Executive Compensation in Canada: Five Legal and Regulatory Considerations

Executive compensation arrangements in Canada frequently give rise to complexities given regular changes in tax legislation, securities regulation and employment law. Recent developments highlight important considerations for employers structuring equity incentives, administering compensation plans and managing employee entitlements upon termination.

The following five considerations and resources offer practical guidance for employers and in-house legal teams reviewing their executive compensation arrangements.

1. Share-Settled Incentives. For stock options granted after June 30, 2021, by certain larger corporations that are not Canadian-controlled private corporations, the availability of the 50% employee stock option deduction is capped. Under the cap, for each vesting year of an option, the shares underlying the option that would become available for purchase in that vesting year, valued in excess of C$200,000 (valued as of the date of grant), are deemed to be non-qualified securities and, therefore, such deduction is not available in respect of such shares. Restricted share units (RSUs) and performance share units (PSUs) that are solely settled in treasury shares offer an alternative, particularly for larger executive grants where traditional stock options may provide reduced tax advantages as a result of the C$200,000 vesting year cap.
2. Employee Tax Deferral Considerations. RSUs and PSUs settled in treasury shares can accommodate extended vesting periods beyond the three-year limit usually applicable to deferred bonuses or cash-settled awards. In addition, these types of RSUs and PSUs can be drafted to provide for dividend equivalents (in the form of additional RSUs and PSUs) and can even be drafted to provide for the employee to elect the timing of settlement and the choice of whether to accept shares or cash in lieu. They therefore represent a flexible equity-based compensation vehicle depending on an employer’s overall objectives.
3. Blackout Period Restrictions. Trading blackouts restrict certain equity grants, settlements and participant elections. Transactions fulfilling legally binding obligations established before acquiring material non-public information may qualify for an exception, provided their timing and terms are not subject to subsequent discretion. Equity plans should distinguish these automatic transactions from discretionary decisions.
4. Termination Entitlements. Recent court decisions reinforce the importance of clear, enforceable forfeiture provisions in equity compensation arrangements. Employees may be entitled to damages for incentive awards that would have vested during potentially lengthy common-law reasonable notice periods unless valid contractual language limits those rights. Importantly, provisions that fail to preserve entitlements during the statutory notice period may be unenforceable, exposing employers to significant additional compensation obligations. Employers should review equity plans and award agreements to ensure compliance with applicable employment standards legislation while clearly addressing vesting during common-law notice periods.
5. Executive Compensation Guide. As Canadian executive compensation arrangements become increasingly complex, employers, boards and in-house legal teams face growing challenges. Against this backdrop, the recently released Blakes Executive Compensation Guide provides practical guidance on navigating Canada’s rules governing equity compensation awards. While not exhaustive, the guide aims to canvass these rules primarily from a Canadian federal and provincial tax perspective, as well as, where illustrative, from a securities and employment law perspective.

Have more than five minutes? Learn more in our Executive Compensation Guide, watch our seminar on this topic or contact any member of our Pensions, Benefits & Executive Compensation group.