Understanding Synthetic Dispositions – Put-Call Collar

We continue our Synthetic Dispositions series this week with a look at an example of a Put-Call Collar and the effect of the March 21, 2013 federal budget has on reporting requirements.

Example: Synthetic Disposition –
Put-Call Collar

Issue: Aaron owns 10,000 shares in XYZ Co. His ACB is $10/share. Their FMV in 2013 is $15/share. He sells an option to Beth to purchase the shares at $15/share in 2015 for $1/share. He also buys an option to purchase the shares for $15 per share with the same expiry date (cost $1/share). If the stock value goes up, he is forced to sell at $15/share. If the stock value goes down, he can sell for $15/share so he cannot lose (except for the costs associated with the options ($2/share). How are these transactions taxed?

Answer: If these options were purchased/sold before budget day (March 21, 2013), the only tax consequence is a capital gain on the proceeds of the option sold to Beth ($1/share or $10,000 capital gain). Additional tax consequences will occur when the options expire or are exercised in 2015. 

If these options were purchased/sold after budget day, Aaron would have to report a capital gain in 2013 of $15/share - $10/share = $5/share or $50,000 as he is deemed to have sold and reacquired the shares at their fair market value in addition to the gain on the sale of the option to Beth. In 2015, if he does not exercise his option to sell the shares, he will have a $1/share ($10,000) capital loss on the expiry of the purchased options.

Excerpted from EverGreen Explanatory Notes. ©Knowledge Bureau.  All rights reserved.

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