RSU vs Stock Options

Overview

Key Features and Differences

Let’s start with the key features and differences of RSUs and Stock Options.

Restricted Stock Units or RSUs are a promise from your employer to grant you a certain number of companies shares in the future typically on a vesting schedule, usually remaining employed for a period of time. Most vesting schedules I have seen are over 4 years or 25% of your share allotment will vest annually. Once the shares vest, they become yours to sell. RSUs always have value, provided the company you work for stock has value. RSUs are sometimes known as notional units as you don’t really own the shares, just the value attributed to them. So, you could sell your shares, take the cash and then buy the same shares but you couldn’t transfer them outright.

Stock options are different. Rather than grant you the shares (or notional shares) directly, your employer gives you the right to purchase your company shares at a fixed price, this is typically called the exercise or strike price, at some point in the future. The strike price is typically set at the market value of the shares on the day the options are granted (but they are sometimes set at a small discount). Options only have value if the stock price rises above the strike price. For example, if you hold options for stock ABC with an exercise price of $100 and the stock goes up to $150 your options are worth $50 if ABC stock falls to $50, the options are worthless (because you wouldn’t pay $100 for shares worth $50).

RSUs are becoming more common at established companies like Google, Amazon, Microsoft where there is a clear market value for the shares and these companies would like to retain employees. Stock options are more common at startups and CCPCs where the upside is higher, but so is the risk. However, this is a generalization, and I have seen employees at major tech firms being offered either or both options.

How They’re Taxed in Canada

Now that we understand RSUs a little bit - lets go in depth on how they are taxed.

When your RSUs vest (not when you get the grant) and they become yours to sell, the full value of the RSUs is added to your employment income and added to your T4. For example, if you have RSUs that vest in 2026 worth $25,000 - $25,000 is added to your employment income. Think of RSUs a bit like a bonus but in shares. The tax event is the vesting date, regardless of whether you sell your RSUs or not.

However, after vesting there can be another tax event - a capital gain or loss. After your shares vest, your cost base or ACB for your shares is the fair market value on the vesting date. If those shares make a gain between vesting and when you sell them, there would be a capital gain. If the shares lost value, then there would be a capital loss.

Let’s take ABC Stock as our example again. Let’s say you received 250 shares at $100 per share on January 1st by March 1st the shares had climbed to $125 per share. The $25 difference between the $100 vest price and the current price would be the capital gain. 50% of that capital gain would be taxable and added to your income for 2026. The same would be true for a capital loss if the shares fell to $75 per share, the difference would be your capital loss which can be used to offset future capital gains.

Planning Note

The tax effect of RSUs means that after the initial vest date - holding your RSUs in your employer brokerage account likely doesn't make sense for most people. If you have TFSA or RRSP room, simply selling the shares on your vest date and moving the cash into your registered plans will prevent, or defer a second layer of taxes.

If you do not have TFSA or RRSP room, I would still argue that selling your shares and moving the cash into your own personal non-registered account would be beneficial. Typically, because you can then diversify outside of your employer's stock which most tech employees hold a lot of already.

How They are Taxed in Canada

Stock Options work differently than RSUs and the tax treatment is much more nuanced but can be more favourable.

With a stock option, your employer grants you the right to purchase shares at a fixed price (remember the strike price) at some point in the future. There is no tax event at grant, but there is a tax event later. For CCPC’s the tax event is often deferred until the sale of the shares, but for non-CCPC’s or public corporations, the tax event is when you exercise (or purchase) your shares.

The taxable employment benefit at exercise is as follows:

Formula

(Stock Price at Exercise - Strike Price) x Number of Shares = Employment Benefit

Back to our example of ABC corp - if you were granted the right to purchase 100 shares of ABC corp at $50 and the stock price has now jumped to $100 and you’d like to buy the shares, you will exercise your option, and thus the difference between your strike price ($50) and the current price ($100) which is $50 becomes your taxable benefit. That is multiplied by the number of shares which is 100 in our example so we would have $50 x 100 = $5,000 taxable benefit which is taxed as employment income.

There is a stock option deduction which can be used for certain stocks of companies. If certain conditions are met, you can deduct 50% of the employment benefit from your taxable income. This effectively cuts the tax rate in half for your stock options. To qualify, the options must be granted at arms length, the exercise price must be at least equal to market value of the shares at the time of grant, and the shares must be common shares of a qualifying public company or CCPC. This is limited to a $200,000 annual cap on the amount of stock options eligible for deduction.

There is a deferral mechanism for Canadian Controlled Private Corporations (think early stage start ups), but we won’t get into that here.

The Withholding Trap

This is where a lot of Canadian tech workers get caught off guard. When your RSUs vest, your employer is required to withhold income tax — and most do this by selling a portion of your shares to cover the estimated tax. This is called sell-to-cover.

The problem is that many employers withhold at a flat supplemental rate rather than your actual marginal tax rate. For a software engineer in Ontario earning $200,000+ in salary before RSUs even vest, your marginal rate could be well over 50%. If your employer withholds at a flat rate of 30% or 40%, there's a gap — and that gap is your problem, not your employer's.

The result? A large, unexpected tax balance owing when you file in April. And if this happens year after year, the CRA may require you to make quarterly tax instalment payments — adding another layer of complexity to your cash flow planning.

Practical Fix

After each vest, calculate the difference between what was withheld and what you actually owe at your marginal rate. Set that amount aside in a high-interest savings account or TFSA, consider making voluntary instalment payments to the CRA to avoid interest charges, and work with a financial planner to model your full tax picture each year before vesting events hit.

Concentration Risk

Here's a financial planning point that often gets overlooked in the excitement of watching equity compensation accumulate: your employer already pays your salary. Do you really want them controlling your investment portfolio too?

When a significant portion of your net worth is tied up in your employer's stock, you have what's called concentration risk — a single company's performance determines both your income and your wealth. For most software engineers at growth-stage tech companies, this exposure can be substantial. The company that's making you wealthy is also the company that could, in a downturn, lay you off and watch your RSU value drop simultaneously.

The evidence-based financial planning approach is clear: diversify at vesting. Sell the shares as they vest, capture the value, and redeploy the proceeds into a broadly diversified portfolio. The one exception worth considering is if you have strong insider knowledge suggesting the shares will continue to appreciate — but even then, the concentration risk argument is hard to dismiss.

One powerful planning combination: use the RRSP contribution room generated by your RSU employment income to immediately shelter a portion of that income. A $100,000 RSU vest creates significant RRSP room the following year — and contributing to your RRSP to offset the employment income can substantially reduce the tax hit.

Your Equity Compensation Deserves a Real Plan

RSUs and stock options are among the most valuable components of a tech compensation package — but they're also among the most tax-complex. Getting the treatment wrong, missing the withholding gap, or holding concentrated employer stock without a plan can cost you significantly over a career.