Lennox Lowes was granted, in year one, an option to purchase 50,000 common shares at $1 per share from her employer, Michael Ltd., a Canadian-controlled private corporation. The shares had an estimated fair market value at this date of $1.50. However, according to the agreement, Lennox could not exercise her option until her fourth employment year. Lennox did exercise her entire option in year five; the fair market value of the shares at that time was $3. Lennox sold all the shares in year six, at $6 per share.

Required:

Discuss the tax implications of the above transactions.

Lennox Lowes was granted, in year one, an option to purchase 50,000 common shares at $1 per share from her employer, Michael Ltd., a Canadian-controlled private corporation. The shares had an estimated fair market value at this date of $1.50. However, according to the agreement, Lennox could not exercise her option until her fourth employment year. Lennox did exercise her entire option in year five; the fair market value of the shares at that time was $3. Lennox sold all the shares in year six, at $6 per share.

Required:

Discuss the tax implications of the above transactions.