Question

juliet is an employee of a canadian public company. in april of year 1, she received an option to purchase 1,000 common shares of her employer at $30 per share when the shares were worth $19 per share. in december of the same year, when the fair market value of the shares was $40 per share, juliet exercised her options. in january of year 2, juliet sold 100% of her shares for $48 per share. what is the employee benefit that juliet will have to report on her tax return in year 1?

Answer 1

Juliet will report an employee benefit of $10,000 on her tax return for year 1, calculated as the difference between the exercise price and the market value at the time of exercising the options, multiplied by the number of shares.

Step-by-step explanation:

Juliet received an option to purchase shares of her employer's common stock at a strike price of $30 per share when the market value was $19. However, she exercised the options when the fair market value was $40 per share. In Canadian tax law, the benefit from exercising stock options provided by an employer is considered taxable income. The employee benefit is calculated as the difference between the fair market value of the shares at the time the options are exercised and the strike price that the employee pays for the shares.

In Juliet's case, she exercised her options when the fair market value was $40, and she bought them at $30. Therefore, the benefit she needs to report on her tax return in year 1 is the difference per share multiplied by the number of shares:

• Benefit per share = $40 (FMV) - $30 (Strike price) = $10
• Total benefit = $10 x 1000 shares = $10,000

Juliet will have to report an employee benefit of $10,000 on her tax return for year 1.