CRA states that the FMV of a stock option is higher than its in-the-money value
The s. 7 rules did not apply where an employee of a consulting company received, as part of his compensation, incentive stock options that had been received by the company on one of its engagements. Accordingly, the fair market value of the options was included in his employment income when received. As to determining “FMV,” CRA stated:
[T]he intrinsic value of an option is not reflective of its FMV; rather, a valuation method that is appropriate in the circumstances should be used to determine the FMV.
As to the subsequent exercise and sale, CRA stated:
The tax consequences that result from the Employee’s exercise of the Options in Year 2 and the disposition of the optioned shares in Year 3 will depend on the facts. For information, refer to Interpretation Bulletin IT-479R, Transactions in Securities.
This was less crisp (and no more poetic) than saying something like: assuming that the Employee holds the Options and optioned shares on capital account, the FMV of the options when received will be added to their cost under s. 52(1), and the resulting ACB of the options will be added to the ACB of the optioned shares on exercise under s. 49(3)(b)(ii).
Neal Armstrong. Summaries of 7 February 2018 External T.I. 2016-0673331E5 under s. 9 – computation of profit.