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What are restricted stock units (RSUs)?
Restricted stock units (RSUs) are a type of employment compensation offered by some companies to their employees in the form of company stocks. Employers offer RSUs as a retention strategy to incentivize employees to remain with a company on a longer term, and therefore, granted shares only become available at vesting.
In other words, it is a promise that the company will give you shares at no cost in the future, on the condition that you remain employed by the company for a certain period of time.
What is vesting?
Vesting for RSUs means that the restriction period has been lifted, releasing the shares, and the employee fully acquiring the shares. This means that you now own the stocks outright and you become entitled to sell them.
The vesting period (or vesting schedule) is the period over which the shares are being progressively released.
Here is an example:
- In July 2024: 25 shares are released, and these shares will be available for sale (taxes to be withheld)
- In July 2025: 25 additional shares are released
- In July 2026: 25 additional shares are released
- In July 2027: 25 additional shares are released
In July of 2023, the company you work for granted you RSUs for 100 shares. The conditions stipulate that the shares will vest in equal installments on the first four anniversaries of the July grant date. This means that, over a period of four years, 1/4 of shares will vest on July 1st of each year.
How are RSUs taxed?
RSUs are usually taxed at source, on the value of the shares as they vest (when you become owner of the shares or cash equivalent of those shares). This means that taxes are withheld immediately upon vesting, and often, there is an automatic sale of enough shares to cover the tax withheld on the date the RSUs vest. The taxable amount is the fair market value of the shares on the date of vesting.
Using the example amount above, after 25 shares are released, 12 shares may be for example retrieved for taxes and only 13 shares are available for you to sell.
The taxable amounts are usually reported on the T4 slip (as well as on the RL-1 slip if you reside in Quebec) by your employer. Proceeds from RSUs that vested are included in box 14 as employment income and any taxes already deducted are included in box 22.
You may also be subject to additional taxation as the sale of the RSUs may trigger a capital gain (or loss) on the change in value between the fair market value (taxable amount) and the sale price.
FAQ
Do I have to pay income taxes on RSUs?
Yes
Are RSUs subject to taxes at the time they are granted?
No, RSUs are subject to taxes at the time they vest (when the shares are acquired by the employee)
What happens if I leave my employer before RSUs vest?
You give up your rights to them, and you risk forfeiting any shares that have not vested
Disclaimer:
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. Wealth Illustrated will not be held liable for any problems that arise from the usage of the information provided on this page.
