Ms. Joan Hanson is an employee of a Canadian controlled private corporation. During 2019, she receives options to purchase 500 shares of her employer's common stock at a price of $22 per share. At this time, the estimated per share value of the stock is $20.50. During 2020, she exercises all of these options. At this time, the estimated market value of the stock is $31.50 per share. On December 1, 2020, she sells the stock for $38.75 per share. The net effect of the 2020 transactions on her Taxable Income would be:

Question

Quizplus · Accepted Answer

In 2020, when Ms. Joan Hanson exercised the options, the shares had a market value of $31.50 per share, which is higher than the exercise price of $22 per share. Therefore, she has a taxable employment benefit equal to the difference between the fair market value of the shares at the time of exercise ($31.50) and the exercise price ($22) multiplied by the number of shares (500). So, her taxable income will increase by:

($31.50 - $22) x 500 = $4,625

When she later sells the shares for $38.75 per share, she will have a capital gain equal to the difference between the sale price ($38.75) and the adjusted cost base of the shares, which includes the exercise price and the employment benefit. The adjusted cost base per share is:

$22 + (($31.50 - $22) x 1.015) = $29.83

(1.015 is the adjustment factor used to account for the fact that the employment benefit is included in the cost base.)

Therefore, the capital gain per share is:

$38.75 - $29.83 = $8.92

And the total capital gain is:

$8.92 x 500 = $4,460

So the net effect of the 2020 transactions on her taxable income is:

Employment benefit: $4,625

Capital gain: $4,460

Total: $9,085

However, half of the capital gain is taxable, so the final increase in her taxable income is:

($4,625 + $4,460/2) = $6,845

This corresponds to answer choice C.

Ms Joan Hanson Is an Employee of a Canadian Controlled