Departure Tax on Stock Options and RSUs When Leaving Canada

Are stock options and RSUs subject to departure tax?

No for options; usually no for unvested units, depending on the plan's terms; yes for shares you already own. When you leave Canada, the Income Tax Act, paragraph 128.1(4)(b) deems you to sell most of what you own at fair market value, but it skips any "excluded right or interest". That definition in subsection 128.1(10) includes rights under a stock option agreement and rights under a plan that pays you for your services. The CRA lists "employee security options subject to Canadian tax" among the exceptions.

Leaving does not end Canada's claim on awards earned while you worked here. What makes a case not simple: awards that vest over years split between Canada and your new country, a CCPC employer, a plan that pays cash instead of shares, or payroll in both countries withholding on the same vest. These are easiest to sort out before the first vest after you leave.

Gather before you leave:

• Each grant agreement and the plan document
• Grant, vesting and exercise dates, exercise prices and the share value on each date
• A count of your workdays in Canada and abroad for each vesting period
• Your departure date and the value of every share and option you own on that date
• Slips and pay statements showing tax already withheld

Are unexercised stock options deemed sold when I leave Canada?

No. A right under an agreement covered by subsection 7(1), which is how the Income Tax Act describes an employee stock option, is an excluded right or interest, so it stays off your departure-tax calculation. Vested and unvested options are treated the same way.

Options still count as reportable property for Form T1161: if everything you must list is worth more than $25,000 on your departure date, list the options at their value on that date, even though no tax is due on them (subsection 128.1(9)). The form is due with your departure-year return, and a late form costs $25 a day, from $100 up to $2,500 (subsection 162(7)).

Are unvested RSUs or share units deemed sold?

Usually not, but it depends on how the plan is written. The excluded list includes a right under a plan "under which the individual has a right to receive in a year remuneration in respect of services rendered" (subsection 128.1(10)), and certain employee benefit plans, but only for the part of the benefit attributable to services in Canada; under those plans, the part earned by work outside Canada is not protected and is deemed sold at fair market value. A unit plan that settles in newly issued shares may instead be a stock option agreement under section 7, which is also excluded. Read the plan document for how units settle (new shares, existing shares or cash). Whichever exclusion fits, the result on departure is usually the same: the units are not deemed sold, and the payout is employment income when it comes. Phantom stock and stock appreciation plans that never issue shares are not security options; their payouts are taxed as ordinary employment income.

Are shares I already received part of the deemed sale, and what is their cost?

Yes. Shares you received from an earlier option exercise or RSU vest are ordinary property once you own them, so they are deemed sold at fair market value on departure (paragraph 128.1(4)(b)). The exception is a share that is taxable Canadian property, mainly a private-company share that gets more than half its value from Canadian real property: it is not deemed sold on departure and stays taxable in Canada when you actually sell it, under the section 116 clearance process. The gain is the value on departure minus your cost.

Your cost is generally what you paid plus the employment benefit already counted on them: paragraph 53(1)(j) adds the section 7 benefit to the cost of option shares. This avoids taxing the same value twice, once as pay and again as a gain. You are then treated as buying the shares back at that departure value, which becomes your new cost.

Shares from a CCPC option you exercised but have not sold need care. Their deemed sale on departure does not count as the sale that triggers the deferred option benefit (subsection 7(1.6)). It also does not count as a sale for the two years holding period that the paragraph 110(1)(d.1) deduction requires. The deferred benefit stays taxable as employment income in the year you actually sell. For shares in a brokerage account, see investment accounts when leaving Canada; for the forms and the option to post security instead of paying now, see leaving Canada.

I exercise options after leaving: does Canada still tax the benefit?

Yes, for the part earned by work in Canada. Subsection 7(4) keeps the option rules running "as though the person were still an employee" after employment ends, and the CRA says a former employee is treated as an employee until the transaction is completed. The benefit is the share value at exercise minus the exercise price and anything you paid for the option itself, taxed in the year you acquire the shares, or for a CCPC in the year you sell them.

As a non-resident, you pay Canadian tax on "incomes from the duties of offices and employments performed by the non-resident person in Canada" and, for work done while you were still resident, outside Canada too (paragraph 115(1)(a)). An option earned partly in Canada and partly abroad has to be split. Neither the Income Tax Act nor the CRA's pages on security options and non-residents give a formula for that split; it turns on the facts of the grant and on any tax treaty with your new country, and is a judgment call. If you sell the shares within 30 days of exercise, subsection 7(1.31) lets you identify them as the shares sold, which avoids mixing their cost with other identical shares; it applies only if you buy or sell no other identical shares in between and you identify them on your return.

RSUs vest after I leave: how much is Canadian-source employment income?

