ISO taxation with tax treaty

[craudiu]

Hi,

I am having some trouble understanding how ISOs would be taxed (if so) in Canada.
Starting with a simple situation:
Canadian resident, H1B holder who commutes to the US to work. Let's say this person was granted ISOs (incentive stock options), exercised them and sold them following all the U.S. restrictions to maintain the ISO status (waiting 2 years after grant + 1 year after exercise before selling). In this case, all the gains would be considered as long term capital gains by the US. All while being employed by the same US employer.
Let's say there are 1,000 stock options at $10 which are exercised when the FMV is $15 and sold a year later for $20. "Gains" of $5,000 upon exercising and $5,000 when selling.
How is this seen by Canada? Is it considered
(a) a $10,000 income exempt from tax by treaty (and therefore being taxable only in the US, no tax payable in Canada)?
(b) a $10,000 capital gain, like the US, and being taxable with a 50% deduction ($5,000 added to the Cdn income calculation)?
(c) $5,000 income plus $5,000 capital gain ($7,500 added to the Cdn income)?

Also, just the fact of exercising such options may generate AMT in the US on the $5,000 gain. Will it trigger any tax event in Canada, considering the treaty?