How RSUs Are Taxed in Canada (Vest, Withholding, Sale)

Restricted Stock Units (RSUs) are one of the most common forms of equity compensation at Canadian technology and public companies, but they are also frequently misunderstood at tax time. Unlike stock options, RSUs carry no purchase price — you receive shares outright when they vest. That simplicity comes with a tax catch: the full fair market value of vested shares is taxed as employment income in the year of vesting, with no offsetting deduction available.

Vest Equals Full Employment Income

When RSU shares vest, the event is governed by ITA section 7. The full fair market value (FMV) of the shares on the vesting date — not just any gain above a strike price — is included in your employment income for that year.

This is fundamentally different from stock options. With options, you pay a strike price and only the spread (FMV minus strike) is taxed. With RSUs, the strike is zero, so the entire FMV is the benefit.

There is no section 110(1)(d) deduction for RSUs. Section 110(1)(d) requires that the option price not be less than the FMV at grant — a condition that can never be met for RSUs because there is no purchase price. The CRA has confirmed that RSUs are explicitly excluded from the deduction. Every dollar of RSU income is taxed at your full marginal rate.

T4 Reporting

Your employer reports the RSU vest benefit on your T4:

• Box 38 — the total section 7 employment benefit (included in your Box 14 total employment income)
• Box 39 — the amount eligible for the section 110(1)(d) deduction. For RSUs, Box 39 will be $0, since the deduction does not apply

The Box 38 amount represents the number of vested shares multiplied by the FMV on the vest date. If your employer withholds shares to cover taxes (“sell-to-cover” or “share-withholding” programs), the shares withheld are still included in Box 38 income — you received the full benefit even though some shares were immediately surrendered.

The Withholding Gap

Employers are required to withhold income tax from RSU vest income, but the withholding rate is often insufficient — particularly for employees earning above $150,000 or receiving large vest tranches.

Canadian payroll withholding for supplemental income typically applies a rate based on a flat lump-sum schedule or a calculation derived from the employee’s regular annualized salary. Neither method precisely captures the marginal rate that applies when a large vest event pushes total income deep into the top federal bracket (33%) plus a high provincial bracket.

For an employee in Ontario with a combined marginal rate above 53%, an employer withholding at 40-45% creates a shortfall of $8,000-$13,000 on every $100,000 in RSU income. That shortfall becomes a balance owing on April 30.

Practical step: if you receive large vest tranches, request an estimate of the gap from your payroll team or use the CRA’s Payroll Deductions Online Calculator to verify. Consider making an RRSP contribution or tax installment payment before April 30 to avoid interest charges.

Adjusted Cost Base at Vest

Once RSU shares vest and you hold them, the adjusted cost base (ACB) of those shares is equal to the FMV on the vest date — the same amount that was included in your employment income.

This is the single most important ACB rule for RSUs. Because you already paid full income tax on the vest FMV, your cost base is stepped up to that amount. You do not pay tax on that portion a second time when you sell.

For example: 100 shares vest at $50 FMV. Your Box 38 income = $5,000 (taxed as employment income). ACB = $5,000 (i.e., $50 per share). If you later sell at $70, the capital gain is ($70 - $50) x 100 = $2,000, not $7,000.

Tax on Disposition (Sale)

When you sell vested shares, any difference between the sale price and your ACB is a capital gain or capital loss:

• Capital gain: sale price exceeds ACB — taxed at a 50% inclusion rate (half the gain is added to income)
• Capital loss: ACB exceeds sale price — 50% of the loss can be applied against capital gains

The capital gain is entirely separate from the vest-time employment income. Many employees mistakenly combine the two, leading to either over- or under-reporting.

If you hold shares from multiple vest dates, each tranche has its own ACB. However, once shares from different tranches are held in the same non-registered account, the CRA requires you to track a weighted average ACB across all lots of the same security.

Calculate Your RSU Tax

Use our RSU Tax Canada Calculator to model the full picture: vest-time employment income, estimated withholding gap, ACB at vest, and projected capital gain or loss at sale — at any federal and provincial marginal rate combination.

Sources

• ITA — Section 7 (Agreement to issue securities to employees)
• CRA — Employee stock options (includes RSU treatment)
• CRA — Capital gains (ACB and adjusted cost base)