FI Personal Finance

The Ultimate Guide to ESPPs and RSUs

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Congratulations! 

You’ve received company stocks through your ESPP (employee stock purchase plan) or RSUs (restricted stock units). This is a good thing—it means you’ll eventually be a little (or a lot) richer!

But all that extra income doesn’t come easy. Not only did you have to work for it, but now you’re wondering, “Okay, now what? What exactly am I supposed to do with these things?” 

I know how confusing ESPPs and RSUs can be, and I’m here to help! I wrote this guide to help you manage your ESPPs and RSUs, step by step. 

Note: ‘ESPP stocks’ or ‘shares’ are the grammatically correct terms, but I chose instead to use the term ‘ESPPs’ for simplicity.

How I’m qualified to help

In case you’re new to my blog (welcome to everyone from the Blind AMA!) my name is Chrissy. I’m a FIRE (financial independence, retire early) blogger and podcaster, and a huge money nerd. 

My husband works for a large video game company and receives ESPPs and RSUs as part of his compensation. Over the years, I’ve become very familiar with the management, sale, and taxation of our ESPPs and RSUs. 

Don’t make our mistake

I have to admit to an embarrassing truth: I didn’t always manage our ESPPs and RSUs properly. In fact, for over a decade, my husband and I ignored them. 

They were so confusing and overwhelming and we couldn’t muster the time, interest, or know-how to deal with them. For more than ten years, the stocks just sat there. Even worse, we opted out of the ESPP for a few years in the middle. This was a very bad move. 

Our inaction and lack of knowledge meant we missed out on tens of thousands of dollars in extra income. Clearly, we had no idea just how valuable our ESPPs and RSUs were. Don’t make our mistake!

The good news

Thankfully, in 2014, I finally took the reins and learned how to deal with our ESPPs and RSUs. The even better news? It wasn’t that hard, and I’m going to share everything I learned with you. Here’s what we’re going to cover:

Disclaimers

  • I’m a FI enthusiast, not a licensed expert. This article is for information only, and is not to be taken as financial advice. 
  • Every attempt was made to ensure accuracy, but I cannot be held liable for errors and omissions. Please do your own research and consult with a tax professional.
  • This guide was written for Canadians and Americans who receive ESPPs and RSUs from US-based companies. 
  • Most of the info in this guide still applies to ESPPs and RSUs from Canada-based companies, but there are slight differences in taxation and the mechanics of the plans.
  • See the Additional Resources section for more info on ESPPs and RSUs from Canada-based companies.

Section 1: The whys of ESPPs and RSUs

When starting something new, I find it’s helpful to first understand the whys. This is especially true when that ‘something new’ is a little bit hard (and let’s admit it—boring). When you understand the whys, you’ll be more motivated to keep going. 

Here are some of the whys I’d like you to think about:

Why you need this guide

If you’re new to ESPPs and RSUs, this guide is for you! It includes step-by-step instructions, written in plain English, to tell you exactly how to manage your ESPPs and RSUs. I’ll explain: 

  • What ESPPs and RSUs are.
  • How to manage them.
  • How to sell them.
  • How to report them on your tax return.

Hopefully, by the end of this guide, you’ll feel ready to manage your ESPPs and RSUs all on your own. This will not only be rewarding because you’ve gained new knowledge and skills, but it’ll also make (and save you) a lot of money.

Why you should love your ESPPs and RSUs

The biggest reason why you should love your ESPPs and RSUs is that it’s more money in your pocket. (Don’t let anyone tell you otherwise!) 

Sure, you’ll owe taxes on them, but you’ll still be left with more money than you started with. How can that be anything but a good thing?

Another benefit of RSUs is they can be an additional form of compensation that you can negotiate for—on top of your salary. Often, your manager will have an easier time approving you for RSUs than for a raise.

Why you should learn how to manage your ESPPs and RSUs

I know this may be a tough sell. After all, you’re busy and tired from long hours at work. Why would you want to spend your free time dealing with investments and taxes? 

My answer to that: you earned those ESPPs and RSUs. That’s your money. No one will care for your money as much as you. By learning how to manage your ESPPs and RSUs, you’ll keep more of your money, gain valuable skills and grow your wealth. (Which will help you reach FI that much sooner!)

Why you should do the accounting and taxes for your ESPPs and RSUs

Basic accounting and tax filing are important wealth-building skills. Not only do they help you to legally minimize your taxes, but they’ll save you from having to pay professionals to help you.

Even if you decide to hire professionals, it’s still crucial to have some of this knowledge. You’ll know the right questions to ask, and will be informed enough to know if you’re getting the services you’re paying for.

The great thing about doing the accounting and taxes for your ESPPs and RSUs is it’s not rocket science. You don’t need to be an expert, nor do you need to take a course to learn these skills. 

All the info is out there, for free, on the internet. (Or, you can read this guide, and have it all collected and neatly summarized for you!) Just take it one step at a time, and you’ll see it’s not that complicated.

Why you may prefer to get professional help

For some of you, it may be worth it to get professional help with your ESPPs and RSUs. For example, if you earn a very high salary, paying an accountant a few hundred dollars might be a worthwhile trade-off.

Or, maybe you’d like to DIY but are nervous about making a mistake. In this case, I think it’s a great idea to pay a tax accountant for an hour or two of their time. They can answer your questions, check your numbers, and give you personalized guidance.

In a situation like this, I think it’s a worthwhile investment. Consider it an affordable tuition fee that’ll save you hundreds every year, for years to come.

Ready to dive in?

Okay, are you motivated and ready to take on your ESPPs and RSUs? Let’s start with a glossary, so you’ll know what some important terms mean.

Section 2: ESPP and RSU glossary

Brokerage

A brokerage is a company that holds your investments and enables you to buy and sell investments on its platform. Your company’s selected brokerage will facilitate all your ESPP and RSU transactions.

