Question

Jerry Farrow is employed by a Canadian controlled private corporation. In 2018, he was granted options to acquire 625 of his employer's shares at $92 per share. At that time, it was estimated that the fair market value of the shares was $90. In 2019, when the estimated fair market value of the shares is $95 per share, he exercises all of these options. In 2020, he sells 125 of the shares for $85 per share. Indicate the tax consequences of the events in 2018, 2019, and 2020 on Mr. Farrow's Net Income For Tax Purposes and on his Taxable Income. Where relevant, identify these effects separately.

Answer 1

A) When options were granted Grant of the options in 2018 doesn't affect Net Income For Tax Purposes orTaxable Income

.B) When options were excercised - In 2019 Due to CCPC involvement , exercise of the options does not affect taxable Income. However, the employment income inclusion for all 625 shares is calculated for this year .

C) When 125 of the total 625 shares sold - in 2020 - When 125 of the 625 shares are sold in 2020, the tax consequences are as follows:

Deferred Employment Income: Fair Market Value At Exercise (125)*($95) = $11,875

Cost Of Shares (125)*($92) = ( 11,500)

Employment Income Inclusion (Increase InNet Income For Tax Purposes) $375 (reduce cost from FMV)

Deduction Under ITA 110(1)(d) at the rate of 1/2 = 1/2*($375)= 188

Hence effective increase in taxable income = +375-188 = 188 Dollars

Further there would be capital loss that is allowed -

calculated as follows: Proceeds Of Disposition (125)*($85) = $10,625

Adjusted Cost Base (125)*($95) = ( 11,875)

Capital Loss = ($ 1,250)

Inclusion Rate @50% (1/2) Allowable Loss = (1250*1/2) = ($625)

Loss deduction allowed = 625 Dollars

Above loss can be deducted in the  taxable income to the extent of taxable capital gains in 2020.