Restricted Stock Units (RSUs): A Comprehensive Guide

Written by Carson Hamill CIM®, CRPC®, Associate Financial Advisor and Assistant Branch Manager & Dean Moro BComm, CIM®, Associate Financial Advisor

In today's workplace, Restricted Stock Units (RSUs) have become a popular form of employee compensation. However, when it comes to cross border scenarios, navigating the complexities of RSUs can be challenging. If you find yourself unfamiliar with RSUs or facing cross border complications with your RSU plan, you've come to the right place. In this blog, we will dive into the intricacies of cross border RSUs, providing valuable insights and guidance to help you understand and navigate the unique considerations involved.

• What are RSUs
• How RSUs Work
• The Vesting Schedule
• Benefits of RSUs
• Tax Burden of RSUs
• Selling Vested Shares
• Cross Border Issues with RSUs

What are RSUs

Restricted Stock Units (RSUs) serve as a type of compensation that grants employees a specific quantity of company shares. However, these shares are subject to a vesting and distribution schedule, which is dependent on the individual achieving predetermined performance milestones or remaining employed by the company for a designated duration.

How RSUs Work

RSUs are issued to employees through a vesting plan and distribution schedule. This means that the shares are not immediately available to the employee. Instead, they must achieve required performance milestones or remain with their employer for a particular length of time before the RSUs are vested.

After the Restricted Stock Units (RSUs) have reached the vesting period, they are assigned a fair market value (FMV), representing their hypothetical worth on the open market. At this point, the RSUs are deemed as income for the employee, and a portion of the shares is withheld to cover income taxes. The remaining shares are subsequently transferred to the employee, who possesses the right to sell them if they choose to do so.

The Vesting Schedule

A vesting schedule associated with Restricted Stock Units (RSUs) is a predetermined timeline or set of conditions that an employee must fulfill in order to gain ownership rights or control over the RSUs. It specifies when and how the RSUs will become fully vested and transferable to the employee. The vesting schedule is typically based on two main factors: time-based vesting and performance-based vesting.

• Time-based vesting: This type of vesting schedule is based on the length of time the employee has worked for the company. It may involve a cliff period, where no shares vest until a specific period (e.g., one year) has passed, followed by a gradual vesting schedule (e.g., monthly or quarterly) until all RSUs are fully vested. For example, if an employee has a four-year time-based vesting schedule with 25% vesting each year, they would become fully vested after four years of continuous service.

• Performance-based vesting: In addition to time-based vesting, RSUs may also incorporate performance-based vesting criteria. These criteria are typically tied to specific performance goals or milestones that the employee must achieve to earn the vested RSUs. Performance-based vesting may involve meeting certain financial targets, reaching revenue goals, or achieving other predetermined metrics. Once the performance conditions are satisfied, the RSUs associated with those conditions become vested.

It's important to note that the specific details of the vesting schedule, including the length of the vesting period, the percentage of RSUs vested at each milestone, and any performance conditions, are determined by the company and outlined in the RSU agreement or plan documents.

Benefits of RSUs

Companies utilize Restricted Stock Units (RSUs) as a means to incentivize and retain talented individuals. RSUs grant employees a stake in their employer's equity; however, they lack tangible value until they have vested. RSUs prove highly valuable as they enable recipients to benefit financially when the company performs well and the stock price increases. At the same time, by requiring employees to fulfill vesting requirements, RSUs incentivize individuals to remain with the company.

Tax Burden of RSUs

If you are eligible for participation in a Restricted Stock Units (RSU) program, the ownership of the shares granted to you is contingent upon meeting certain vesting requirements. Until you fulfill the "vesting" period, you do not technically possess the shares, and thus there is no tax burden associated with them. However, once you satisfy the vesting period, the tax liability is triggered. The taxable value of the vested shares is determined by multiplying the number of shares by their fair market value (FMV). It is crucial to understand that this value is considered taxable income for you.One challenge that individuals encounter is the required withholding tax. Fortunately, some companies provide the option to offset your tax liability by reducing the number of shares granted to you by the amount of tax owed.Here is an example: If you receive 500 shares after your vesting period and the shares are worth $20 a stock, you are obligated to pay tax on $10,000 of income. If you are in a 30% tax bracket, your tax obligation is $3,000. If your company allows it, you may have the option to sell a portion of the shares to meet your withholding tax obligation. Then you could sell 150 shares at $20 and retain 350 shares. Again, this isn’t always an option and depends on the company plan. If it is not an option, the recipient would have to fund the $3,000 tax liability on their own.

