Understanding How Nonconventional Compensation is Taxed in Canada: RSUs, Stock Options, and More
When Canadians think of income, they usually think of their salary or hourly wage. But many professionals, particularly in tech, finance, and executive roles, receive nonconventional compensation—such as restricted share units (RSUs), stock options, employee share purchase plans (ESPPs), and deferred bonuses—as part of their overall remuneration. These forms of compensation can be powerful wealth-building tools, but they come with complex tax rules.
In this post, we break down the key types of nonconventional compensation and explain how each is taxed in Canada, using guidance from the Canada Revenue Agency (CRA).
1. Restricted Share Units (RSUs)
What they are: RSUs are a promise by an employer to grant company shares at a future date, typically subject to a vesting schedule (e.g., over 3–4 years). You don’t receive the shares until the units vest.
Taxation:
At vesting: When RSUs vest and the employee receives the shares, the fair market value (FMV) of the shares is considered employment income. This income is taxable in the year it vests and is included on your T4 slip.
At sale: If you hold the shares after vesting and later sell them, any gain (or loss) relative to the FMV at vesting is treated as a capital gain (or loss). Only 50% of capital gains are taxable in Canada.
📌 Example: If 100 RSUs vest at $30 per share, you report $3,000 as income. If you later sell the shares at $40, the $1,000 gain is a capital gain.
Tip: If your employer withholds tax at vesting, it might not be enough to cover your marginal rate—leading to a tax bill at filing.
2. Stock Options
What they are: Stock options give employees the right to buy shares at a set price (the exercise price), typically after a vesting period.
Taxation depends on the type of option plan and whether the employer is a Canadian-controlled private corporation (CCPC) or a public company.
A. Public Company Stock Options
At exercise: The difference between the exercise price and FMV at the time of exercise is taxed as employment income.
Stock option deduction: If certain conditions are met, you may be eligible for a 50% deduction on this income (similar to capital gains treatment).
At sale: Any further increase or decrease in value is taxed as a capital gain or loss.
📌 Example: You exercise options at $20 when shares are worth $30. You report $10 as employment income. If you sell later at $35, the $5 difference is a capital gain.
B. CCPC Stock Options
Tax deferral: With CCPCs, you don’t pay tax at the time of exercise. Tax is deferred until the shares are sold.
When sold, the entire gain from exercise to sale is taxed as employment income, potentially eligible for the 50% stock option deduction.
The post-exercise to sale gain is taxed as a capital gain.
Special note: There are limits. The stock option deduction is capped for individuals with more than $200,000 of annual options vesting (per Budget 2021 rules).
3. Employee Share Purchase Plans (ESPPs)
What they are: Many companies offer plans that allow employees to buy shares at a discount (e.g., 10–15%) via payroll deductions.
Taxation:
The discount on the purchase price is considered employment income and is taxable in the year of purchase.
Future gains or losses when shares are sold are treated as capital gains or losses.
📌 CRA requires companies to report the discount amount on your T4 slip.
4. Deferred Bonuses and Phantom Shares
Some companies offer phantom stock, which mirrors the value of real shares without actually granting equity. Others may defer bonuses over several years based on performance.
Taxation:
These are taxed as employment income when the amounts become vested and are no longer subject to forfeiture.
Since there is no underlying security (like a share), there is no capital gain component—just employment income.
Planning Tips for Canadians
Withholding ≠ Final Tax: Withholding rates may be lower than your marginal rate, especially on large RSU or option vests. Budget for tax owing at year-end.
Track ACB (Adjusted Cost Base): When you sell shares acquired through RSUs, options, or ESPPs, keep records of the original cost to properly report capital gains.
Beware of Double Taxation: It’s common to mistakenly pay tax on the full sale amount rather than only the gain over the FMV at vesting or exercise.
Final Thoughts
Nonconventional compensation can be a powerful part of your wealth-building strategy, but understanding the tax rules is critical to avoid surprises. These assets often overlap with personal financial planning, investment strategy, and even estate planning.
At Rivers Wealth, we help professionals and business owners navigate the complexities of equity compensation, minimizing tax and maximizing long-term wealth.
Get in touch to review your compensation package and make sure you're taking full advantage of every opportunity while avoiding costly mistakes.