ESPP

ESPP stands for Employee Stock Purchase Plan. ESPPs are offered by many publicly-traded companies as a way for employees to purchase company stocks at a discount. There are two types of ESPPs (check with your employer to find out which plan you have):

1. Qualified ESPPs

Qualified ESPPs have more rules but receive favourable tax treatment. (See the taxation section for more on this.) Most ESPPs are qualified.

2. Non-qualified ESPPs

Non-qualified ESPPs have fewer rules but do not receive favourable tax treatment.

RSU

RSU stands for Restricted Stock Unit. RSUs are company stocks that are given to employees as a form of compensation—often as bonuses. RSUs have no value until they vest. (See ‘vesting’ below for more info.)

Shares/Stocks

Most people use these terms interchangeably, but technically, shares are actually units of a stock. So you buy shares of your company stock in your ESPP.

Vesting

Vesting means you have to wait a set amount of time (or for the company to reach a specific goal) before you can sell your shares. That means, until your shares vest, they have no value. If you leave your company before your shares vest, you’ll have to forfeit them.  

Section 3: ESPP and RSU basics

Now that you understand what ESPPs and RSUs are, let’s run through the basics of how you get them and how they work.

How you get them

ESPPs

  • Speak to your payroll or HR department to sign up for your company’s ESPP.
  • Once registered, you’ll have to wait for the next enrolment or offering period. At that point, you’ll start contributing towards your first purchase.
  • During the offering period, a portion of your paycheque will be deducted and held for the purchases.
  • The purchase date falls at the end of each purchase period.  (There are typically two purchase periods per year.) This is when your shares are purchased in your brokerage account.

RSUs

  • You can’t register for RSUs—they can only be granted to you.
  • Typically, RSUs are granted as bonuses for being hired, promoted, or for exceptional performance.
  • Your RSUs will be held in your brokerage account while they vest.

How they work

ESPPs

  • Employees can contribute a maximum of 1–30% of their pay towards ESPP purchases.
  • ESPP contributions are deducted from your paycheque.
  • ESPP shares are offered to employees at a discount (typically 10–15%).
  • Note that some ESPPs do not offer a discount. If this is the case, I’d advise that you not participate.
  • Some ESPPs offer a lookback provision. That means your discount will be applied to the stock price at the beginning of the offering period or the purchase date, whichever is lower.
  • There’s typically one offering period and two purchase periods per year.
  • There are two types of ESPPs: qualifying and non-qualifying (this may not be the case for Canadians—see the box below). 
  • Taxation and other rules differ with each type of ESPP. Check with your employer to find out if your ESPP is qualifying or non-qualifying.

RSUs

  • RSUs have no value when they’re granted. 
  • You won’t know their ultimate value until they vest.
  • You’ll receive a statement of grant which will tell you how many RSUs you’ve received and what the vesting schedule will be.
  • A small RSU grant may vest in a single period (typically one year) whereas a large grant may vest in portions (¼ after one year, then ¼ every six months after that).
  • If you leave the company before all your RSUs vest, you’ll forfeit the unvested units.

Only one type of ESPP for Canadians?

As far as I can tell, if you live in Canada, your ESPP will function like a non-qualified ESPP—whether your company is US or Canada-based.

However, there is very little info on this, so this is only my conclusion and not a fact. If my conclusion is incorrect, please let me know and I’ll update the info in this guide.

Section 4: Income tax and capital gains

Like all income we earn, the government wants its cut from your ESPPs and RSUs! In Canada and the US, there are two forms of tax that you’ll face with ESPPs and RSUs:

1. Income tax

Your ESPP discount and RSUs are considered taxable benefits (Canada) or ordinary income (US). You’ll owe income tax on both. (See the taxation section for more details.)

2. Capital gains

A capital gain occurs when an investment you own increases in value. When you sell your ESPPs and RSUs, you’ll owe tax on the capital gain. 

Taxes on capital gains are a little more complex than income tax, so I’ll explain more below:

  • A capital gain isn’t realized until you sell your investment.
  • When you realize a capital gain, you need to report it on your tax return in the year it was realized.
  • Capital gains are treated differently in Canada and the US (see below).

In Canada

  • All capital gains are taxed the same way, regardless of how long you held the investment.
  • Capital gains receive favourable tax rates—only 50% of your gain is taxed.

In the US

  • There are two types of capital gains:
    1. Short-term: if you held the investment for a year or less, the capital gains will be taxed at ordinary income rates.
    2. Long-term: if you held the investment for more than a year, the capital gains will be taxed at favourable tax rates, between 0–20%.

Capital losses

We can’t discuss capital gains without also discussing capital losses. When you sell your ESPPs and RSUs at a loss, you’ll have a capital loss:

  • A capital loss isn’t realized until you sell your investment.
  • When you realize a capital loss, it’s not necessarily a bad thing. That’s because capital losses can be used to offset capital gains you may have realized.
  • You can carry forward unused capital losses to future years until they’re all used up.

In Canada

  • You can also use capital losses to offset capital gains in the previous three years. 

In the US

  • Capital losses must be claimed against the same type of capital gain:
    • Short-term capital losses against short-term capital gains.
    • Long-term capital losses against long-term capital gains.

Don’t disallow your capital loss

  • When claiming a capital loss, be careful not to disallow it by repurchasing the same investment within 30 days. 
    • In Canada, that’s what’s referred to as a superficial loss and in the US, it’s a wash sale.
    • Either situation will result in your capital loss being disallowed.

Canadians—avoid double taxation with the W8-BEN form

Your brokerage and/or company will likely prompt you to do this, but if they don’t, be sure to ask for and submit a W8-BEN form. 

