Question

William Jenkins has been employed for many years by a Canadian controlled private corporation. In 2012, William Jenkins was granted options to acquire 4,000 shares of his employer’s stock for $50 per share. At this time, the shares have a fair market value of $60 per share.  On January 10, 2014, Dr. Dobson exercises all of these options. At this time, the fair market value of the shares is $80 per share. On February 10, 2018, he sells all of the shares for $100 per share. Calculate and show the effect of the transactions that took place during each relevant year on Mr. William Jenkin’s income, and show his Net Income For Tax Purposes and Taxable Income under the Canadian Taxation Regulations. Identify any carry forwards

Answer 1

ANSWER

- In 2012 William was granted the option to buy 4,000 shares for $50 per share
- Value of shares in 2012 , $60 per share

- In 2014 , exercises the options provided
- Value of shares in 2014, $80 per share

- in 2018 all the shares were sold at $100 per share


Option exercised of buying the share

- Buying price of share

= 4000 x $50
= $200,000

- Selling price of share

= 4000 x $100
= $400,000


Income earned after selling of shares

= Selling price - Buying price
= $400,000 - $200,000
= $200,000


Amount included in williams overall net income for tax purpose in year 2018 is

= $200,000 / (7 years - 3 years )
= $50,000

So net income for tax purposes in year 2018 is $50,000

Also calculating year wise

Effect on taxable income in the year 2014

= No. of shares x ( Market price - exercise price )
= 4000 x ( $80-$50)
= $120,000

Effect on taxable income in the year 2018

= No. of shares x ( Market price - exercise price )
= 4000 x ( $100-$80)
= $80,000

The total of 2014 and 2018 proves the above calculated net income of $200,000