RSUs, explained properly

Restricted Stock Units are the most common form of equity comp at established tech companies — and the most misunderstood, because they’re deceptively simple.

The one mental model that fixes everything

An RSU that vests is identical to a cash bonus that was auto-invested in your employer’s stock.

Internalize that and most “RSU strategy” questions answer themselves. You would never take a $50,000 cash bonus and immediately buy $50,000 of a single stock. Yet that’s exactly the default position a vesting RSU leaves you in.

How RSUs are taxed in Canada

There are two separate taxable moments:

1. At vesting — the fair market value of the shares is taxed as employment income, exactly like salary. It shows up on your T4.
2. At sale — any change in price after vesting is a capital gain or loss. In Canada only 50% of a capital gain is taxable (the inclusion rate), and — unlike the US — there’s no short-term vs long-term distinction. Holding period doesn’t change the rate.

The withholding trap

Your employer typically sells some shares at vest to remit tax (a “sell to cover”). But if your marginal rate is higher than what was withheld — common once you’re into the top bracket (~48–54% combined, depending on province) — you’ll owe the difference when you file. Plan for it.

The default strategy: sell to diversify

For most people, the optimal RSU policy is boring and powerful:

Sell vesting RSUs immediately and reinvest in your diversified portfolio.

Because the shares are taxed at vest, your adjusted cost base (ACB) is the vest-date price. Selling right away triggers little or no additional capital gain, so there’s almost no tax cost to diversifying — and you remove single-stock risk.

If you want to keep some company stock as a conviction bet, fine — but size it deliberately (e.g., “no more than 10% of net worth in any one stock”), not by accident through inertia.

If your shares are in a US parent company

Very common for Canadian engineers at US-headquartered firms. Two extra wrinkles:

• Currency — the vest-date value and your ACB must be converted to CAD. Foreign-exchange movement between vest and sale is itself part of your capital gain or loss.
• T1135 — if the total cost of your foreign property (US shares held outside registered accounts, etc.) exceeds CAD $100,000 at any point in the year, you must file Form T1135. Penalties for missing it are steep.

Common, expensive mistakes

• Holding everything because selling “feels disloyal” or you’re anchored to a higher past price. The market doesn’t know your ACB.
• Letting concentration creep past 30–50% of net worth in one ticker.
• Forgetting the under-withholding gap and getting a surprise bill at filing.
• Reporting an ACB of zero on your Schedule 3 — a shockingly common error that makes you pay tax twice on income already taxed on your T4. Your ACB is the vest-date value in CAD.

A simple checklist

• Set a default: sell at vest unless I have a specific reason not to.
• Pick a concentration cap and write it down.
• Check whether withholding covers my actual marginal rate.
• Track ACB in CAD; confirm I’m not reporting it as zero.
• If foreign shares > $100k cost, file T1135.

Next: CCPC vs public-company options, where the tax gets genuinely interesting.