This form tells the US government that you’re Canadian and that they shouldn’t withhold American income taxes from your ESPPs and RSUs. If you’d like to know more about the W8-BEN form and the tax treaty, read this excellent article.

Section 5: Taxation of ESPPs and RSUs

Now that you have an understanding of ESPP and RSU income taxes and capital gains, it’s time to move onto the specifics. 

The first thing to know is that taxation on qualified ESPPs, non-qualified ESPPs and RSUs differ. I’ll detail the specifics for each below.

A reminder for Canadians

As far as I can tell, if you live in Canada, your ESPP will function like a non-qualified ESPP—whether your company is US or Canada-based. That means you can ignore the section on qualified ESPPs.

1. Taxation of qualified ESPPs

  • You’ll owe income tax on the difference between the market value on the purchase date and the discounted purchase price (that is, your ESPP discount).
  • In qualified ESPPs, no income tax is due until you sell your shares.
  • Capital gains on all ESPPs is calculated by subtracting the market value on purchase date from your selling price.
  • However, the taxation on qualified ESPPs differs depending on the type of disposition (aka selling of shares): qualifying or disqualifying. See the dropdowns below for specific taxation info for each.
  • You’ve made a qualifying disposition when you sell your ESPP shares at least one year after the purchase date and two years after the offering date.
  • In a qualifying disposition, your capital gains will be taxed at long-term capital gain rates.
  • Do not confuse this with the holding period for long-term capital gains (which is one year). Your ESPP shares are in a qualified plan, so they do not follow this rule.
  • You’ve made a disqualifying disposition when you sell your ESPP less than one year after the purchase date or less than two years after the offering date.
  • In a disqualifying disposition, your capital gains will be taxed as ordinary income.
  • Even if you meet the holding period for long-term capital gains (which is one year) you will not qualify for long-term capital gain rates.

2. Taxation of non-qualified ESPPs

  • You’ll owe income tax on the difference between the market value on the purchase date and the discounted purchase price (that is, your ESPP discount).
  • In non-qualified ESPPs, income tax is due upon purchase.
  • Typically, income tax on non-qualified ESPPs will be deducted from your next paycheck, so expect a reduced paycheque following each ESPP purchase.
  • Some ESPPs add the value of the discount to your income for the year. In this case, it will be taxed with the rest of your earned income.
  • Capital gains on all ESPPs is calculated by subtracting the market value on purchase date from your selling price.
  • In Canada, you can sell anytime and receive the same favourable capital gain rate.
  • In the US, if you hold your ESPP shares for at least one year after the purchase date, you’ll qualify for long-term capital gain rates.
  • Despite this, I’d still advise you to sell your ESPPs immediately. (See the ‘when to sell’ section for more on this.)

3. Taxation of RSUs

  • You’ll owe income tax on the market value of the vested RSU shares on the release date. 
  • When your RSUs vest, your brokerage will sell a portion of your shares to pay for the income tax.
  • That means, unlike non-qualified ESPPs, you won’t need to worry about taxes being deducted from your paycheque.
  • Capital gains on RSUs is calculated by subtracting the market value on release date from your selling price.
  • If you hold your RSUs for at least one year after the purchase date, you’ll qualify for lower long-term capital gain rates.
  • Despite this, I’d still advise you to sell your RSUs immediately. (See the ‘when to sell’ section for more on this.)

Section 6: When to sell your ESPPs and RSUs

As great as ESPPs and RSUs are, you don’t actually want to hold on to them (even if it means you may forgo favourable taxation). Instead, I’d advise you to sell them immediately—for these important reasons:

1. The real value of ESPPs and RSUs

This may be surprising to hear, but the real value of ESPPs and RSUs isn‘t from their value as stocks. Instead, the value is in the ESPP discount and the immediate value of the RSUs once vested. 

Capture these gains by selling your ESPPs and RSUs as soon as you can. By doing so, you’ll lock in a 10–15% gain on your ESPPs and a 100% gain on your RSUs. You’ll be hard-pressed to find such high, guaranteed returns anywhere else.

This article from Wealthfront echoes my advice (scroll down to When Should You Sell the Stock?)

2. Too many eggs in one basket

It’s very risky keeping so much of your capital in one company. Look at what happened to Enron and Nortel’s employees—all at once, they lost their jobs, pensions and life savings. That’s heartbreaking. Don’t let that happen to you.

3. Don’t let the tax tail wag the dog

Successful investors know that you should never let the tax tail wag the dog. That is: don’t let tax avoidance become more important than your overall investing goals. 

Your goals should be to keep as much of your money as possible, and to grow your wealth with solid, diversified investments. 

Keeping too much of your wealth in your company stocks, just to save on taxes, may end up costing you much more than just taxes. (Remember Enron and Nortel!) 

4. Individual stocks can be risky

Your company stock is an individual stock. In my opinion, most people should stay away from investing in individual stocks. That’s because they come with significant risks:

  • They can be very volatile.
  • They can suddenly go to zero (again, remember Enron and Nortel).
  • They decrease your portfolio diversification.
  • They require a high level of knowledge to invest in successfully.

Very few investors have the time, interest, or knowledge to profitably invest in individual stocks. Unless you know how to analyze company financials and have a high level of investing knowledge, I’d advise you to stick to more diversified investments.

If you absolutely must

Maybe you work for Amazon or Apple and have complete faith in your company’s fortunes. If this is you, selling your ESPPs and RSUs may feel like letting go of a winning lottery ticket!

If you absolutely must hold onto some company stocks, I’d suggest limiting them to 1–5% of your overall investments. Sell the rest, then invest the cash in more diversified investments (such as low-cost index funds).

Section 7: Selling ESPPs and RSUs

Now that I’ve convinced you to sell your ESPPs and RSUs, it’s time to learn how do it! In this section, I’ve outlined how things should generally work. However, every brokerage is different, so your menus and screens may differ. 