Selling Vested Shares

Selling your vested shares depend on whether your employer is a private or public entity.

Private Company: Limited Options for Selling Shares

If your employer is a non-public entity, selling your shares can be more challenging. There is no readily available marketplace for these shares, which means you may need to fund taxes out of pocket. Some companies issue double-trigger RSUs with a liquidity event provision to address this issue. If a liquidity event occurs, it offers an opportunity to sell shares, which can be used to fund the tax liability.

However, with limited options for selling shares, you may need to wait for your company to have a liquidity event. This can be frustrating, especially if you need cash for other purposes. It’s important to note that some liquidity events, such as an IPO or SPAC listing, have lock-up periods, which means you are restricted from selling your shares right away. Despite these challenges, holding on to your shares can be worthwhile if your company is growing and the value of your shares rise over time. If you’re confident that your company’s shares will be worth more once it becomes public and you have enough cash to cover the taxes, you may want to consider holding on to the shares and paying the taxes out of pocket in hopes of a larger payoff down the road.

Public Company: Selling Shares Made Easy

If your employer is a publicly traded entity, selling your shares is usually straightforward. The company’s shares are listed on a stock exchange, which means you can sell them at any time. This can be particularly useful if you need cash to pay for taxes or other financial goals.

However, it’s important to remember that having too much exposure to one company can increase the risk of your portfolio. If you’re concerned about this, you may want to consider selling some of your shares to diversify your investments.

Also, when it comes to taxes in the United States, holding shares for over a year before selling can result in a long-term capital gain, which is generally subject to less tax than a short-term capital gain. If you’re concerned about capital gains tax, there are strategies you can use to reduce this. Consult with a cross-border investment professional to learn more.

Cross Border Issues with RSUs

There are several cross-border tax issues associated with RSUs, particularly when employees who hold RSUs are subject to tax obligations in multiple jurisdictions. Here are some key considerations:

1. Tax residency: RSU taxation is influenced by an employee's tax residency status. Tax residency rules vary between countries, and determining the tax residency status of an individual can have implications for how RSUs are taxed.
2. Double taxation: When an individual is subject to tax obligations in both their home country and the country where the RSU-granting company is located, there is a risk of double taxation. Double taxation occurs when the same income (such as RSU gains) is taxed in two jurisdictions. To mitigate this, countries may have tax treaties in place to address the issue and avoid or reduce double taxation.
3. Withholding obligations: RSU vesting can trigger withholding tax obligations for the employer. Employers are typically required to withhold taxes on the value of the vested RSUs at the applicable rates. This withholding is meant to cover the employee's tax liability. However, the withholding process can be complex when dealing with cross-border RSUs due to variations in tax rates and withholding obligations across different jurisdictions.
4. Reporting requirements: Individuals with cross-border RSUs may have additional reporting requirements to fulfill in both their home country and the country where the RSU-granting company is located. These reporting obligations can include disclosing RSU holdings, gains, and other relevant information for tax purposes.
5. Foreign tax credits: In some cases, individuals subject to taxation in multiple jurisdictions may be eligible for foreign tax credits. These credits can help offset the taxes paid in one jurisdiction against the tax liability in another, reducing the risk of double taxation.

It's important to note that cross-border tax issues related to RSUs can be complex and vary based on individual circumstances, the countries involved, and any applicable tax treaties. Seeking guidance from a tax professional with expertise in international taxation is highly recommended to ensure compliance with tax laws and to optimize tax outcomes when dealing with cross-border RSUs.

Summary

Restricted Stock Units (RSUs) are a popular form of compensation. In this blog we provided valuable insights into RSUs, including their structure, benefits, tax considerations, and selling options. We hope this helps you understand and navigate the complexities associated with RSUs and make an informed decision regarding your compensation plan and the accompanying tax obligations. As always, ensure you speak with an experienced cross border tax professional before making important decisions regarding your plan.

Next Steps

If you’re planning on moving to Canada and need assistance with your investments, estate planning, and portfolio management, please call or email Snowbirds Wealth Management, as we specialize in cross-border financial planning and wealth management. We work closely with experienced cross-border lawyers and accountants to ensure you have a team behind you.

About Snowbirds Wealth Management

Gerry Scott is a portfolio manager and founder of Snowbirds Wealth Management, an advisory firm focussed on the cross-border market. Together with Dean Moro and Carson Hamill, associate financial advisors and assistant branch manager with Snowbirds Wealth Management, they provide investment solutions for Americans living in Canada, and Canadians residing in the United States. Licensed in both Canada and the US, they provide tailored investment solutions to minimize the tax burden when moving assets across borders.

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