Background

Restricted Share Units (RSUs) are a type of equity compensation that may be awarded to an employee. RSUs are notional units that mirror the market value of the employer’s common shares and do not represent actual share ownership. While employees do not receive any dividends that are paid to owners of the underlying shares, they are generally granted additional units equivalent to the value of dividends.

At the end of a predetermined period (known as a vesting period), RSUs can often be redeemed for either common shares or a cash benefit that’s based on the fair market value (FMV) of the shares. Regardless of how the RSU benefit is received, the benefit is fully taxable as employment income and subject to payroll withholding tax.

Options to Receive RSU Benefit

Restricted Share Units will almost always provide the employee with some value at the vesting date. The exceptions would be if the share price drops to zero or if the employee does not meet the eligibility requirements (typically staying at the company for the duration of the vesting period). RSU plans are structured to avoid Salary Deferral Arrangement (SDA) rules and therefore have similar characteristics across employers. As a result, employees are generally provided with similar options when it comes to deciding how they wish to receive the benefit at the vesting date. Plans still do vary, however, and employees may not be afforded the flexibility to pursue all of the options discussed. For each option outlined below, it’s assumed the employee has 500 Restricted Share Units that vest when the market value is $100, and 30% is required to be withheld for payroll tax.

Receive a Cash Benefit

The cash benefit received will be equal to the fair market value of the shares at the time, minus payroll withholding tax. The following benefit would be received:

(500 shares x $100) x (1 – 30% withholding tax) = $35,000

Receive Shares – Net of Withholding Tax

When an employee elects to receive actual common shares for the RSUs, an employer may address the withholding tax requirement by paying out a net number of shares. The total shares received will be equal to the number of RSUs that vested, minus the portion that were converted to cash in order to source the payroll withholding tax. This would result in the following number of shares being received:

(500 shares) x (1 – 30% withholding tax) = 350 shares

Receive Shares – Provide Withholding Tax

An employee could choose to provide the required withholding tax and receive all 500 shares. The amount an employee would need to provide is:

(500 shares x $100) x (30% withholding tax) = $15,000

Potential options to provide this withholding tax include providing the employer with a cheque or electing for additional tax to be withheld from other income sources such as salary or bonus.

Deciding How to Receive RSU Benefit

In the simplified example above, the RSUs resulted in the same net benefit regardless of the option selected. However, in practice there are additional factors that need to be considered such as the exact price the shares are sold and the impact of foreign exchange costs and rate variability. These variables can have a significant impact, so careful planning should be considered when deciding on the best course of action. Individuals may benefit from collaborating with an independent financial planner to determine the best path for their unique situation.

Control Timing and Price

If an individual plans to hold the resulting shares, then the decision to receive shares (instead of a cash benefit) is clear. However, if an individual prefers to receive cash proceeds, it may still be beneficial to receive the shares and then handle the sell transaction separately.

Mitigating Short-Term Price Volatility

The proceeds from selling an individual stock can vary significantly based on the exact timing of when it’s sold. This is due to the price volatility of individual stocks, which can be considerable, even over short time periods. The amount an individual receives in the form of a cash benefit is dependent on the market value (price) of the shares at the time. Electing to receive the cash benefit, only to see the share price increase in value shortly after, can cause considerable frustration and regret for the individual.

By electing to receive the shares, individuals can have the shares deposited into a non-registered investment account where they can control the timing of when they’re sold. Strategies can then be used to mitigate the short-term volatility. One method is to divide the shares into tranches to be sold over a set period. The sell transactions will net to an average price, lessening the impact of selling just before a sudden increase in share price. The trade-off with this strategy is that a decrease in share price would result in the average sale price being less than the individual could have received.

Limit Price

Individuals may also have a target price at which they are willing to sell the shares. By electing to receive the shares, individuals can set a limit (minimum) price that they are willing to accept for the shares. This will be an attractive option for patient individuals with a positive outlook on the future share price.

Foreign Exchange

Although an employee may live and work in Canada, the shares of their employer’s company may trade on a US stock exchange. If an employee elects to receive a cash benefit, the USD denominated shares are sold, and the proceeds are automatically converted to CAD at the exchange rate set by the financial institution used by the employer.

An employee that elects to receive the shares, deposit them into a USD denominated investment account, and subsequently sell them, will see the proceeds remain in USD. This will enable the individual to confirm the foreign exchange rate they are receiving before converting the USD to CAD.

Cost to Convert Currency

The foreign exchange rate offered by financial institutions will always differ from the actual rate as it includes a commission (or spread). This spread can vary significantly and is often highest when individuals have no choice. It’s not uncommon to see a conversion rate with an embedded cost in the range of 2% to 3%. By researching the best rates and negotiating a further discount for larger dollar amounts, it’s reasonable to secure a rate with an embedded cost in the 0.5% to 1% range. If 500 shares are sold for $100 USD, the rate at which the resulting $50,000 USD is converted will have a material impact on the CAD received.

Assuming a USD to CAD exchange rate of 1.24, a competitive rate may be 1.23 compared to an uncompetitive rate of 1.21. A conversion rate of 1.23 would result in $61,500, while a 1.21 conversion rate would only net $60,500 ($1,000 difference).

Variability in Rates

By using a USD denominated investment account, individuals will also control the timing of when to convert to CAD, allowing them to be patient if the foreign exchange rates are not favourable at the time. The USD to CAD exchange rate can fluctuate significantly, even over short periods of time. As an example, the Bank of Canada’s historical data for the 2020 calendar year reports the year’s lowest rate was 1.2718, the average rate was 1.3415, and the highest rate was 1.4496.

To illustrate the potential impact of exchange rate fluctuations, $50,000 USD of proceeds would equate to $63,590 if converted at the lowest rate and $72,480 if converted at the highest rate ($8,890 difference).

Individuals may decide to hold off converting the USD to CAD until the foreign exchange rate hits a level that they deem to be acceptable. In the meantime, the USD can be invested in USD denominated investments within the account.

This article is meant to provide a general overview and is not intended to provide tax or legal advice. You should consult with professionals to ensure that your own unique circumstances have been considered and any action taken is based on the latest information available.

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