If you get stuck, contact your brokerage and read these instructions to them. They should be able to help you figure out how to do it on their platform.

1. Log in

  • Log into your brokerage.
  • Click on the link to view your ESPP. (Your RSUs will likely also be in the same section.)

2. View your holdings

  • You should be at a screen that displays the value of your ESPPs and/or RSUs.
  • You’ll also see tabs or links that will lead you to other pages, such as Holdings, Sell, My account, or Help.

3. Sell your shares

  • Click on the link or tab that says ‘Sell’.
  • You should now be on a screen that displays your current holdings.
  • Click on the set of shares that you’d like to sell.
  • You should then be taken to a screen that shows you the details for those shares: the number of units, the current unit price, and the market value of all your units.
  • Click on the ‘Sell’ button or link.
  • This will take you to an order entry screen
  • It may look a little intimidating, but don’t panic! Here’s what you need to enter:
    • Quantity: Enter the number of shares you’d like to sell (all of them).
    • Order type: I recommend using ‘Limit’ orders. This means your shares will sell at the price you set or better.
    • Limit price: Enter the price you want to sell your shares at. I recommend setting it to the ‘Bid’ price. (See the box below for more on this.)
    • Duration: I recommend GTC. This means ‘good till cancelled’—the order will stand until it sells for the price you set it to sell at.
  • Once you’ve finished entering your order info, click ‘Sell’ or ‘Okay’. 
  • You’ll be taken to a summary which shows everything you entered as well as the trading fee or commission. (This will be deducted from your cash once the shares sell.)
  • Check all the order details, then hit ‘Okay’ or ‘Confirm’.
  • You’ll receive a final notification when your order goes through.

Selling at the bid price

When you set your sell price to match the bid price, you are selling at the price that buyers are currently happy to pay. Selling at the bid price will likely result in your order going through immediately, which is a good thing. 

It means you won’t have to wait and fret about the price dropping below your limit price. This takes the emotion out of the transaction and reduces the potential that you’ll change your mind, get greedy, or become fearful. 

Instead, you’ll receive an immediate confirmation that your order was executed. That means you’ve sold your stocks and you’re done! 

As you go through this sale process, remind yourself: the goal isn’t to hit a home run by banking on the value of the shares increasing. (That’s essentially gambling with your money.) 

The goal is to make money from the ESPP discount or the immediate grant value of your RSUs. You’re more likely to accomplish this if you sell immediately at the bid price.

4. Don’t forget T+2

Once your shares have sold, there’s something called T+2 that you should be aware of. T stands for transaction day and +2 means you need to add two business days to that for your trade to settle. 

That means if you sold your stocks on Monday, August 1, you’ll need to wait until Thursday, August 4 to access the cash. 

5. Select your method of payment

Once T+2 has passed and your trade has settled, your cash is free and clear. Here are your options to transfer or withdraw your money:

Transfer within the same brokerage

If your other investment accounts are with the same brokerage, you can simply transfer the money from one account to another. This should be easy to do. Ask your brokerage for help if you don’t know how.

Transfer to a linked bank account

If you haven’t already linked your bank account to your brokerage, you should do that now. (It usually takes 3–5 business days.) Transferring cash from your brokerage to your bank account is fast, easy, and usually free. 

Note: this isn’t an option if you’re transferring from an American brokerage to a Canadian bank. See below for other options.

Request a cheque

This option is easy and usually free, but it can be slow. The cheque needs to be mailed to you, then your bank may hold the funds when you deposit the cheque. (Despite the slow speed, this is the best option for transferring from an American brokerage to a Canadian bank.)

Wire transfer

Wire transfers are fast but EXPENSIVE. Your brokerage will likely charge $15–$25 to send the transfer, then your bank will charge another $15–$25 to accept it. 

Additionally, if you send the wire transfer from an American brokerage to a CAD-denominated account, the receiving bank will automatically convert the USD to CAD at a very expensive rate.

6. Reinvest the cash

Your ESPP or RSU sale is complete, and now you’ve got a bundle of cash… but don’t just go spending it! Instead, reinvest it into low-cost index funds. (See FI School Lesson 6: Index Investing to learn how.)

Section 8: ESPP and RSU record keeping

ESPP and RSU record-keeping is tedious, but if you do a good job of it, you’ll thank yourself at tax time. Here’s how I recommend you keep your ESPP and RSU records organized:

1. Keep printed and digital records

I recommend keeping printed and digital records because:

  • The printed copies are easier to reference when completing your tax return. (Be sure to save trees by printing on the back of previously-used sheets.)
  • The digital copies are there for backup and are easy to reference from anywhere.

2. Name your documents

You should name the individual documents so you can quickly see what they’re for and when you received them. (For example, ESPP Purchase 2020-02-01.pdf or RSU Release 2020-05-16.pdf.)

3. Use folders

Use a consistent system and file your records the same way every time. I use a folder system, set up as follows:

  • ESPPs and RSUs
    • Previous tax years
      • Sold and reported
    • Current tax year
      • Sold
      • Not yet sold

4. Records to keep

Here are the documents you’ll need to keep in the previously-mentioned folders:

Statements of purchase (ESPPs) or release (RSUs)

You’ll receive these from your company and/or brokerage. You only need one set, but keep both just in case. These statements show the market value of your shares and other important info that you’ll need to calculate your capital gains.

Trade confirmations

Your brokerage will generate a trade confirmation each time you sell your ESPPs or RSUs. You’ll need the info on your trade confirmations to calculate your capital gains.

RSU grant statements

When you’re granted RSUs, you’ll likely receive a statement that tells you how many shares you were granted and when. You won’t need your grant statement for tax purposes, but keep it because it tells you when your shares will vest.

