Question 4: 6 Marks (3Marks x 2)

You have been asked for advice on employee stock options by two different clients.

(a) James is part of the management team of a Canadian public company and is eligible for the

employee stock option plan. A few years ago he received an option on 2,000 shares. The current price of the shares is $45, and he is optimistic that it will go up. The option requires him to pay the option price of $40 (the fair market value at the time the option was granted) for the shares at the time he exercises his option. He plans to sell these shares when they reach $55.

He has asked you to tell him the amount of income he will have to report and when he must report as a result of exercising the option and buying the shares for $40.

Answer:

(b) Nina is part of the management team of a Canadian-controlled private company and is eligible for the employee stock option plan. A few years ago she received an option on 4,000 shares. The current price of the shares is $65, and she is optimistic that it will go up. The option requires her to pay the option price of $60 (the fair market value at the time the option was granted) for the shares at the time she exercises her option. She plans to sell these shares when they reach $75.

She has asked you to tell her the amount of income she will have to report and when she must

report as a result of exercising the option and buying the shares for $60.