Tech workers, how are your RSUs taxed? What about your share purchase plan? Do you owe taxes on that?
If you work at any of the Magnificent Seven, you have almost certainly heard of Restricted Stock Units (RSUs) and Share Purchase Plans. They are an integral part of most tech company’s employee retention strategy. Most people have no idea how they are taxed, however. I’ll explain:
Restricted Stock Units
RSUs are called sometimes called “Golden Handcuffs” because companies use these plans to dissuade top employees from leaving.
How they work – you are awarded shares in your company as a signing bonus, as a regular bonus, or maybe as part of your regular compensation. When you are awarded these shares, however, there is a catch – you don’t actually own the stock until a predetermined amount of time has passed. Hence the “Restricted” in Restricted Stock Units. After some time has passed, these stocks “vest,” meaning they are legally yours now. You can sell them.
If you leave a company, you can take your vested shares with you, but you leave behind your unvested shares.
When you receive the vested shares, this is the first taxable event. This is when you’ve officially been paid in shares, and you owe tax on this payment as if you received this amount on your paycheck. In almost every scenario, the custodian withholds the tax for you and submits it to the taxman on your behalf. This is why you only see half your shares vest on your statement. There is no real way to recoup this tax, other than to make a RRSP contribution to lower your income.
Unfortunately, you are not done paying tax on these shares. If you are holding them in a non-registered (taxable) account, you will owe tax on any profits that are generated. If the company pays a dividend, you will pay tax every year on that dividend. Canadian Dividends are tax-preferred. Foreign ie. US Dividends are not tax preferred. In other words, if your share plan is paying US dividends, you are probably losing half of that to the taxman.
If the shares you hold appreciate in value, then you are building up a taxable event in the future. For instance, if your shares vested at $10,000 and have grown to $20,000, you have a $10,000 unrealized capital gain. When you sell these shares you will owe tax on this capital gain. One piece of good news is that only half of a capital gain is added to your income.
Employee Share Purchase Plan
Most tech companies have a share purchase plan, where the company will offer you a discounted rate if you would like to buy company stock. Normally, they take some of your pay and purchase shares on your behalf at regular intervals. With these programs, there isn’t a vesting period, usually. As soon as you buy the shares, they are your property. Nice, right?
You need to be aware that the discount that the company gives you is a taxable benefit. If you bought $10,000 worth of shares at a 15% discount, you will see a taxable benefit of $1500 on your T4 slip at the end of the year. Once you have the shares, you are most likely holding them in a taxable account, again, where you pay tax on any profits.
If you have any shares in a non-registered account, you need to move them immediately to a RRSP or TFSA, assuming you have the room. Going forward, you need to set up a schedule to make sure that you transfer your shares as soon as they receive them. The tax savings will be enormous.
Bonus Tax Tip – For 100% efficiency, hold your company shares in a RRSP if they pay a foreign dividend. If you hold foreign dividend-paying stocks inside a TFSA, you are obligated to pay a 15% withholding tax on any dividend paid. It’s not huge, but it can add up.