Section 9: Calculating capital gains on ESPPs and RSUs

You’ll need to calculate your capital gains in order to report them accurately on your tax return. Unfortunately, your employer and brokerage won’t do this for you. 

That means you’ll have to learn to do it yourself. Fortunately, this isn’t difficult, thanks to some free online resources, which I’ll share below.

Tools to help you calculate your capital gains

One extra step for Canadians

Canadians who receive ESPPs and RSUS in USD will also need to convert the values to CAD. See the box below—Converting your ESPP and RSU transactions from USD to CAD for instructions.

Additional tips

When you enter the buy prices for your ESPPs and RSUs, there are some important things to keep in mind:

ESPPs

  • Use the market value on purchase date, NOT the purchase price
  • Remember: you’ve already paid income tax on the difference between the market value on purchase date and the purchase price.
  • If you use the purchase price, you’ll be taxed twice on that income. Don’t make this mistake!

RSUs

  • Use the market value on release date.
  • Remember: you only need to report the shares that were issued to you. (That is, the shares that remain after a portion of your shares were sold to pay for income taxes.)

Once you’ve entered all your info into the calculators linked above, you’ll have a final capital gain (or loss) to report on your tax return.

Converting ESPP and RSU transactions from USD to CAD

Canadians who receive ESPPs and RSUs in USD will need to convert the values to CAD to correctly calculate their capital gains. Here’s how to do that:

1. Decide on the rate you want to use

Decide whether you want to use the annual average rate or the exchange rate for each transaction date:

  • Using the annual average is much simpler and requires only one lookup.
  • Using the exchange rate for each transaction date is more time-consuming, but could give you an overall lower exchange rate. (However, it could also give you an unfavourable rate.)
  • If you have time, do both and see which gives you a better rate. 
  • If you don’t, the annual average will be fine—there usually isn’t a big difference.

2. Go to the Bank of Canada website

3. Find the rates for these dates

  • ESPP purchase date. (Your company’s ESPP purchase statement may include this. If so, you don’t need to save the Bank of Canada rate—use the rate on the statement.)
  • RSU release date (not the grant date).
  • ESPP and RSU sale settlement date (not the trade date).

Section 10: Reporting capital gains on ESPPs and RSUs

Now that you have your capital gain (or loss) calculated, it’s time to report it on your tax return. This is very easy to do—your tax software should prompt you when it’s time to enter it. If not, Google “where do I enter a capital gain in X”—with X being your tax software of choice.

Tax software options

For Canadians

  • FreeSimpleTax is free (or by donation) and the interface is clean and simple to use.
  • PaidUFile is affordable and easy to use. I used it for years and was always happy with it.

For Americans

Why you should report your ESPP and RSU income

Some of you may be feeling overwhelmed right now. Perhaps you’re thinking it’ll be easier to ignore the tax issues and leave it for another time. Please don’t do that! 

It’s in your best interest to report your capital gains and file on time. Here’s why:

  • Canada and the United States use ‘self-reporting’ income tax systems. That is, it’s up to you to file your income taxes and submit your info accurately.
  • Yes, you could ‘forget’ to report your capital gains, but the CRA and IRS have the right to audit you anytime. That is, it’s a matter of when not if you’ll be caught. 
  • On top of the pain of going through an audit, they may even have grounds to charge you for tax evasion. Yes—you could go to jail and end up with a criminal record.
  • Additionally, late-filing penalties and fines compound over time. These fines can multiply very quickly. That’s why it’s in your best interest to report your capital gains and file every year, on time. 
  • Even if you’re late, sooner is still better than later. Do not procrastinate on this! The sooner you report your capital gains, the sooner you stop the clock and stop the accrual of compounding penalties and interest.

I don’t want any of you to get in trouble with the CRA or IRS. If you only take one thing away from this guide, it’s this: file your taxes on time and report all your income (including capital gains on your ESPPs and RSUs) every year!

Section 11: How to not pay taxes on your capital gains

If you have a capital gain, be prepared to pay taxes on it. (Your tax program should tell you if you owe any taxes, and how much you owe.) If you don’t like the sounds of this, then consider a legal way to reduce your taxes owing…

Contribute to your RRSP (Canada) or 401k (US)

Doing so will give you a tax deduction, which lowers your taxable income. Lowering your taxable income may result in a refund, which could offset the taxes on your capital gains. 

You can use your tax program to calculate how much to contribute to your RRSP or 401k to fully offset the taxes on your capital gains. Keep in mind that you’ll then need to contribute before the contribution deadline. (Also, be careful not to exceed your contribution limits.)

Contribute anyway—you may get more free money!

Even if you don’t need extra tax deductions, you should be contributing to your group RRSP or 401k anyway. That’s because most companies that offer ESPPs and RSUs also match group RRSP and 401k contributions.

That’s right—your company gives you free money to help you invest for your retirement! Not only does this help to grow your FI fund, but your contribution will also become a deduction, which will help to lower your taxes for the year.

Some caveats

  • You need to make your group RRSP/401k contributions before the end of the tax year. If you wait until tax time, it’ll be too late.
  • Make it easy on yourself, and set up automatic payroll contributions so you know your contributions are maxed out every year.
  • Your company will likely have a maximum amount they’ll match to (for example, up to 6% of your salary). I recommend only contributing up to the match and no more.
  • If you’re aiming for FI, you should invest much more than just 6% of your salary—just do it outside of your company plan. It’ll be cheaper and you’ll have more flexibility this way.
  • For more info on how to invest outside of your group RRSP or 401k, see FI School Lesson 6: Index Investing.

