Visual material from seminar Funding and Negotiating Tax Efficient Executive Compensation

1. Executive Compensation Strategies
Funding and Negotiating Tax-Efficient Rewards

2. Agenda
• Overview and Assumptions
• Negotiated vs. Contingent Compensation
• 6 Quick ‘n Dirty Planning Solutions
• Your Entitlement and the RCA
• “Equity” Plans – SARS, Stock Options and 6801D plans
• US employment – Danger!
• Negotiating Your Benefit
• Exit Strategies
• Dealing with Severance

3. Overview and Assumptions
Executive compensation strategies are arranged to provide
incentive.
Executives (Employees) only have one planning opportunity to
increase wealth - compensation
Compensation in excess of your lifestyle needs should be deferred
in a tax-efficient manner.
ff
An employer should be willing to make arrangements that are
beneficial t th executive.
b fi i l to the ti
Your objectives and the objectives of the firm are not yet aligned.
Multiple tactics/options give you negotiating leverage.

4. Overview and Assumptions
The other side of the table: Public and Private Companies
Private – robust planning options, multiple tax rates, nimble decisions
Public – robust planning options fewer tax rates, committee decisions
options, rates
Your negotiating objective: Lifestyle or Legacy Capital:
1. Lifestyle capital – what you and your family need now
2. Legacy capital – what you need and your family need later:
1. Your Next Transition
2. Your Retirement
3. Your Estate

5. Overview and Assumptions
Challenges and Trends:
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• “Say For Pay”
• US Pay for Performance Act
• CCGG emphasizes pay for performance
• Transparency
• Executive and Enterprise risks are aligned
• Considered more risk aligned when deferred
• Departure should not trigger early payout
• Salary Deferral Arrangements
• 3 year max. deferral
y
• Ill-defined, broad definition

6. Negotiated vs. Contingent
vs
Contingent:
g
• Does not have an up-front, negotiated value
• Is not certain
• Is dependant on the future solvency of the company
• May never vest with employee
• Are designed for quantity of benefit
• Generally less tax efficient
Negotiated:
• Has value negotiated as part of the compensation package
• Delivers certainty
• Is settled on behalf of the employee as beneficiary
• Should be off balance sheet of the company
p y
• Are designed for but about quality of benefit
• Structured for tax efficiency

7. Negotiated vs. Contingent
vs
Contingent
g Negotiated
g
Bonus Perq’s
Commission Health Care Spending Account
Unfunded Phantom Stock Plan Individual Pension Plan
Deferred Profit Sharing Plan or Retirement Compensation
Employee Profit Sharing Plan
l f h l Arrangement
Appreciation Rights or Units Insured Retirement Plan
Stock Options Stock Options
6801D Plans 6801D Plans

8. QnD #1: What Perq’s are still allowed?
Perq s
• Athletic or social clubs
» “main purpose must be for the employer’s advantage”
• Professional Membership Fees
• Counseling Services
• Employer Paid travel “primarily for of a business nature”
• Executive medical services (as part of PHSP)

9. QnD #2: Health Care Spending Account
• A private health care expense account set-up for the benefit if
the
th executive and immediate f
ti di di t family members.
il b
• Annually, the employer settles a negotiated amount (in trust)
on behalf of the executive.
• The trust can fund qualified health care expenses to the
executive and family.
• Contributions must b reasonable.
C t ib ti t be bl
• Contributions made by the company are deductible to the
employer, and all benefits are received tax-free by the
employee.

10. QnD #3: Wage Loss Replacement Plan
• specialized disability income replacement insurance paid by
the
th corporation
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• The employer funds the disability income benefit for the
executive.
• The premiums are tax deductible to the corporation.
• The benefit is taxable when received by the employee, but
the
th amount is grossed up to accommodate.
ti d t d t
• The plan is transferable upon departure

11. QnD #4: Mortgage Payments
• An employer can pay the mortgage interest of an employee,
as l
long as the employee pays at least the prescribed rate
th l tl t th ib d t
(currently 1%).
• e.g. fixed mortgage rates are at approximately 5%, so the amount
that your employer can pay tax free is 4%
tax-free 4%.
• For a $500,000 mortgage, this means a $20,000 per year non-
taxable benefit.
• The equivalent amount of income that the employee would need to
earn to pay this $20,000 of mortgage interest would be a taxable
income of $37,320.
• Note that this strategy is available for either a new home (not
gy (
brand new, just new to the individual), or to a new employee.
• It is not entirely clear if this loan strategy can be used to fix the
rate at 1% indefinitely. However, a safe bet would be to fix your
1% loan agreement with your employer t th same t
l t ith l to the term as your
mortgage (i.e. a five-year fixed rate).

12. QnD #5: Insured Retirement Plan
• a deferred savings vehicle, with the associated costs
sponsored b th company.
d by the
• The company settles an exempt insurance contract.
• The Cash Account grows tax deferred, is off the balance sheet
deferred
and owned by the employee.
• The cash account can be set up with minimum performance
guarantees.
t
• Assets are invested in a “self directed” manner.
• Assets may be able to be withdrawn tax efficiently at
retirement
• There is no deduction available for deposits on this plan.

13. QnD #6: Individual Pension Plan
• A pension plan which is funded by the corporation for the
benefit of a key executive based on past and current service
b fit f k ti b d t d t i
calculations.
• The IPP funds a portion of the entitlement, but is capped.
• The IPP replaces some or all of the RRSP.
• The IPP is off the balance sheet and “in-trust” for the
executive
ti
• Investment options are flexible as per RRSP assets, and can
be “self-directed.”

