Introduction

Canadian tech companies that hire US-based employees — increasingly common as remote work has expanded the talent pool across the border — face a specific complexity when it comes to equity compensation. Options and restricted stock units (RSUs) that work cleanly for Canadian employees under section 7 of the Income Tax Act have a different tax treatment in the US, and the company must navigate both systems simultaneously.

Why Equity Compensation Is Different for US Employees

Canada and the United States both have specific rules governing the taxation of employee equity compensation — but the rules differ in timing, character, and rate. An equity plan designed for Canadian employees and applied without modification to US employees will likely fail to satisfy US compliance requirements and may result in adverse tax consequences for the US employees.

The most important differences:

Canadian CCPC options: As discussed in Article 48, Canadian employees of a CCPC benefit from deferral of the employment benefit until the shares are sold. No US equivalent of this deferral exists for non-qualified stock options (NSOs) — US employees recognise income at exercise, not at sale.

Incentive stock options (ISOs): The US equivalent of preferential option treatment — qualifying for capital gain treatment at sale rather than ordinary income at exercise — is only available for options in US-incorporated entities. A US employee of a Canadian corporation (without a US subsidiary) cannot receive ISOs. They will hold NSOs, with ordinary income at exercise.

Section 409A: US NSOs must be granted at or above fair market value to avoid the punitive consequences of Internal Revenue Code section 409A. Canadian companies issuing options to US employees must comply with 409A — which requires a documented FMV determination at grant, typically through a 409A valuation (which differs from a Canadian FMV determination).

RSUs for US-Based Employees

Restricted stock units (RSUs) are promises to deliver shares (or the cash equivalent) upon vesting. For US employees, RSU income is taxable at ordinary income rates when the RSUs vest — not when they are granted or when the shares are eventually sold.

This creates a payroll withholding obligation for the company. When a US employee's RSUs vest, the company must withhold US federal and state income tax (and FICA — Social Security and Medicare). This withholding obligation arises even if the company is a Canadian corporation, because it is the employer of the US employee.

A Canadian company with US employees must register as an employer with the IRS and relevant state tax authorities, obtain an Employer Identification Number (EIN), and withhold and remit US payroll taxes. This is not optional; it is a legal obligation triggered by employing US residents.

The Double-Trigger Problem for Founders

For Canadian tech founders who have US-based co-founders or early employees with equity, the interaction between the Canadian option plan (section 7), the US option treatment (section 83, section 409A), and the eventual liquidity event (IPO, acquisition) requires careful structuring. An acquisition by a US company triggers different tax events for Canadian shareholders and US shareholders holding the same underlying equity in a Canadian corporation.

Practical Considerations Before Granting Equity to US Employees

Before issuing equity (options, RSUs, or warrants) to any US-based employee, the Canadian company should:

Confirm whether a US subsidiary should be established — allowing US employees to hold equity in the US entity (potentially as ISOs) rather than in the Canadian parent.

Obtain a 409A valuation if granting NSOs to US employees, to establish the required FMV at grant.

Register as an employer with the IRS and relevant state authorities.

Engage a cross-border employment and tax lawyer alongside the CPA.

When to Speak With a CPA

Cross-border equity compensation is a multidisciplinary issue requiring both a Canadian CPA and a US tax advisor. The Canadian CPA ensures the Canadian corporate structure, CCPC status, and Canadian option plan are correct; the US advisor ensures the 409A compliance, withholding obligations, and US employee tax treatment are addressed. Both are necessary.

Rotaru CPA works with Canadian tech companies on the Canadian dimensions of cross-border equity and employment tax. Book a consultation to discuss your US employee equity structure.