Question

The following info on employee stock options is available:

You are part of the management team at a Canadian public company and you are eligible for the employee stock option plan.

A few years ago you received an option to purchase the following # of shares: 1,100

The current price (per share) & the FMV on the date of exercise is: $36

The option requires that you pay the option price of (per share), when exercising the options: $31

FMV of the shares (per share) when the option was granted: $31

You believe the FV of the shares will increase and plan to sell these shares when they reach (per share): $40

Required: calculate the 1) amount of employment income you will be required to report and when you must report it as a result of exercising the option and buying & 2) the tax cost (ACB) going forward.

Answer 1

1) On the date employee purchase the shares; Employee 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.

Exercise price of the shares = $31

Fair market value of the shares on the date of purchase = $36

Taxable benefit per share = $36 - $31 = $5

Total taxable benefit = $5*1100 = $5,500

Amount of employment income, which will be required to report when exercising the options is = $5,500

2) Going forward, if the employee choose to hold onto the shares and sell them in the future for a profit, the profit made from the sale will be classified as a capital gain and subject to tax.

Suppose, if I hold the shares until share price reaches $40 and sold the shares at $40.

Then I need to pay tax on the profit received.

Amount of capital again = ($40-$36)*1100 = 4*1100= $4,400

So, I need to pay tax on the capital gain of $4,400