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

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- 14 - misconduct directly or indirectly resulted in the employee receiving or realizing a higher amount of incentive or deferred compensation.” 16 CANADIAN TAXATION From the Canadian tax perspective, a clawback occurring in the same taxation year as the receipt of the compensation should pose no difficulty. The employer and employee can adjust the compensation and the related source deductions, prior to making the required tax filings in respect of the year. The difficulty arises when the clawback occurs in a subsequent year. Limitations of Section 8 of the Income Tax Act The difficulty stems from subsection 8(2) of the Income Tax Act, (Canada) (the “Act”) which reads as follows: Except as permitted by this section, no deductions shall be made in computing a taxpayer’s income for a taxation year from an office or employment. The balance of section 8 of the Act provides for a number of express deductions in computing income from employment, including deductions for: • the reimbursement of amounts included in income for periods during which no services were rendered (8(1) (n)). • amounts previously included in income but forfeited under a salary deferral arrangement; (8(1) (o)) and • expenses incurred by employees engaged in the selling of property or negotiating of contracts, which deduction may provide relief in respect of a clawback in limited circumstances. (8(1) (f)). (See CRA Document 2004- 0103391E5, where a commission salesperson was unable to make full 16 Proxy filed March 29, 2011
- 15 - use of the provision where amounts had to be repaid to his former employer.) None of the deductions set out in section 8 expressly covers the scenario where a reimbursement or forfeiture of a bonus is required. Accordingly, relief would have to be sought elsewhere. Filing an Amended Tax Return The taxpayer subject to a clawback could simply file an amended return for the year in which the bonus was received. However, there is no general, statutory right to file an amended return as established in Armstrong v. The Queen, 2006 DTC 6310 (FCA). While the Act contains specific provisions that permit or mandate the filing of an amended return in specific circumstances, (See, for example, paragraph 164(6) (e), regarding the carry back of losses to a deceased’s terminal year.) No provision expressly permits an employee to do so in the case of a clawback. Accordingly, relief would depend on the discretion of the Canada Revenue Agency (“CRA”) to assess on the basis of the amended return. The Law of Mistake A taxpayer may argue that the prior income inclusion ought to be reversed on the basis of a mistake of fact which rendered the agreement to pay the bonus void. A clawback would not seem to meet the Canadian definition of a mistake: “If the parties base their contract on a fundamental error about the assumptions supporting their agreement, and neither party agrees to bear the risk of the assumption turning out be false, the contact can be held void on the basis of the doctrine of common-law mistake.” 17 17 Bell v. Lever Bros. Ltd., [1932] A.C. 161, [1931] All E.R. Rep. 1 (H.L.).
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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 and 40: Conclusion • Clawbacks in Canada
Page 41 and 42: Long Term Incentive Plan Clawbacks:
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: - 13 - operate, the terminated part
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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