In Year 1, a public company granted an employee resident in Canada an option to purchase 1,000 common shares of the employer company for $10 per share. The fair market value of the shares at the date the option was granted was $8 per share. No other stock options were granted to this employee during Year 1. In Year 2, when the shares were worth $16 per share the employee exercised the option and purchased all 1,000 shares.
In Year 5, the employee sold the 1,000 shares for $38 per share. The shares do not have any special dividend rights or restrictions.
Discuss the income tax consequences to the employee from these transactions (show calculations). Income tax reference: ITA 7(1), 110(1)(d).