The part of the vest that pays for work you did in Canada. The CRA's T4058 says former residents may have to report amounts such as bonuses and security option benefits from a job they held while living in Canada. The common shape is a ratio: workdays in Canada, plus days worked abroad while still resident, over total workdays in the period the units were earned. Which period counts (grant to vest, or only the year before vesting) changes the answer, and neither the Act nor those CRA pages say which period to use. Your plan document and your new country's treaty with Canada are the starting points.

Does the stock option deduction still apply, and what about a CCPC deferral?

Yes, if its conditions are met. Under paragraph 115(1)(d), a non-resident may claim the paragraph 110(1)(d) and (d.1) deductions to the extent they relate to employment income taxed in Canada. The deduction is 50% of the benefit, and the conditions are the same as for a resident: see who can deduct half of the stock option benefit and the CRA page on security options. For CCPC shares, paragraph 110(1)(d.1) requires holding them at least two years after exercise. RSUs that are not section 7 options get no deduction.

Who withholds, and which return reports it?

The employer or plan payer reports a security option benefit as employment income on a T4 slip, using the security option codes the CRA payroll rules list, and withholds income tax on it. A CCPC withholds nothing on a non-cash option benefit. A vest or exercise after your departure date but in the same calendar year goes on your departure-year return, as Canadian-source income for the part of the year after you left (section 114); see your departure-year return. In later years, you report Canadian-source employment income, including security option benefits, on line 10100 of the return for the province or territory where you earned it, not the non-resident package. If you also report other Canadian-source income, such as capital gains from taxable Canadian property, add Form T2203 to work out the provincial tax (T4058). Filing is how withholding gets matched to the Canadian share of the income. See which non-resident return to file.

Expect a T4, not an NR4: NR4 slips report passive income such as dividends and interest, not employment pay. Watch for payroll withholding in Canada on the whole vest while your new employer also withholds on it abroad.

How do I avoid tax on the same award in Canada and my new country?

Usually through your new country's credit for Canadian tax, not a Canadian credit. Canada's foreign tax credit in section 126 relieves foreign tax while you are resident in Canada. After you leave, Canada taxes the Canadian-work share as source country, and relief normally comes from your new country under its law and its treaty with Canada.

Shares deemed sold on departure have one Canadian relief: if a treaty country where you now live taxes the gain that built up while you lived in Canada when you sell, subsection 126(2.21) can give a credit against your departure-year Canadian tax. You claim it by filing a prescribed form amending the departure-year return no later than the filing due date for the year you sell (subsection 152(6)).

What records show grant dates, vesting, Canadian workdays and values?

Keep them for each award, in the currency of each event and converted to Canadian dollars at the rate on that date, as the CRA requires:

Example

All amounts are illustrative, in Canadian dollars.

Options and shares, moving to the UK

An engineer leaving Canada holds 1,000 unexercised options and 400 shares from an earlier exercise. The shares are worth C$40,000 on departure and have a cost of C$10,000. The options stay off the departure-tax calculation but go on her Form T1161 list. The 400 shares give a C$30,000 deemed capital gain, and their new cost is C$40,000. When she later exercises the options, Canada can tax the part of the benefit that relates to her Canadian work, depending on the plan's terms and the Canada-UK tax treaty.

RSUs vesting after departure

An employee holds 2,000 RSUs granted on one date, vesting 500 a year over four years, and leaves Canada after two years. The first two vests were Canadian employment income in full. The year-three vest is worth C$30,000. Measured from grant to vest, two of its three years were Canadian work, so C$20,000 could be Canadian-source. Measured over its final year only, none of it is. The plan's terms and any treaty decide which applies.

CCPC shares held after departure

Two years ago an employee of a CCPC exercised options for shares worth C$50,000 at an exercise price of C$10,000, deferring a C$40,000 benefit. He leaves when the shares are worth C$70,000. The deemed sale gives a C$20,000 gain, because his cost is C$50,000. The C$40,000 benefit is still employment income in the year he sells, less any stock option deduction he qualifies for.

Different for you?

• You are moving to the US: the workday split and withholding in both countries are in stock awards and pay after a move.
• You run the company granting the options: see stock options for employees in Canada.
• You keep working for the Canadian employer from abroad: see working for a Canadian employer from abroad.
• You also got severance or a final paycheque: see severance and final pay after leaving Canada.
• Awards vest over years in two countries, tax was withheld twice, or you hold CCPC shares: the split and the relief claims need a review of the plan and treaty; get individual tax help.
• You lived in Quebec when you left: Quebec has its own return and its own stock option deduction, so the provincial share of the tax differs; get individual tax help.
• You have not filed a return since leaving: see non-resident returns and catch-up.