If you work for a large company, chances are Employee Stock Option benefits (ESOPs) have been replaced with Restricted Stock Units (RSUs). There are significant differences between tax treatment of ESOPs and RSUs. In this post, we will look at how RSUs are taxed for Canadian residents. Restricted Stock Units are simply a promise to issue stock at some future vesting date(s) provided some condition(s) (often just being an employee of the company on the vesting date) are met. It is important here to distinguish RSUs from Restricted Stock Awards (RSAs). RSAs are stock grants in which employees may not sell or transfer the shares until they vest but are entitled to dividend payments. RSAs are unpopular in Canada due to their tax treatment: the FMV of the the RSA grant is taxed as employment income at grant but employees will receive the cash from the sale after the grants vest, which may be many years later.

Like stock options, there are no tax implications when RSUs are granted to an employee. At the time of vesting, the FMV of the RSU grants that vested is considered as employment income. Starting in 2011, the Canada Revenue Agency requires employers to withhold taxes on employee stock benefits, including RSUs. Therefore, your employer will likely sell a portion of vested restricted stock and remit it to the CRA. The FMV of restricted stock and taxes withheld will be added to the Employment Income (Line 101) and Income Tax Deducted (Line 437) of the T4 slip for the financial year.

The employee has to keep track of restricted stock FMV at the time of vesting. If there are multiple vesting events, the adjusted cost base of the stock must be calculated. When the stocks are eventually sold, the difference between the proceeds of the sale and the adjusted cost base of the shares should be reported in Schedule 3 Capital Gains (or Losses).

Let’s take an example. Sue works for ABC Corp. and was awarded 300 RSUs on May 1, 2011. ⅙th of the award will vest every 6 months provided Sue is employed on the vesting date. Sue’s first batch of 50 units of restricted stock vested on November 1, 2011. ABC was trading at $10 and Sue’s employer sold 23 shares and remitted the withholding tax to CRA. Sue’s second batch of 50 units of restricted stock vested on May 1, 2012. ABC was trading at $12 and Sue’s employer again sold 23 shares and remitted the withholding tax to CRA. In both cases, her employer included $500 and $600 in employment income and $230 and $276 in income tax deducted in Sue’s T4 for 2011 and 2012 respectively. Note that, unlike stock options which are eligible for the stock option deduction and hence are taxed at 50 percent, there is no favourable tax treatment accorded to RSUs.

On May 15, 2012, ABC hit $15 and Sue sold the 54 shares of ABC Corp. that she holds. Sue’s adjusted cost base is $11 (27 shares acquired at $10 and 27 shares acquired at $12). Since she sold for $15, her capital gains are $216, which she would declare when filing her 2012 tax return in Schedule 3.

This article has 30 comments

  1. Thanks for the timely post. My first round of RSUs vest this week.

  2. Based on your example where 23% of RSUs are sold to pay taxes, I assume that only half the employment income from RSUs gets added to income (similar to stock options). Is that right?

  3. @Michael: Good point. There is no stock option deduction available for RSUs. Therefore, the entire FMV of the vested shares are added to employment income and there is no offsetting stock option deduction.

  4. “Let’s take an example. Sue works for ABC Corp. and was awarded 600 RSUs on May 1, 2011. ⅙th of the award will vest every 6 months provided Sue is employed on the vesting date. Sue’s first batch of 50 units of restricted stock vested on November 1, 2011. ”

    Seems like something is wrong here. 1/6 of 600 is not 50.

    My company has been selling 23% of my RSUs to cover taxes for many years now (my marginal tax rate is 46%), has issued my T4s to that effect, and has assured me that this is the correct tax treatment of RSUs. Do you think they are incorrect?

  5. @Greg: Oops. Of course, it should be 300 units so that 1/6th of 300 is 50.

    It’s only starting in 2011 that CRA *requires* employers to withhold tax on employee stock benefits. Prior to that most employers did not withhold tax on stock benefits. Since it appears that your employer withheld and remitted tax even earlier, there is no issue here. Your employer is doing the correct thing.

    See this CRA page for more information:
    http://www.cra-arc.gc.ca/gncy/bdgt/2010/mplystckptns-eng.html

  6. Ok, yes, $300 makes sense. But now your example is consistent with your comment above that RSU FMV is fully is taxed as income. My employer only sells to cover 50% of the taxes that would be due on income, the same as stock options. They tell me that their tax consultants indicate that the tax rates on RSUs and stock opions are the same but I have never been able to directly confirm this.

