In the latest federal budget, Canada introduced an innovative strategy to transform the landscape of business succession: Employee Ownership Trusts (EOTs). EOTs offer a compelling and creative approach to transitioning business ownership, benefiting business owners, their employees, and, more importantly, the businesses' communities.
What Are Employee Ownership Trusts?
Small businesses are the workhorses of Canada’s economy, accounting for over 90% of businesses and employing over 80% of the private sector (ISEDC). While the government may have tightened intergenerational business transfer rules, selling your business to your employees is an excellent alternative if you cannot find or want to sell to a third party or your family is not interested in taking over ownership and responsibility of the business.
Employee Ownership Trusts (EOTs) are a unique model of business ownership in which company shares are owned by a trust on behalf of its employees. This concept, already successful in the UK and the US, has now made its way to Canada. Unlike traditional succession methods, EOTs enable employees to own and manage the business collectively. The primary aim of EOTs is to facilitate the smooth transition of business ownership while ensuring the long-term sustainability of enterprises.
Benefits for Business Owners
Pending any government metrics needed to qualify and other succession planning methods, the benefits to business owners are worth a second look.
Tax Incentives (Federal Budget 2023):
- Business owners can benefit from capital gains tax relief on the first $10 million of gains realized until 2026, which the owners share.
- Additionally, when you receive sale proceeds over several years, the capital gain reserve method allows you to spread the gain over ten years instead of five years.
- If you chose to lend funds to the EOT to purchase the company shares, you now have an extended shareholder repayment period of 15 years instead of one year.
- The $10 million tax relief also seems separate from the increased Lifetime Capital Gains Exemption (LCGE) of $1.25 Million - adding another layer of tax advantage.
Smooth Succession Planning: Selling to an external party or passing the business to family members has complications. EOTs provide a seamless alternative, allowing owners to transfer ownership without the upheaval accompanying other succession strategies, preserving the company’s culture, values, and operational integrity.
Legacy Preservation: Instead of selling to a third party with a different culture and operational objectives, you ensure jobs stay in your community and retain the continuity of your brand. Employees who deeply understand the company’s operations and values are often the best stewards of the business’s future.
Benefits for Employees
Employees greatly benefit depending on the terms of the trust and business structure.
Financial Incentive: EOTs give employees a financial interest in the company's success. As the business prospers, so do the employees through profit-sharing and other economic benefits. For instance, if the EOT distributes dividends, those dividends retain their character in the hands of the beneficiaries, making them eligible for the dividend tax credit (CRA).
Increased Engagement and Productivity: Employee ownership instills higher levels of engagement and productivity. Employees with a stake in the company are more motivated to contribute to its success. This sense of ownership fosters a collaborative work environment and can lead to innovative ideas and improved operational efficiency.
Empowerment and Job Security: Owning a part of the company can incredibly empower employees. This empowerment can lead to a more stable and secure work environment, as employees work towards common goals with a shared purpose. Not selling it to a third party makes employees less likely to experience unfavourable conditions such as getting laid off or income reductions.
Employee Ownership Trusts represent a groundbreaking shift in business succession planning in Canada. By aligning the interests of business owners and employees, EOTs create a sustainable and resilient business model. This innovative approach secures business owners' legacy and empowers employees, fostering a collaborative and productive work environment.
Connect with us to learn about EOTs and how they can benefit your employees and community.
