to pay tax because they will have cash available from the sale of the shares.

Case C

Since the shares are granted at $23 and exercise price is $ 23, there would be no gain or loss

Case D

There would be a gain of $ 1 per share as option price is $ 23 and exercise price is $ 24