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

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become payable due to a clawback, the employee would repay the loan. While
imperfect and slightly cumbersome, this method would avoid having to unwind an
income inclusion in a prior year.
Care will need to be taken to structure the loan such that it is clearly a loan and not, for
example, a taxable advance, or in the case of an employee who holds shares, a
shareholder benefit.
(c)
Use of a Trust
The bonus could be structured using a trust to hold employer stock during the clawback
period. Upon issuance of the stock to the trust, the employee would have an income
inclusion (see Subsection 7(2) and paragraph 7(1)(a) of the Act). (It is assumed the
deferral provided for in subsection 7(1.1) for shares of a Canadian-controlled private
corporation would not be relevant in the context of clawbacks.) At the end of the
clawback period, if the stock is released from the trust, the employee would not have an
additional income inclusion and would be able to liquidate the stock. If the clawback
was engaged prior to the release of the stock to the employee, and the arrangement
provided for the stock to be returned to the issuing employer, the employee would be
entitled to a deduction in computing income equal to the amount of the income inclusion
in the prior year under Subsection 8(12) of the Act. Subsection 8(12) of the Act
provides a deduction for an employee who forfeits rights to a share in certain
circumstances. The deduction is available if the employee is deemed to have disposed
of the share held by a trust pursuant to subsection 7(2) of the Act. The trust must have
disposed of the share to the corporation that issued the share as a result of the
employee failing to meet the conditions necessary for title to the share to vest in the
employee. Furthermore, the corporation must acquire the share from the trust or
redeem or cancel it for an amount no greater than the price paid to acquire the share
from the corporation.
If the foregoing conditions are satisfied, the employee may, in the year of forfeiture,
deduct the excess of the amount of the benefit deemed to have been received by the