Section 12: Housekeeping

Now that you’ve reported your ESPP and RSU income and filed your tax return, you’re basically done! All you have left to do is a bit of housekeeping:

  • Save a PDF of your tax return. (You can also print it out, but I find that the digital copy is sufficient.)
  • Collect all your ESPP and RSU paperwork and clip it together for easy reference.
  • File it away with that year’s tax returns.
  • Organize your digital records the same way, moving the files into the folder for that year.

Section 13: Summing it up

Phew—we covered a lot of info in this guide! Let’s review it all with a summary:

The basics

  • ESPPs and RSUs are forms of compensation from your employer. It’s essentially free money—so take them if they’re offered to you!
  • ESPP stands for Employee Stock Purchase Plan—you get to purchase company stocks at a discount.
  • RSU stands for Restricted Stock Unit—you are given company stocks as a bonus.
  • There’s typically one offering and two purchase periods for ESPPs every year.
  • RSUs are given to you, then they typically need to vest for at least six months before you can sell them.
  • You should sell your ESPPs and RSUs immediately. This is to avoid having too much of your income tied to one entity—your company.
  • There are two types of ESPPs: qualifying and non-qualifying. Taxation and other rules differ with each plan.

Taxation

  • Keep meticulous records for your ESPPs and RSUs (you’ll thank yourself at tax time).
  • ESPPs and RSUs are taxed in two ways: income taxes and taxes on the capital gains.
  • You’ll owe income tax on the discount on your ESPPs and for the market value of your RSUs on the release date.
  • You’ll also owe taxes on the capital gains when you sell your ESPPs and RSUs.
  • To report your capital gains, you’ll first need to calculate the capital gains using the records you’ve gathered.
  • Take the capital gains amount you’ve calculated and enter it on your tax return.
  • File your return, then organize and store your printed and digital records for future reference.
  • It may seem daunting and boring, but it’s in your best interest to file your taxes on time and report all your income every year.

Section 14: Additional resources

ESPPs

RSUs

Taxation

ESPPs from Canada-based companies

Got questions or comments?

I’d love to hear them! Leave your feedback in the comments below—I’m happy to reply and help however I can. Also, if anything is incorrect or you have an edit to suggest, feel free to let me know. I’d like to make this guide as accurate and helpful as possible.

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29 Comments

  • Reply
    Michael Baker
    August 10, 2020 at 1:16 am

    Hi Chrissy! This is my first time here, thank you for this detailed guide. It’s cool that you share your knowledge and experience. I will subscribe to your blog so as not to miss new publications.

    • Reply
      Chrissy
      August 10, 2020 at 11:44 pm

      Hi Michael—thanks for coming by and for the lovely comment. I appreciate your interest!

  • Reply
    Jacob Moore
    October 20, 2020 at 4:57 pm

    Hi Chrissy!

    Great article. One thing I would like to comment is that Canadians may want to look at opening an American-based bank account. I know RBC has an American subsidiary at which Canadians can open accounts. That way, they can just transfer the money to that account and rather than waiting for a cheque or doing a wire transfer

    • Reply
      Chrissy
      October 20, 2020 at 8:32 pm

      Hi Jacob—thanks for the excellent tip. I’ve been looking into this for many years, but it sounds tricky to do. Some Canadians have an easy time opening US-based bank accounts, but many have had to jump through many hoops to make it happen. I’ll have to spend more time researching to see if there’s an easy, foolproof way to do it. Thanks for sharing!

      • Jacob
        October 20, 2020 at 8:59 pm

        Thanks for the reply Chrissy!

        I know for the RBC US-Based account at least it’s specifically meant for Canadians, so there should be minimal hoops to jump through (other than the account fees of course). I mostly bring it up as another option.

      • Chrissy
        October 21, 2020 at 10:28 pm

        Hi Jacob—thank YOU for the reply! I didn’t realize this about the RBC account. Now I’m extra intrigued! I’ll look into it and hope that we’ll be able to open one. It would be a huge help for us. Thanks again for sharing.

  • Reply
    ksha3yaa
    February 14, 2021 at 9:11 am

    Chrissey, thank you for detailed post. I can only imagine the time and effort taken to research and consolidate this. I got answer to several questions on espp here. Do you have researched the ISO stocks offered in US ? I had received some ISO stocks pre IPO and then company went public. I migrated to Canada 2 years later. Now I have several espp, rsu and these iso stocks stuck in USA brokerage and just afraid to even touch it considering tax implications between USA and Canada.

    • Reply
      Chrissy
      February 14, 2021 at 9:30 pm

      Hi ksha3yaa—I’m happy to hear this post was helpful. I unfortunately don’t know anything about ISOs, but after receiving your comment, I did some quick reading about them and the cross-border issues.

      As you may have guessed, it all depends on your specific situation. The taxation rules change depending on when you moved, when the shares were granted, when they vest, when you sell, etc.

      Your residency also factors into the taxation rules in both countries as well, so that’s another factor!

      You could probably figure out 90-95% of the info you need by spending a day Googling for the answers. Then, for that last 5-10%, consider paying a cross-border taxation lawyer or accountant for an hour or two of their time to confirm your findings and give you some guidance.

      Or, if you’re not into all that research, it may be worth your while to pay for professional help for everything. (That would be the priciest option, but it could be worth it, to save you from making a costly mistake and to give you peace of mind.)

      One final suggestion is to go on Reddit, an expat Facebook group, or other forum to see if anyone has had the same situation as you. Someone may be able to give you the answers you’re looking for or point you in the right direction.

      I hope those suggestions were a little bit helpful. 🤞

      Before I go, I just have one more thing to mention: ISOs usually have to be exercised within 90 days of leaving your company, or else you’ll have to forfeit them. I’m not sure if you’re still with your company or not, but if you’re not, it would be worth looking into this soon.

      Best of luck to you!

