Insights & Resources

Many of our clients work for corporations that offer a variety of employer savings programs designed to enhance their financial security. 

These programs can encompass Group RRSP programs, Employee Profit Share Plans, Defined Contribution Plans, and the increasingly popular Restricted Stock Unit (RSU) share plans.

While our clients often grasp the advantages of these programs, they might not always fully understand the tax ramifications associated with each option.

In this case study, we’ll view a client that we recently assisted, named John. He was employed by a prominent Canadian telecom company and benefited from a generous RSU (Restricted Stock Unit) program. We’ll share the strategic choices that enabled him to unlock the potential of his RSUs and accomplish his goals while minimizing his tax liabilities.

Understanding RSUs

Restricted Stock Units, or RSUs are a valuable component of employee compensation packages. These units represent a promise from an employer to provide shares of the company’s stock to an employee after a predetermined vesting period. Unlike stock options, RSUs have no exercise price; the employee is granted the stock outright upon vesting. The value of the RSUs is determined by the company’s stock price at the time of vesting.

Case Study

In John’s case, he found himself in need of funds to secure a down payment for a vacation property. The problem was his personal savings were predominantly held within a Registered Retirement Savings Plan (RRSP). This comes with significant tax implications upon withdrawal. 

Since withdrawals from an RRSP are considered taxable income, the prospect of a 50% tax rate on his desired withdrawal was discouraging.

Fortunately, John possessed a substantial balance of vested RSUs through his employer’s program. He owned 5,000 shares of his company’s stock. He gained profit because he acquired them at $100 per share, now valued at $130 per share. This amounted to a profit of $150,000. 

Leveraging this asset, we developed a strategic plan to help John realize his dream of owning a vacation property without the unnecessary tax burden.

Solution

Our recommendation to John was to sell his vested company stock and face a better tax rate of approximately 25% on the capital gain. 

His Adjusted Cost Base (ACB) was $500,000, while the current market value was $650,000, leading to a capital gain of $150,000. With half of this gain taxable at his marginal tax rate of 50%, John’s total tax liability amounted to $37,500.

In an alternative scenario, had John withdrawn the same $150,000 from his RRSP, the tax implications would have been far greater. The entire amount being taxed at his income tax rate. Consequently, the $75,000 tax burden on the RRSP withdrawal would have doubled his tax expense.

Conclusion

By thoughtfully planning John’s financial decisions, he was able to generate the down payment for his vacation property and minimize taxes. The decision to tap into his vested RSUs saved John $37,500 in taxes, compared to the RRSP withdrawal route.

Just as John’s situation underscores, strategic tax planning can make a substantial impact on maximizing opportunities for prosperity.

We can help

We work with business professionals, executives, and families to grow and protect their wealth using our Wealth Plan formula. To discuss our approach and if it is the right fit for you, we invite you to schedule a no-obligation discovery consultation.