The Scenario- Peters optiions are set at .22. Over the course of time, the value of the shares on the open market rises to be worth $1.25 a share. So, Peter exercises part of his options and buys 488040 shares for .22 each. His cost, then, is $107368.80. The shares are worth $610050.00 (488040 shares at $1.25 each). He makes a nice profit of $502681.00 in the process.

This is going to trigger some tax. He has just realized a benefit of $1.03 per share (1.25 less $.22), for a total benefit of $502681.00. This will be taxable not as a capital gain, but as employment income. Most stock option plans in Canada are structured to take advantage of a stock option deduction equal to 50 per cent of the taxable benefit. In this example, then, we’ll assume that just $251340.50 of the benefit (one half of $502681.00) will be taxable. This will give rise to a tax bill of $125670.25 for someone in a high tax bracket in Ontario in 2015.

I'm by no means a Tax Expert. I thought I'd try and do something useful (for once) and help people better understand what impact is created by option owners when they exercise their Options. As you can see, if I was Peter, I'd want these exercised Pronto. Wish I could be there Tues. Cheers.