|Hello ESOP Community,|
The government has proposed legislation regarding employee ownership trusts (EOTs) in the 2023 budget. Any talk about ESOPs in Canada is extremely positive and will bring great awareness to Employee Ownership in general.
The government has provided some detail compared to what they said in 2021 and 2022 and announced implementation of EOTs by January, 2024.
Unfortunately, while this could provide an additional mechanism for how to structure a Plan in certain limited circumstances, the proposed EOT has really missed the mark and the government does not seem to have listened to the recommendations given to create more Employee Ownership. These limited circumstances for its use would be a business that is steady, has stable cash available, not growing much, and the owner has no other exit options. As it is described now, there doesn’t seem to be much incentive, tax or otherwise, to create the Plan through the EOT. In the end, the employees do not actually own the shares, employees become beneficiaries of the EOT which owns the shares. The employees are only entitled to dividends while they are employed, therefore it is perhaps more like an employee benefit trust rather than an EOT.
The EOT doesn’t take away the mechanisms that have previously been used. There are many alternatives to achieve employee ownership that we have worked with (share equity purchase plans, stock option plans, and phantom plans (or EVOPs)) and now EOT is another mechanism. Which mechanism to use depends on the goals of the owner and the company. Since every company and owner is different, our process is geared toward identifying those goals from the outset to create a foundation to then drive how the plan is strategically designed.
We are hopeful that the government still has time to harness the opportunity to make amendments, and create a very meaningful and valuable structure that will be attractive to 1. business owners looking to exit and 2. employees who participate.
We will continue to monitor and provide updates as new information becomes available.
Here is an excerpt from the 2023 Budget: