ESOPs and EOTs in Canada

If you ask us about Employee Ownership, including ESOPs and EOTs, in Canada we would say that Employee Share Ownership Plans are a tool for meaningful employee engagement and small- and medium-business growth. Growth that can dramatically impact the livelihood of Canadians. An Employee Ownership Trust (EOT), that has recently been introduced in Canada, is a form of employee ownership.

If you’re looking for a definition, we offer this: ESOPs are stock equity plans that allow employees to acquire ownership in a company, heightening employee buy-in and investment, while fostering accountability and an ownership mentality. They may include stock options, stock purchase, phantom-stock ownership, EOT or a combination of alternatives. Employee ownership can range from 1% to 100% of the company. As employees become owners, they share in the risks and rewards of the company.

At ESOP Builders we help companies develop customized ESOPs and EOTs in Canada to suit business and business-owner needs, following a detailed consultation with our team.

Why implement ESOPs and EOTs in Canada?

  • attract and retain talented staff
  • improve productivity and profitability
  • engage employees in the big picture of company
  • flexible succession or exit plan while maintaining your legacy
  • method for employees to build long-term wealth
  • source of capital for company
  • flexible design parameters : eligibility, share allocation, purchase methods, etc.

EOT

The Employee Ownership Trust (EOT) structure is in place to provide another alternative for business owners wishing to sell their company to employees as part of their succession planning activities.

What kind of owner is an EOT for?

  • wants to exit in a very short time frame (immediate to 1 year, however this may not mean completely stepping away from the business)
  • desires to sell control (51%) to the employees
  • would like all employees to have the opportunity to participate (broad-based eligibility)
  • has a stable business generating reliable profits

Why consider an EOT?

  • transition ownership to employees via a trust
  • tax incentive: the first $10 million of capital gains realized on the sale are exempt from tax (subject to certain conditions)
  • employees don’t have to invest any money, if they meet the eligibility criteria, they are beneficiaries of the trust which owns the shares
  • there can be a time worked requirement before employees become eligible
  • employees benefit through the trust and receive profit distributions and/ or receive equity payouts for their proportional account in the trust when they leave the company (which may have tax advantages subject to certain criteria being met)
  • offer a form of compensation on top of more traditional compensation and bonus plans
  • extend the timeframe of the capital gains reserve for the business owner

What to keep in mind when considering Employee Ownership

Since there are multiple ESOP models available (equity, stock options, phantom stock, and EOTs) it is important for the owner to first assess their goals and the pros and cons of each option in order to determine the best fit. We can help through the Feasibility Audit Stage of our three-stage model.

In an Employee Ownership Trust, consider the following:

  • owner must sell a controlling stake in the company to the trust
  • delayed financial return for the owner as the proceeds come from company profits over the years
  • employees don’t actually own shares themselves nor do they put any financial stake into the business, which is important to some owners however many owners appreciate this barrier is removed and employees gain value through the effort they make in the business and share in the success long-term
  • requires ongoing education and communication to employees (like any structure change)
  • must manage employee expectations as to what participating in the EOT means to them personally and in relation to their roles and responsibilities (like any employee ownership model)
  • requires an employee group that has people in it that can be developed to (or already ready to) take the reins of the business (or hiring someone), given the limited participation in the business allowed for the seller, post sale

Our commitment to you: A tailored plan, communicated and implemented well. To learn more about what an ESOP or EOT succession plan could look like, contact us today.

If you’re still wondering “what is an ESOP and EOT?” and want to learn more or assess whether ESOPs and EOTs are suitable for your company, please contact our team directly at info@esopbuilders.com or complete our free Feasibility Survey.

Submit your info to get the free EOT info package

Do you want to sell at least 51% of your business? (EOT requires a sale of a controlling interest)
Do you want all employees to be eligible to participate? (subject to an eligibility period no greater than 12 months, all employees would automatically participate as beneficiaries of the EOT)
I prefer that employees are NOT required to make a financial investment. Do you agree? (employees are beneficiaries of the EOT without making any financial investment)
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Employee Ownership Canada is a non-profit organization working toward educating, advocating and bring awareness to the concept of Employee Ownership as a whole across Canada.