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).
- 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
- employees benefit through the trust and receive profit distributions
- employees may be able to 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
- owner must immediately 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 and therefore it will be more difficult to fully create an ownership culture
- 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.
Complete a Feasibility Survey through our website to see what kind of employee share ownership plan can work for you and your company.