Canadian employee ownership,  Employee Ownership,  Employee Ownership Trust,  EOTs,  ESOPs in Canada,  Taxes

Employee Ownership gets a new model

Most recent info on Canada’s Employee Ownership Trust (EOT)

If you read our blogs, of course you are familiar with the typical models of employee share ownership (purchase plans, stock options plans and phantom (or EVOP) plans).
You may also already know that there is now a new model; the Employee Ownership Trust (EOT).
This structure was heavily researched and advocated for by the Canadian Employee Ownership Coalition (CEOC) and has now been put in place for business owners of Canadian SMEs who want to retire or exit their business but may not have a traditional way to do so (3rd party sale or family transition). You can read more on our other blog.

The federal government released the April 16, 2024 budget recently which had information about the EOT as well as some other share ownership related info. Some of the changes that the budget propose may have an indirect effect on employees who own shares in their company, so we wanted to share them with you*. 

  1. Capital Gain Inclusion Rate
    • before June 24, 2024 it is 50%, as it has been for some time, where you would only take, for example, $50 of a $100 gain into income which would be taxed at your marginal tax rate
    • after June 24 the government proposes to increase the inclusion rate to 2/3rds (66.67%) of the gain – so $66.67 of $100 gain would be taxed as income
    • however there is an annual exception that for the first $250,000 of capital gains realized by an individual in a year the inclusion rate is 50%
    • so your inclusion rate basically remains at the 50% rate until the gain is over $250,000
  2. Stock Option Employment Benefit Deduction
    • after receiving stock options, exercising it, buying the shares and then selling the shares in the future, the employee may realize a taxable employment benefit
    • that benefit may be eligible for a 50% deduction that taxes the benefit at the same rate as a capital gain
    • the government proposes to amend this deduction to align with the changes around the capital gain inclusion rate mentioned above
    • the deduction would be 1/3rd (33.33%) so that 2/3rd (66.67%) of the benefit is subject to tax
    • however, as above, there is an annual exception for the first $250,000 of benefit realized in a year; the deduction up to this amount is 50%
    • note: the annual reduced rate for the first $250,000 is cumulative between a capital gain and an employment benefit from stock options
  3. Lifetime Capital Gains Exemption
    • currently $1,016,836 of an individual’s capital gain from a sale of qualifying shares is sheltered from tax
    • the government proposed to increase the sheltered amount to $1,250,000 for capital gains realized after June 24, 2024
  4. Canadian Entrepreneurs’ Incentive (CEI)
    • this is a new incentive that aims to reverse the increase to the capital gains inclusion rate, basically bringing it back to 50%
    • it is subject to a $2,000,000 maximum that will be phased-in over 10 years in $200,000 increments
    • the budget indicates it is for “founding investors” active in the business who own more than 10% of the shares so it is unlikely to be applicable to most employee-shareholders
    • it may be a way for an owner to mitigate tax when selling shares directly to employees (in addition to capital gains deduction) in a year where the owner would realize greater than $250,000 of capital gains
  5. Employee Ownership Trust (EOT): The Budget provided details on the incentive
    • exempts the first $10,000,000 of capital gains on a sale to an EOT
    • the $10,000,000 maximum is in respect of the sale of the business as a whole, but can be shared between multiple selling shareholders.
    • note: if an EOT has a disqualifying event within a set number of months after
      the sale, the exemption is denied; the exemption is not reversed, but the EOT is deemed to realize a capital gain equal to the amount exempted
      • in this case, the EOT must pay the tax that was saved by the seller(s)
      • a disqualifying event occurs if the EOT ceases to be an EOT or if the corporation that was sold subsequently fails an active-business-asset test at the beginning of two consecutive taxations years

*This information is not tax or legal advice and is not to be relied on.

Again, take a look at our blog section for more, or schedule a call as each individual’s and company’s situation differs.

You can also visit Employee Ownership Canada or the CEOC.