14. Your Entitlement
Every taxpayer in Canada is entitled to a pension up to 70%
of thei pre-retirement ea nings upon retirement.
their p e eti ement earnings pon eti ement
Traditional retirement plans (RRSP or RPP) are meant to
provide benefits for individuals with income up to
~$115,000.
However,
However your entitlement is unlimited in theory, based one
theory
of the following two calculations:
1. Defined Benefit: (# years service) * 2% * (Average earnings)
OR
2. Defined Contribution: 18% of income (unlimited)

15. Your Entitlement
Past Service Contributions
• You are eligible to receive “credit” for past service in a similar position
• Allows you to “bring forward” past experience in your area of expertise and
monetize it
Current Service Contributions
• Current service is accumulated with each passing year
• If not claimed, it turns into “past service”
past service
Entitlement is reduced by the value of any existing plans:
• RRSP
• Defined Benefit or Defined Contribution Pension
• IPP
• RCA

16. Retirement Compensation Arrangement
• a funding vehicle that creates a large amount of retirement benefit
for h
f the executive up to their maximum entitlement.
i h i i il
• The company settles an RCA in favour of the executive.
• The
Th RCA can fund all, or a portion, of the entitlement.
f d ll ti f th titl t
• The RCA is off the balance sheet and “in-trust.”
• Assets are invested as per trust document, but is flexible.
A t i t d t td t b t i fl ibl
• Also known as SERP – S
Al k Supplemental Executive Retirement Pl
l t lE ti R ti t Plan
A SERP is not be funded!
An RCA can be funded with a LOC - caution

17. Stock Options
Basic Tax Treatment
• Like Capital Gains in their treatment
• Not the same as Units, Rights, etc.
Strategies
• Negotiate options hybrid situation with SAR’s
Tax treatment
• Employee must take possession of the options (i.e. must own them for an
instant, or be entitled to own them)
• The issuance of options must be entirely at the employee’s discretion
Downside
• Politics/Insider Rules
• Potential Negative Tax Situation if shares exercised and not sold
g

18. SAR s
SAR’s – Stock Appreciation Rights
Description
• Right to receive amount based on increase in value of stock
• Will not have value at date of grant
• Settled for cash, not shares
Tax Treatment
• Treated as income when exercised or matured
• Not the
N t th same as Units, Rights, etc.
U it Ri ht t
Downside
• Politics/Insider Rules

19. PSU or RSU’s – Performance or Restricted Stock Units
RSU s
Description
• Right to receive amount based on increase in value of stock
• Typically takes the form of 3-year deferred bonus
• Settled for cash or shares
• PSU’s usually require vesting requirement
Basic Tax Treatment
• Treated as income
Strategies
• Negotiate RSU’s for a bonus to defer income

20. 6801D (DSU) Plans – Deferred Severance
Description
• An equity-linked award that is deferred until death, retirement or loss of
employment
• Can use the employer shares or a related company
• SPIV for diversification
Basic Tax Treatment
• Entire FMV taxed as income upon receipt
• Not given preferential deduction like the stock option
Tax treatment
• Income is deferred to the termination of the employee
• Must be taken at the before the end of the calendar year following the
termination
Downside
• Politics/Insider Rules
o t cs/ s de u es
• Can be seen as an incentive to leave

21. US Compensation – Danger!
• Non Compliant Deferred Compensation Arrangement
• 20% additional tax or penalty
• Difference on taxation of Restricted Stock
• Taxation at date of vesting (US)
• Taxation at date of grant (CDN)
• Basic principle of recent rules is that the employee is taxed on
accrual basis (i.e. if rights are granted or service rendered)
• Rules 409A (2004), 457A (2008), and a host of other sponsored in
congress
• A significant effort to control/alter executive comp
• Expatriation penalties
• Tax on gains over $600k
• Deemed disposition on any deferred comp plans
• TARP recipients subject to significant restrictions

22. Exit Strategies
Lifestyle vs. Legacy Capital:
• understand how to use this benefit to manage your career cycle, or retirement
Plan in Advance
• You lo e pl nning options
Yo lose planning option as soon as your te min tion announced
oon o termination nno n ed
• Negotiate for severance now
• Understand the ways/timing in which you will receive your income
Future Employment
F t E l t
• Planning today will affect your ability to arrange tax-effective compensation in the future
Jurisdiction
• Consider retiring to another place - a tax treaty country can minimize tax withholdings
Estate considerations
• If the benefit is well in excess of lifestyle needs, consider how to transfer benefit to the
next generation

23. Negotiating Your Benefit
Get Certainty
• It is fair to ask for some of your deferred compensation to be guaranteed
Defer Admin Costs:
• Get the employer to pay for the cost of your savings
Defer tax:
• Find out the most advantageous method for you, then work backwards
• Your planning threshold: $
l h h ld $126,264 is the highest marginal rate in 2009
h h h l
Creditor Protected:
• Move the benefit from balance sheet and into your name (as beneficiary)
Vesting and Portability:
• Dictate how you become the owner of your benefit how it transfers to you
Planning:
• Understand how this planning affect overall financial architecture

24. Contact
Jamie List CFP, CIM, FCSI, CLU, FMA, Ch.P
647-296-8841
jlist@bearingcapital.ca
Follow us at:
www.bearingcapital.ca/blog
b i it l /bl

25. Negotiating Your Benefit
1. Salary negotiation is about a mutually agreeable solution
2. HR policy and your capital requirements are rarely aligned
3. Demonstrate creativity and set policy at the enterprise level before
you join
4. Secure “last rock” advantage…

26. Dealing with Severance
Now
Canadian Resource investments can help convert employment
income into capital Gains
1. Full Income deduction and tax credit
2. Capital gains inclusion yr.2
3. Interesting opportunity for those “on the beach” for a while
Future
Many of these strategies can accommodate a lump-sum or
“balloon payment” at “retirement”
IPP
RCA