A shareholder receive rights from a company through direct ownership in shares. Not expecting to exercise them, she sells the right on the relevant exchange. What is her capital gain?
A.
The sale price of the rights.
B.
The sales price less the exercise price of the rights.
C.
The current price of the shares less the sale price of the rights.
D.
The current share price less the exercise price of the rights.
When a shareholder sells rights on the exchange, the proceeds of the sale represent the capital gain. Rights provide shareholders with the opportunity to purchase additional shares of a company at a discounted price. If a shareholder chooses not to exercise these rights and instead sells them on the secondary market, the value they receive from the sale constitutes their capital gain.
Rights Offering:
A rights offering allows existing shareholders to purchase additional shares at a set price (exercise price) within a specific period.
Shareholders can either exercise these rights or sell them on the market.
Capital Gain Calculation:
The capital gain from selling the rights equals the sale price. This is because the rights themselves were issued at no cost to the shareholder.
The exercise price is irrelevant to the calculation as the rights were not exercised.
Tax Implications:
The gain from the sale of rights is treated as a capital gain for tax purposes. Only 50% of the capital gain is taxable under Canadian taxation rules.
Since the shareholder did not exercise the rights but sold them, the capital gain is the sale price of the rights. Subtracting the exercise price or using the share price is unnecessary and incorrect for this scenario.
References from CSC Study Materials:
Volume 2, Chapter 24: " Canadian Taxation, " Section on Capital Gains and Losses.
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