      • ksha3yaa
        February 18, 2021 at 9:53 am

        Thank you Chrissy again for taking time to research and reply. Yes all ISO is exercised. I have reached out to few experts, but unfortunately they always contradict my own research on several points. It has become a good nightmare. Good because I gain money, nightmare to do research and constantly challenged. I wish I could just give CRA my money and say, “calculate, cut tax and give me rest” 😀

      • Chrissy
        February 18, 2021 at 10:24 pm

        Hi ksha3yaa—if only it were that easy, right? Speaking of CRA, I would highly suggest giving them a call. Their agents are surprisingly friendly and helpful, especially the ones who have more advanced knowledge. (I believe they’re referred to as “Level 2” agents.) I hope you find a resolution for your “good nightmare”.

      • ksha3yaa
        March 10, 2021 at 8:57 pm

        Chrissy, do we maintain single ACB for ESPP and RSU if they are identical stocks ?

      • Chrissy
        March 10, 2021 at 9:22 pm

        Hi ksha3yaa—yes, they should all be recorded together. Here’s a helpful article from adjustedcostbase.ca.

        They have lots of other helpful info there. I also use their tool to calculate our ACB. It’s very handy and even allows you to enter a foreign currency exchange rate.

      • ksha3yaa
        March 10, 2021 at 10:15 pm

        thank you Chrissy !

  • Reply
    Shiv
    February 28, 2021 at 2:08 am

    Hi Chrissy,
    I have a quick question on how to income tax paid by the brokerage automatically. Can I get a refund on the amount if I sell the RSU (realize capital gains) and invest in RRSP?

    • Reply
      Chrissy
      February 28, 2021 at 4:10 pm

      Hi Shiv—I’m not a tax expert, but I will share my thoughts below. I’ll start with an explanation of the flow of money when your RSUs vest:

      – RSU taxes are withheld by your brokerage as soon as your RSUs vest.
      – This amount is remitted to CRA and included in the amount of taxes you’ve already paid for the year.
      – You will see this amount broken out on your confirmation of RSU release.
      – However, you will not see this amount broken out on your paystub. BUT if you look at the YTD taxes paid on the paystub immediately following your RSU release, the taxes for your RSUs will be reflected in that total.
      – This means RSU taxes are not in a separate ‘basket’ from the taxes that have been deducted from your pay. Rather, it is simply added to the total of your income taxes paid for the year.

      This is a roundabout way to say: yes, you *may* get a refund on some of those taxes by contributing to your RRSP. However, since RSU taxes and taxes on your employment income are fungible (interchangeable and indistinguishable) you can’t necessarily say that the refund was from the RSU taxes or the taxes on your employment income.

      *Notice that I said you *may* get a refund. That’s because it’s not a guarantee that you’ll get a refund, even if you make an RRSP contribution. For example, if you have a lot of capital gains to report, you may owe more in taxes than your RRSP deduction can offset. It all depends on your situation for that tax year.

      I hope this all makes sense! Let me know if you have other questions.

      • Shiv
        February 28, 2021 at 4:55 pm

        Thank you so much for the wonderful blog and reply. 🙏🙏

  • Reply
    Ishmar Dar
    March 2, 2021 at 2:15 pm

    I work for a Canada company but work in US. I get paid in US and pay US taxes (I am US citizen). I got RSUs, Options, and ESPP. I sold them in 2020. I got US forms for the sale, but, I also got a Canada Tax form T5008. I am not sure what to do with that for Canada. I will pay the US taxes. My question is, do I need to pay taxes in Canada? I don’t pay any Canadian taxes today since I live and work in US.

    • Reply
      Chrissy
      March 2, 2021 at 5:53 pm

      Hi Ishmar—I unfortunately don’t know much about taxation for Americans working for Canadian companies. Based on what I do know, my hunch is that you can probably ignore this form, given that you’re an American living in the US.

      I did do some research, and found this article, which might be of some help to you.

      There wasn’t much other info I could find on this topic. But I do have one other suggestion: give CRA (Canada Revenue Agency) a call. Their agents are friendly and helpful, and should hopefully be able to give you more info.

      Best of luck to you!

  • Reply
    Ishmar Dar
    March 2, 2021 at 6:03 pm

    You are too kind and amazing to respond so quickly.

    • Reply
      Chrissy
      March 2, 2021 at 7:10 pm

      Sorry I couldn’t be of more help. I hope you get it sorted. 🤞

  • Reply
    ksha3yaa
    March 24, 2021 at 7:59 am

    Hi Chrissy
    Finally got some very good explanation from a cross border tax consultant. Did not come cheap but I have some confidence now. So whatever was exercised before leaving USA is considered deemed disposition. I got all of them transferred to Canadian brokerage and planning to sell it to diversify in few days. So these will be in USD once sold. Have you done any research on investing USD in Margin, TFSA and RRSP ? Do you convert them to CAD or just buy US stocks ? I know the taxation for US dividends is different in margin and TFSA. Just curious what is best when you have USD in Canada to diversify.

    • Reply
      Chrissy
      March 24, 2021 at 8:02 pm

      Hi again ksha3yaa—it’s so nice of you to come back to share an update! Would you feel comfortable sharing the name of the consultant you saw? I’m always on the lookout for good experts to send readers and friends to.

      When I was still DIY investing, all of my non-Canadian holdings were in USD, held mostly in my TFSA and RRSP accounts (but our ESPP and RSU stocks are held and sold in our margin account). So yes, I have experience with this!

      It’s up to you if you’d like to keep the USD as USD to invest, or convert it to CAD first. You will save on MERs by holding the USD, US-listed versions of ETFs versus holding the same Canadian-listed ETFs in CAD.

      However, the fee savings may not be enough to justify complicating your portfolio. There are many things to weigh:

      – What will you do when you have more money to invest and when you rebalance?
      – Will you convert CAD to USD, or will the rest of your investments be in CAD?
      – Are you okay with calculating the USD to CAD exchange every time you rebalance, so that you’re rebalancing accurately?

