Canadian employee ownership,  Employee Ownership,  Employee Ownership Trust,  EOTs,  ESOPs in Canada,  Founding Owners,  Succession planning

What to know about the new EOT in Canada

November 22, 2023 /

Employee Ownership Trust (EOT) is in Canada

Canadian business owners may be curious about a possible new option when considering an employee ownership transition; the EOT. 
Employee Share Ownership Plans in Canada have been used by business owners as they are shown to facilitate numerous benefits; increased retention, engagement, productivity, and profit. They can also improve the country’s economy by spreading the wealth more fairly, protecting small businesses and local work, and improving resiliency of these businesses. 
The government had previously announced the creation of an Employee Ownership Trust (EOT) in the 2023 budget and have now confirmed it’s creation in the Fall Economic Statement along with announcing tax incentives for business owners who decide the EOT is a fit for their goals. New EOT legislation can hopefully be a positive contribution to employee ownership in Canada.
As of January 1, 2024, an EOT can be used. Here is a breakdown of the Pros and Cons as we know it today (updated Jan 19, 2024).

Pros:

  • transition ownership to employees via a trust
  • until 2026 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 (up to 12 months)
  • employees benefit through the trust and receive profit distributions and/or 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
  • governance continues in a fairly typical fashion just with the addition of a ‘Board of Trustees’ where the employees must represent at least 33% of the votes
  • extend the timeframe of the capital gains reserve for the business owner

Cons:

  • owner must immediately sell a controlling stake in the company to the trust and cannot make up more than 40% of the votes on the ‘Board of Trustees’ or the Board of Directors (each representative on the ‘Board of Trustees’ has 1 vote)
  • delayed financial return for the owner as the proceeds come from company profits over the years (some deals may be able to finance all or a portion of the sale through a financial institution)
  • employees don’t actually own shares, they are beneficiaries and receive benefits, but it is the trust that is the shareholder
  • requires ongoing education and communication to employees
  • must manage employee expectations as to what participating in the EOT means to them personally and in relation to their roles and responsibilities
  • requires an employee group that has people in it that can take the reins of the business (or hiring someone), given the limited participation in the business allowed for the seller, post sale

All employee must be allowed to participate; it is not a plan for only the leadership team for example.

Answer these 3 questions to see if pursuing an EOT makes sense for you.

Not sure which type of employee ownership is for you? Complete a Feasibility Survey through our website to see what kind of employee share ownership plan can work for you and your company.