  7. @Greg: I’m by no means a tax expert, so I may be mistaken on this. My understanding is that since RSUs are typically granted with a strike price of $0 (which is less than the FMV of the stock at the time the grant was awarded), the stock option deduction is not available.

  8. If my employer issues the RSUs at vesting date as share certificates, can I transfer them at the FMV (deemed by the company) to my spouse?

  9. If a company were to issue RSU’s to their staff, but they did not want to dilute the market, would they buyback the shares from the open market when the RSU’s are granted? or when they vest?

  10. Thanks Greg for the post. What happens if a U.S. based public company issues RSUs to a Canadian employee?

  11. This question is a slight variation from the conversation above. I am a consultant to public companies and often received stock options in my clients. I have always reported gains from stock options as capital gains, not business income.

    Have I been reporting correctly since 2008?

    Thanks in advance for any assistance.

    George

  12. Very informative article. I have a simple question: in your example, the recipient Sue is a Canadian employee and thus subject to tax withholding by the employer. What happens is RSUs are granted to a US based employee (non-Canadian citizen) of a Canadian company? Is there any employer withholding at vesting or is the only tax consequence that of capital gains at the time of selling the shares?

  13. Does it work in the same way if RSU are vested in US stocks?

    • Canadian Capitalist

      @Joseph: RSU taxation works exactly the same whether it is US stocks or Canadian stocks.

  14. My question is do you need to show the share gain/loss on disposal (when to company sells your share to pay the DAS)?

    • Ram Balakrishnan

      @Michele: The company sells a portion of vested RSU units and remits it to CRA as tax deducted at source. Since the disposition is done at the time of vesting, there will be no capital gains / loss.

      • This is not entirely correct. My company sells the stock for taxes one day after the stock vests. While the difference in stock price is small, there is a difference.

  15. My company sells stock on the same day or one day after stock vests and issues a T5008 for the small stock price difference. Is this the correct treatment? Should the difference on stock price on T5008 be an ACB?

  16. Canadian RSU taxation/reporting rules. Do they differ for non-employees, i.e. for consultants and contractors? Or are they the same as employees?

  17. Thanks for writing this article! What should I do if the stock price is lower at sale relative to the issue date? Can you declare a capital loss in this case?

  18. I have a client who received RSU from her employer (an American company). Her benefit was included in her income on her T4. Her company does it a different way. They pay the necessary taxes, CPP & UI if necessary, then they ask her to pay the company back for the amount of taxes they paid on her behalf. If this amount was not included in her tax deducted at source then can she claim it on her tax return (adding it on to her taxes deducted at source)?
    thanks

  19. I have received a lot of questions on this lately, as more companies are now offering RSUs vs. options. People are definitely confused about the tax implications. I will also be writing a similar article on my site – but this is well explained, good work.

  20. What if a US company grants some RSA to a Canadian employee, the RSA starts vesting a year later but the full value of the RSA is added to the employee’s T4 at grant time. What happens if the employee is no longer employed by the time the RSA vests… Tax has been paid on income that will never materialized then…?

  21. What are the tax withholding implications for a company that has issued RSUs (fully vested) to a non Canadian expat?

  22. What are the tax withholding implications for a company that has issued RSUs (fully vested) to a non Canadian expat?

  23. My wife is a Canadian employee of a US based company. She was awarded some RSUs, it was vested last year and the company sold part of it to pay the withholding tax. The problem is the , it looks like the withholding tax was paid to California state while the value of the RSUs was reported in the Canadian T4 with no tax deducted. How should this be handled? Should we file US tax returns (no income, only RSUs ) to get the refund back and the normal Canadian tax return?

    • Did you figure this out? I have the same situation and not sure how to deal with it.

      • Ram Balakrishnan

        Sorry guys. I have no idea. Your company payroll should help with this. If they screwed it up, they should fixed it.

  24. If an individual was not full resident of Canada between the grant and the vest date of the RSU . How would CRA treat the tax payment at the vest date (case senario the individal is now resident of Canada) ? is ther any pro rated calculation…
    Thanks.

  25. For T1135 (Foreign income verification) reporting, should the vested RSUs be included? Isn’t the actual cost basis for RSUs 0 ?