Second, upon the sale of the stock acquired pursuant to the option, the difference between the proceeds of disposition of the stock and the fair market value of the stock on the date the option is exercised is taxed as a capital gain or capital loss, as the case may be. One exception concerns stock options granted by a Canadian-controlled private corporation (“CCPC”). To be precise, the AMT imposed is the amount by which the tentative minimum tax liability exceeds the regular tax liability. The tentative minimum tax liability is calculated by recomputing regular tax liability, first by adding back to taxable income tax preference items and by making certain adjustments in order to determine the alternative minimum taxable income (“AMTI”), then by applying the appropriate AMT rate to the amount by which AMTI exceeds the taxpayer’s exemption amount.
Under subsection 7(1.1), if certain conditions are met, the inclusion of the employment income benefit is deferred until the time that the shares are sold. In addition, there is a deduction equal to one-half of the inclusion if either the option strike price is equal to or greater than the fair market value of the share at the time of the grant (section 110(1)(d)) or if the shares acquired on exercise are held for a minimum two- year period before sale (paragraph 110(1)(d.1)). As the backdating scandal mainly involves public corporations, we do not consider the tax treatment of options issued by CCPCs further.
S. It is important to understand the differences in these rules, particularly the extent to which these differences affect the after-tax return to a Canadian executive compared to a U. Part II considers these personal income tax rules in detail. For individuals, the exemption amount depends on whether the individual is married and filing a joint return (in which case the amount is $45,000) or is a surviving spouse ($45,000) or is single ($33,750).
In particular, the relevant personal income tax rules in the two countries are compared and contrasted to demonstrate the role these rules may play in determining the demand for backdated options in the two countries. As will be shown, this is potentially an important component in the decision of executives to accept backdated stock options and may provide an additional incentive for executives to demand them in Canada.
The first step in untangling the causes of backdating is to acknowledge that the backdating phenomenon must be driven by both supply and demand factors. Lipman, Incentive Stock Options and the Alternative Minimum Tax: The Worst of Time, 39 Harv. Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub.