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

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.