Taxation of Restricted Stock Units (RSUs)
- Restricted stock units (RSUs) are a way your employer can grant you company shares.
- RSU’s are effectively deferred employee bonuses.
- When the RSU’s vest (when you’re able to sell them), you’ll receive a taxable benefit equal to the value of the shares received or cash received. This amount should be reported on your T4 from your employer.
- Under certain circumstances, you may claim a deduction as reported in Box 39 of your T4 slip. This deduction is 50% of the deemed value of the RSUs included in Box 14 of your T4 slip, thereby emulating a capital gain. Thus, only 50% of the RSU value is included in taxable income.
Restricted stock units are a way an employer can grant company shares to employees. The grant is “restricted” because it is subject to a vesting schedule, which can be based on length of employment or on performance goals, and because it is governed by other limits on transfers or sales that your company can impose.
With RSUs, you are taxed when you receive the shares. Your taxable income is the market value of the shares at vesting. If you have received restricted stock units (RSUs), congratulations—this is a potentially valuable equity award that typically carries less risk than a stock option due to the lack of leverage. Unlike stock options, which can go “underwater” and lose all practical value with a falling stock price, RSUs are almost always worth something, even if the stock price drops dramatically. However, while the concept of RSUs is simple, there are technical points in these grants that you must understand to make the most of them.
Security options deduction for the disposition of shares of a Canadian-controlled private corporation – Paragraph 110(1)(d.1)
The employee receives the benefit in the year they dispose of the shares, but not in the year of acquiring them if all of the following conditions are met:
- when the agreement to sell or issue shares to the employee was concluded, the issuing or selling corporation was a Canadian controlled private corporation (CCPC)
- the employee acquired shares after May 22, 1985
- the employee dealt at arm’s length with the corporation or any other corporation involved right after the agreement was concluded
In this case, the employee can claim a deduction under paragraph 110(1)(d.1) of the Income Tax Act if all of the following conditions are met:
- CCPC shares disposed of in the year where the employee dealt at arm’s length with the corporation
- the employee has not disposed of the share (otherwise than as a result of the employee’s death) or exchanged the share within two years after the date the employee acquired it
- the employee did not deduct an amount under paragraph 110(1)(d) for the benefit
If you’re an independent contractor (instead of an employee), the taxation of stock-based incentives can vary greatly. Frequently, the tax treatment is less beneficial than if you were an employee. Contractors can also be faced with a tax bill before they are able to sell their shares.
Selling the Shares
In general terms, the price you paid plus the taxable benefit you received will be the adjusted cost base (ACB) of your shares. Calculating the ACB can be difficult when you’ve received the shares through multiple plans, over multiple dates, and frequently the shares are quoted in a foreign currency. The ACB is important as it is used to determine the capital gain or loss on the sale of your shares.
Please note the ACB must be tracked in Canadian dollars based on Canadian tax principles. The reports provided by most US based brokerages (such as Charles Schwab) are typically not prepared in a manner suitable for Canadian tax reporting.
Reporting Shares in Non-Canadian Companies – Avoid Penalties
If you work for a foreign employer (e.g. Tesla, Uber, Lyft) and have received shares in the company, you may need to file a T1135 foreign reporting form. Why is this important? Well, if you forget to file your T1135 there’s a late filing penalty of up to $2,500 CAD per year! If you have been delinquent in your reporting, you may qualify to make a voluntary disclosure to waive the penalties.
If your RSUs have recently vested and you wonder about the specific tax implications, please call us at 604 558 -2234.
If you have agreed to a share re-purchase when a 3rd party company has acquired the company you work for, please provide a copy of the share re-purchase agreement so that we can provide specific advice.