Equity Compensation for Canadians (RSU)

Microsoft, Google, Salesforce and other US companies often compensate their employees through salary, bonuses and RSUs (restricted share units). From a tax perspective, RSUs are complicated to understand, so I'll make it easier for you today.

What are RSUs?

RSUs are notional share units (phantom shares) that track the value of the company's share price.

Important Dates for RSUs

There are two essential dates of an RSU.

The first is the date the RSUs are granted; at that time, you hold RSUs but they are just notional amounts (not marketable or sellable).

The second is the date the RSUs are vested. The date when the RSU becomes actual shares of the company and you can choose to keep them or sell them.

When an RSU vests, it can be paid out in cash or company shares. The fair market value is the total value of the shares based on the price (10 shares at $10 per share = FMV of $100). In this example, $100 is taxable to you as employment income.

Grant Date vs Vest Date of RSUs

The date when the RSU is granted is different than the date that the RSU is vested, It is essential to know that in most cases, the RSU is taxable to the employee when it is vested, not when it is granted, as long as it is vested within three years of the RSU being granted.

Example:

The employee is granted $100k RSUs that vest over a 3-year time frame.

33% vest annually on September 1 of each year.

The employee would have taxable income of 33% of the FMV of the total RSU amount - it may be more or less than $33,000 depending on if the value of the shares is more or less than $33,000 when it vests.

Employees pay taxes as if they earned that 33% as employment income.

Salary Deferral Arrangement

If structured properly, it avoids the SDA (salary deferral arrangement), preventing companies from deferring compensation for over three years. Because an RSU is a form of compensation, it cannot be deferred for over three years. That means that between the date the RSU is granted and the date it is vested, it can be up to three years.

If SDA is triggered, the RSU becomes taxable on the date your shares are granted, instead of the date they are vested.

In the US, they have different tax rules, for US companies, including for Canadians working at US companies; RSU arrangements sometimes qualify as salary deferral arrangements. This opens the door for double taxation.

Double Taxation of RSUs

1. RSU granted - qualifies as SDA - Taxable as income at the time the RSU is granted
2. RSU Vests - if there is an increase in share price from the grant date, the increase is taxable as a capital gain

Example of double taxation of RSUs

RSU value at grant date = $10 per share - taxable as employment income

RSU value at vest date = $20 per share

Employee cashes in the shares at vest date - $10 is investment growth - $6.70 is taxable to the employee.

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