Question

Annie is an employee of ABC Ltd., a Canadian controlled private corporation. On April 1, 2015, ABC Ltd. granted Annie stock options to buy 10,000 shares in the company at an exercise price of $25 per share.

On February 16, 2016, she exercised a portion of her options and received 8000 shares. On March 31, 2019, Annie exercised the remainder of her options. On May 1, 2019 she sold all her shares.

ABC Ltd. shares had the following fair market values -

April 1, 2015 $27 per share

February 16, 2016 $42 per share

March 31, 2019 $33 per share

May 1, 2019 $45 per share

a) For each taxation year 2015, 2016 and 2019, indicate the effect of the above transactions on Annie's income from employment.

b) For each taxation year 2015, 2016, and 2019, indicate the effect of the above transactions on Annie's income for income tax purposes.

c) For each taxation year 2015, 2016, and 2019, indicate the effect of the above transactions on Annie's taxable income

Answer 1

Key Points:

• Short-term capital gains result from selling capital assets owned for one year or less.
• Long-term capital gains result from selling capital assets owned for more than one year.
• Assets that are subject to capital gains tax include stocks, bonds, precious metals, real estate, and property.
• Long-term gains are subject to unique tax brackets that are generally more favorable than the regular income tax brackets
• The long-term capital gains tax rate is 0%, 15% or 20% depending on your taxable income and filing status. They are generally lower than short-term capital gains tax rates.
• Capital gain = selling price – purchase price

a)
For the year 2015, No effect on Annie's income from employment.
For the year 2016, 8000 Shares received at an exercise price of $25 per share. So no effect on income from employment.
For the year 2016, Shares sold at an exercise price of $45 per share. So no effect on income from employment.

b)
For years 2015 and 2016 No effect on Annie's income for income tax purposes.
For the year 2019 sold 10000 shares at $45 per share
Long term capital gains = 8000 x ($45 - $25) = $160,000
Short term capital gains = 2000 x ($45 - $25) = $40,000
So the transaction effects Annie's income for income tax purposes increases by $200,000

c)
For years 2015 and 2016 No effect on Annie's taxable income.
For the year 2019 sold 10000 shares at $45 per share
Long term capital gains = 8000 x ($45 - $25) = $160,000
Short term capital gains = 2000 x ($45 - $25) = $40,000
So the transaction effects Annie's taxable income by $200,000