      Re: USD dividends, generally, it’s best to hold USD investments in RRSPs first, then when you run out of room, TFSAs. I would avoid holding USD investments that pay any dividends in taxable accounts. Doing the ACB accounting for all those dividend payouts will be a massive headache!

      I’m just skimming the surface here and would highly suggest reading what Dan Bortolotti @ Canadian Couch Potato has to say on this topic! He has lots of excellent info on his blog about this. Search foreign withholding tax on his site and you’ll find all the info you need. 👍

      If, in the end, you decide to convert the USD to CAD, you may want to look into something called Norbert’s Gambit. It’s a low-cost way to convert USD to CAD (or vice versa).

      I hope that’s all helpful to you! Sorry if it’s overwhelming!

      • ksha3yaa
        March 25, 2021 at 8:05 am

        Thank you Chrissy !
        It’s not overwhelming at all, now that I have researched this for few months. Yes I plan to keep it in USD and buy US growth etf in tfsa and rrsp to avoid dividend tax. However, I plan to keep 50% of espp, rsu transferred in margin account due to max out. I known the tax on dividend here is heavy but some of it I can claim as foreign tax credit I think. When I get more room in registered account, I plan to sell and move them next year. I plan to use this app ‘Passiv’ to rebalance which automatically converts the currency and also has tie up with questrade to automate investments. I have tried rebalancing with it but have not automated it yet. I have used Norbert’s Gambit previously to convert CAD to USD, but I was not sure if the reverse was good or bad. I was impressed with this article so I got a paid consultant time to get clarified with them. https://mcacrossborder.com/moving-back-to-canada-with-us-stock-options/ .

      • Chrissy
        March 25, 2021 at 2:08 pm

        Hi ksha3yaa—oh, fantastic! I’m happy to hear you’re using Passiv. It’s such a great tool to make rebalancing easier. I wish it existed when I was still DIY investing. I didn’t realize it also helps you convert the currency. That’s an added bonus! It sounds like you’re doing well and have everything set up optimally. Well done!

        Thanks for sharing the info about your cross-border consultant. I’ll file that in my records. 🙂

  • Reply
    TheFCM
    April 23, 2021 at 6:03 am

    Hi Chrissy,

    Great article… wish I found it many years ago as it sounds like I am on similar path. The guidance regarding selling ESPP and RSU immediately makes sense – especially regarding the nuances around ACB and capital gains.

    With that said, as you mention for over 10 years you had those types of stocks sitting in your account.. if I was to now try and follow the guidance of selling immediately I would still have to do the ACB calculation and incur capital gain/loss depending on my 10 year old stocks, correct?

    OR can those shares that grant/vest immediately and sell immediate not have to be counted in your capital gain/loss calculations and not affect your ACB?

    And personally did you eventually sell all of the accumulated shares over the years and incur the related capital gain/losses?

    Thanks

    • Reply
      Chrissy
      April 23, 2021 at 3:51 pm

      Hello TheFCM—thanks for reading and commenting. Congrats on receiving so many (hopefully profitable) ESPP and RSU shares! I’ll reply to your questions below:

      No matter which shares you sell (old or new) you must keep a running ACB calculation which includes all holdings of the same stock, across all your non-registered accounts. (That is: you can’t simply isolate the newest shares and ignore the old ones.) This makes the distinctions between your various shares (old versus new; Lot A versus Lot B) irrelevant. That’s because you must always take all of them into account when calculating your ACB.

      This article explains this process in-depth: How to Calculate Adjusted Cost Base (ACB) and Capital Gains

      In the US, investors are allowed to select from a number of calculation methods, including the “specific lot” method. That is: each lot of granted stocks can be isolated, allowing you to do the calculations on just that lot. Unfortunately for us, that’s not allowed in Canada!

      My husband and I bit the bullet and sold off pretty much all his ESPP and RSU shares in 2015. We reported a substantial capital gain that year, but were fortunate that we had a lot of RRSP room. We contributed most of the gains, claimed the RRSP deductions, and still came out ahead with a refund.

      Nowadays, we always sell right away (or as close to right away as we can) so it’s rare for us to hold more than one lot of shares at a time.

      I hope that was helpful. Let me know if you have any other questions.

      • TheFCM
        April 24, 2021 at 10:44 am

        Hi Chrissy,

        I really appreciate your response and again the time and effort you put in creating this page. I will for sure take a look at the rest of the site

        Thank you also for confirming with respect to filing taxes in Canada that we would have to sell off existing holdings with the calculation of running ACB while we continue to possibly have holdings vest until all are gone.

        After this point it makes it easier to then adopt the process of selling off RSUs as they vest and ESPPs as they are granted and not have to incur capital gains on those – and most importantly the additional management of the ACB with transactions over time related to the same holding.

        Thanks again and keep up the great work!

  • Reply
    Fabien
    September 5, 2021 at 12:38 pm

    Hello Chrissy, and thank you so much for this guide. You cannot imagine how useful it is!

    Question: I get my RSUs in USD. So to avoid USD/CAD conversions fees, did you explore the possibility to open a RRSP & TFSA in USD?

    Thank you so much!

    • Reply
      Chrissy
      September 5, 2021 at 9:04 pm

      Hello Fabien—what a lovely comment. Thank you! Yes, I held USD in our RRSPs and TFSAs at Questrade. You don’t need to open a separate account to do this. Questrade allows you to hold both currencies in all their accounts (except the RESP, which technically does allow USD, but in a roundabout way).

      You can perform Norbert’s Gambit in your RRSP, TFSA or non-registered at Questrade to save on conversion fees. Let me know if you have any other questions!

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