Canadian employee ownership,  Communication,  Culture,  EOTs,  ESOP Benefits,  ESOPs in Canada,  Exit Planning,  participative culture

5 questions business owners ask about ESOPs and EOTs in Canada

September 21, 2025 /

1. Is there a significant difference between ESOP and EOT?

And how can the employees afford shares?

Since there are multiple ESOP (employee share ownership plan) models available — equity in the form of shares, EOT (Employee Ownership Trust), stock options, and phantom shares — it is important for the owner to first assess their goals and the pros and cons of each model in order to determine the best fit.

An EOT, an ownership model that makes use of a trust, differs from employee ownership plans that make the employees direct shareholders. In an EOT:

  • The Owner(s) must sell a controlling stake in the company to the Trust.
  • The Trust buys out the Owner(s) either with funding by a third party or from company profits over the ensuing years. In the latter case, the financial return for the Owner(s) is delayed. This may be a consideration for the Owner who intends to use the proceeds immediately to support their retirement.
  • Employees don’t have to put any money up to purchase shares and therefore have no financial stake in the business, as they don’t actually own shares themselves. Some Owners appreciate that their employees don’t have to fund the purchase, while other Owners believe financial “skin in the game” is important.
  • The Owner(s) can continue in the business on the Board of Directors and on the Board of Trustees. However, given the limited role in the business on the Board of Trustees that is allowed for the selling Owner(s) post-sale to the Trust, there must exist among the employee group people who are ready, or can be developed, to take the reins of the business; otherwise, someone could be externally hired.

In a share purchase plan:

  • An ownership model that sells Owner(s)’ or treasury shares directly to employees. They can sell any percentage of the company.
  • Financing for employees commonly comes from payroll deduction programs, annual bonuses, company loans, bank loans, company financing (the company takes on the loan), or Owner financing. The methods used largely depends on the employees’ financial capacity, the value of the company, and the percentage ownership the Owner(s) wish to sell.
  • The governance of the company typically remains the same and over time, employee shareholders enter into leadership and board positions to lead the company as their ownership increases.

Any employee ownership model requires ongoing education for and communication with employees, like any other change. Also required is the management of employee expectations as to what participating in the plan entails, and what it means to them personally as well as in relation to their roles and responsibilities in the business.

We offer free consultations for those considering employee ownership. Please fill in the feasibility survey to book the free consultation.

Curious about the EOT specifically, complete this short form to find out more.

2. What are the tax benefits to owners and employees?

When setting up an ESOP in Canada, the only federal laws that govern any of the models is the EOT, which has recently been passed into federal law. Other ESOP models are set up following securities legislation and The Income Tax Act of Canada. A major consideration in choosing and designing any plan is the tax implications for the employees who will be participating.

Plans can be designed so that employees of a Canadian Controlled Private Corporation (CCPC) who become shareholders would not be subject to tax when receiving the shares and can access capital gains tax treatment when the shares are sold (50% of the gain is taken into income and taxed at an individual’s marginal tax rate, the rest is not taxed). They would potentially also be able to access the Lifetime Capital Gains Exemption or LCGE, which is $1,250,000 in 2025 (increasing in 2026). This could mean all gains up to the limit made on sale of shares would be tax-free.

3. Does it have to be offered to everyone in the company?

Participation in an EOT must be offered to everyone, subject to an eligibility period up to 1 year. For other models, eligibility can generally be categorized as a broad-based plan or strategic-person plan (a.k.a. key-person plan).

The intent of a broad-based plan is to allow the majority of employees to be eligible; however, there is a qualifying or waiting period that the employee has to be employed for before becoming eligible. That period can range from 3 months to 5 years, but usually is 1 or 2 years.

A strategic-person plan is meant only for specified employees or those in a certain position and above. A company with a hierarchical structure may indicate that only those in a manager position or above are eligible, while smaller companies with less hierarchy might have the owner identify individuals who they feel contribute most directly to the success of the company. The latter example is less common. In this case it may be difficult to communicate that eligibility is indeed determined fairly, since it is very subject to the owner’s thought process.

4. How do I make sure it is fair?

There are many considerations when it comes to perceived fairness. Generally, they all boil down to two things; communication and trust. Trust is hard to build but easy to lose and good communication is a key foundation to maintaining trust. Designing a plan in a participatory way, with input from potential participants, has been shown to lead to greater success, meaning that the ESOP achieves its goals. A participatory approach means that you are not only considering the technical requirements (legal and tax) but also the cultural elements. It is important to address the questions employees have; how does it benefit them as individuals and what are the risks. Clearly defining all the design parameters, including ones that won’t be in a shareholder’s agreement, like eligibility, share allocation, and purchase methodology, creates the conditions for a successful launch and sustainable ESOP. Finally, make sure to follow through in your actions from what you’ve communicated.

Having a specific and transparent allocation methodology also addresses the issue of fairness because it is easy to communicate, and everyone knows what criteria are considered and to what extent. When designing the plan, companies will usually come up with a formula that includes up to four criteria, such as tenure, position, salary and/or performance. Many companies prefer to make sure that the number of shares an employee owns is related to level of responsibility and impact they have on success of the company.

An EOT has its own set rules for allocation and payout calculations.

5. How do I get my money out?

Owners typically want their ESOP to achieve multiple goals. The first of those goals is often getting their money out at fair value. This means planning their exit, which includes defining their timeframe. Next to consider is succession planning so that the company will run without them.

An EOT was developed as another exit option for Canadian business owners. It effectively allows the owner to exit immediately, but possibly getting paid over time if there is no external financing for the sale. Because of the immediate exit, it is important for the leadership team or specific individuals to be ready to take over; continuing the business and the legacy.

Otherwise, the most convenient way for an owner to get their money out is to sell their shares directly to the employees rather than issuing new shares and diluting the value of the owner’s holdings. Many companies might start off with a five-year timeframe and plan to sell 10 to 20 percent in that timeframe; however, consideration needs to be given to what employees can realistically acquire. This is why defining the exit timeframe is important, and having multiple financing methodologies (such as cash, payroll deduction, loans, and the use of bonuses) can help.

By Joanna Phillips, CHRL,

People & Culture Partner

Employee Ownership Specialist

ESOP Builders