Royal Inc has a very generous stock option plan that allows all of their long term employees to participate Shera 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, 2017, Shera was granted options to acquire 275 of the Companys shares at a price of $15 00 per share At a later point in time, when Shera exercises these options, the Companys shares have a fair market value of $17 50 per share On December 1, 2019, all of the shares acquired with the options are sold Required Indicate the tax effect on Shera of the transactions that took place during 2017, 2018, and 2019 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 Royal is a Canadian controlled private company At the time the options were granted, the Companys shares had a fair market value of $16 00 per share The options are exercised on February 28, 2017 When the shares are sold, the proceeds of disposition are $20 25 per share Provide a detailed explanation for Case A Case B Royal is a Canadian public company At the time the options were granted, the Companys shares were trading at $14 00 per share The options are exercised on July 1, 2018 When the shares are sold, the proceeds of disposition are $19 75 per share Provide a detailed explanation for Case B Case C Royal is a Canadian controlled private company At the time the options were granted, the Companys shares had a fair market value of $14 00 per share The options are exercised on July 1, 2018 When the shares are sold, the proceeds of disposition are $21 50 per share Provide a detailed explanation for Case C

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Aug 31, 2024

Royal Inc. has a very generous stock option plan that allows all of their long term employees to participate. Shera has worked for the Company

Royal Inc. has a very generous stock option plan that allows all of their long term employees to participate. Shera 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, 2017, Shera was granted options to acquire 275 of the Companys shares at a price of $15.00 per share.
At a later point in time, when Shera exercises these options, the Companys shares have a fair market value of $17.50 per share.
On December 1, 2019, all of the shares acquired with the options are sold.

Required: Indicate the tax effect on Shera of the transactions that took place during 2017, 2018, and 2019 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 Royal is a Canadian controlled private company. At the time the options were granted, the Companys shares had a fair market value of $16.00 per share. The options are exercised on February 28, 2017. When the shares are sold, the proceeds of disposition are $20.25 per share. Provide a detailed explanation for Case A.

Case B Royal is a Canadian public company. At the time the options were granted, the Companys shares were trading at $14.00 per share. The options are exercised on July 1, 2018. When the shares are sold, the proceeds of disposition are $19.75 per share. Provide a detailed explanation for Case B.

Case C Royal is a Canadian controlled private company. At the time the options were granted, the Companys shares had a fair market value of $14.00 per share. The options are exercised on July 1, 2018. When the shares are sold, the proceeds of disposition are $21.50 per share. Provide a detailed explanation for Case C.