Strategies for Executive Compensation: Design and Tax Issues for a ...

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Long Term Incentive Plan Clawbacks: Design, Tax and Other Legal Issues Kathryn Bush Partner 416.863.2633 kathryn.bush@blakes.com Blake, Cassels & Graydon LLP Barristers, Solicitors 199 Bay Street Suite 4000, Commerce Court West Toronto, ON Canada M5L 1A9 www.blakes.com
Long Term Incentive Plan Clawbacks: Design, Tax and Other Legal Issues Kathryn Bush, Blake, Cassels & Graydon LLP 1. INTRODUCTION In recent years, particularly since the global financial crisis, the use of clawback provisions in executive compensation plans has become more widespread in Canada. Basically, clawbacks are arrangements under which an employee’s compensation that has previously been awarded is forfeited or ‘clawed back’. Canadian public companies listed in the United States are subject to statutory clawbacks for certain employees. As well, certain Canadian financial institutions regulated by the Office of the Superintendent of Financial Institutions (“OSFI”) have adopted clawbacks as an OSFI-recommended best practice. Other Canadian public companies are not required to adopt clawbacks, but may choose to do so by agreement with affected employees. The increasing use of these provisions in Canadian employment contracts raises a series of interesting and potentially difficult issues that should be kept in mind when designing executive incentive plans. A potentially problematic example is the income tax consequences of compensation clawbacks in the context of the Canadian income tax laws. As will be discussed, the potentially harsh tax treatment of the clawed back amounts in Canada is an added layer of complexity that should be taken into account, particularly when using existing U.S. policies as a source for drafting Canadian clawback provisions. As explained in the Blakes Bulletin “Clawbacks Coming to Canada”, clawback provisions can take a variety of forms and be triggered by different types of events. 1 They may apply to vested and unvested awards, affecting different forms of compensation from annual bonuses to long term incentive awards of equity and non- The author acknowledges the assistance in the preparation of this paper of Atbin Dezfuli, Articling Student.
Page 1 and 2: Strategies for Executive Compensati
Page 3 and 4: April 10, 2012 Strategies for Execu
Page 5 and 6: Incentive And Stock Compensation Ar
Page 7 and 8: Types of Private Equity Transaction
Page 9 and 10: Participation of Target/Portfolio C
Page 11 and 12: Exit Strategies and Investment Hori
Page 13 and 14: Key Design Considerations and Commo
Page 15 and 16: Stock Options - Rules for Canadian-
Page 17 and 18: Stock Options - Rules for Canadian-
Page 19 and 20: Share Purchase Loans • Management
Page 21 and 22: Cash-Based Long-Term Incentive Plan
Page 23 and 24: Cash-Based Long-Term Incentive Plan
Page 25 and 26: Non-Portfolio Company Incentives (c
Page 27 and 28: Acquirer (Buyer) Priorities in a Co
Page 29 and 30: Program Treatment - Equity Compensa
Page 31 and 32: Dollar Amount Converted to RSUs/DSU
Page 33 and 34: U.S. Statutory Clawbacks (cont’d)
Page 35 and 36: Type and Relative Prevalence of Cla
Page 37 and 38: Potential Tax Relief for Later Year
Page 39: Conclusion • Clawbacks in Canada
Page 43 and 44: - 3 - are subject to recoupment. It
Page 45 and 46: - 5 - U.S., a wide range of incenti
Page 47 and 48: - 7 - review our policy to assure t
Page 49 and 50: - 9 - Cash and Earnings Bonus Unit
Page 51 and 52: - 11 - underway or contemplated at
Page 53 and 54: - 13 - operate, the terminated part
Page 55 and 56: - 15 - use of the provision where a
Page 57 and 58: - 17 - interest paid or payable the
Page 59 and 60: - 19 - right is to postpone tax pay
Page 61 and 62: - 21 - taxpayer under subsection 7(
Page 63 and 64: Bill Sutherland Bill is a Senior Co

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