Opting Inc. has a very generous stock option plan that allows all of their long term employees to participate. Sandra has worked for the Company for over 10 years and has participated in this plan on a regular basis. With regards to the last options granted to her, the following information is relevant:
On January 1, 2014, Sandra was granted options to acquire 275 of the Company's shares at a price of $15.00 per share.At a later point in time, when Sandra exercises these options, the Company's shares have a fair market value of $17.50 per share.On December 1, 2016, all of the shares acquired with the options are sold.
Required: Indicate the tax effect on Sandra of the transactions that took place during 2014, 2015, and 2016 under each of the following independent Cases. Your answer should include the effect on both Net Income for Tax Purposes and Taxable Income. Where relevant, identify these effects separately.
Case A Opting is a Canadian controlled private company. At the time the options were granted, the Company's shares had a fair market value of $16.00 per share. The options are exercised on February 28, 2014. When the shares are sold, the proceeds of dispositions are $20.25 per share.
Case B Opting is a Canadian public company. At the time the options were granted, the Company's shares were trading at $16.00 per share. The options are exercised on February 28, 2014. When the shares are sold, the proceeds of disposition are $16.00 per share.
Case C Opting is a Canadian public company. At the time the options were granted, the Company's shares were trading at $14.00 per share, the options are exercised on July 1,2015. When the shares are sold, the proceeds of disposition are $19.75 per share.
Case D Opting is a Canadian controlled private company. At the time the options were granted, the Company's share had a fair market value of $14.00 per share. The options are exercised on July 1, 2015. When the shares are sold, the proceeds of disposition are $21.50 per share.